EPAM Systems: Defying the Odds in the IT Services Industry
EPAM Systems continues to relentlessly pursue the most innovative and often mission critical technology solutions for every client, aiming to solve where others have failed.
Results. Relentlessly.
EPAM Systems (NYSE: EPAM), a mid-sized product development service company, is outpacing the global market for information technology services. And it’s has achieved notable recognition in a mature application space, in a world that favors scale and size. So, what is its secret for beating the odds?
Business Model:
EPAM provides its customers with complex software engineering solutions aimed at improving their ability to innovate while minimizing time to market. With over 14,000 engineers and consultants across delivery centers in Central and Eastern Europe, EPAM serves clients across four primary industry segments: banking and financial services, technology and independent software vendors, business information and media, and travel / consumer.
The product development services industry, or more broadly, the IT outsourcing industry, is one of the most crowded technology services industries, historically served by well renowned Indian firms such Tata Consultancy Services, Infosys, Wipro, Cognizant, HCL Technologies, and the likes. What has allowed EPAM to grow its revenues over 25% year on year and continue to compete in a saturated industry, has been its focus on providing highly specialized and extremely technical client solutions, unmatched by its peers in the services universe [1].
Unlike most other outsourcing firms, EPAM strays away from providing low end technology services (such as checking whether Blackberry’s shipment of handheld devices can be powered on). Instead, the Company’s engagements (primarily with independent software vendors and technology companies) must be designed with a higher level of product configurability and operational performance to address the needs of a diverse set of end-users operating in a variety of deployment environments [2].
Operating Model:
Talent Acquisition Powerhouse
As a prerequisite to being hired as an engineer, one must have a Master’s degree in math, science or engineering and generally a proficiency in English. In order to ensure they are pulling from the best talent pool, the Company has developed strategic relationships with universities across Central and Eastern Europe, often designing curriculum and parsing through regional hackathons to find their next generation of developers. As a result of their commitment to sourcing high quality engineers and consultants, the Company reportedly has the lowest employee attrition rates across its delivery centers (11.8% vs. ~20% industry average) [3].
Secret Sauce to Quality Assurance: Proprietary Agile Development Model
EPAM was one of the earliest offshore adopters of agile development – a relatively new form of software development that emphasizes speed, iterations, greater business involvement and rapid time-to-market. Client requirements and solutions evolve in this methodology through collaboration between cross functional, self-organizing teams. 70% of the Company’s 2014 revenue was generated through their agile development model, which is the second highest in the industry and the highest in Europe [4].
Successful product delivery through Agile development requires frequent, almost daily interaction between customer and developer and hence the Company uses this opportunity to create trusted relationships with its clients – forcing them up the value chain and often allowing them to win substantial follow on engagements. As a result, 93.1% of EPAM’s 2014 revenues came from clients that had used their services for at least one to two years. The number of existing accounts for over $1 million has grown from 42 to 116 in the last 6 years [5].
Flexible Contract Pricing
To cater to their customer’s tailored product delivery preferences, the Company offers both fixed and time-and-material contractual pricing models. The former bundles the services, offering customers a transparent upfront price while limited the flexibility and scope of the project. The latter provides (priced at a discount to the fixed price contract) offers customers an ability to iterate on the scope of the project, while paying EPAM for its services on an hourly basis.
A majority (over 80%) of EPAM’s customers typically choose time-and-material, leaving the “what” and “how” project delivery decisions in the hands of the Company. Given the broad scope of such contracts, EPAM has begun initiating advisory engagements, digital lab session and hackathons with their clientele, in some instances allowing them to help reach end users through digital channels.
Evolution of Services through Acquisitions
According to Forrester Research, industries that collect large sets of consumer data are increasingly identifying “big data” integration as a strategic challenge. In conjunction with the emergence of big data, the internet of things (IoT) is coming in to demand after years of buzz. These complex projects require coordination across several lines of business as well as technical barriers around technology integration, protocol rationalization, data architecture, and systems management. In an aggressive effort to gain global market share, the Company has expanded their vertical domain-specific expertise, geographic footprint, service portfolio and most importantly, technical capabilities, by acquiring 7 companies over the last two years.
In November 2015, EPAM recently acquired Alliance Global Services, a software and quality management services company which services clients in Life Science and Healthcare, Insurance and Information and Media verticals [6]. The acquisition crystallized EPAM’s foray in the the healthcare services arena as well as provided the Company with an on the ground presence (and headcount) in the Indian subcontinent. The viability of this service segment as well as the success of the delivery center, will be determined by EPAM’s ability to remain dedicated to quality product development and its commitment to compete for service level agreements on the scope and complexity of project, rather than the contract price. Interesting times lie ahead!
Conclusion
EPAM’s dominance in the product development services arena is a product of alignment in its business and operating models. EPAM creates value for its customers by delivering complex, mission critical software development at industry leading cycle times. Most importantly, the Company has developed an operating model which allows it to move fast and iterate service offerings in synchrony with their end users’, making it an unequivocal winner in my eyes.
Resources:
[1] Forrester Research. Vendor Landscape: Product Development Services Target New Digital Demands.
[2] 2014 Annual Filing.
[3] 2014 Annual Filing and Wall Street Initiating Coverage Report.
[4] Forrester Research. Market Overview: Agile Development Service Providers.
[5] 2014 Annual Filing.
[6] Company Website.
Great post about an important industry. Given EPAM’s commitment to offering high levels of configurability and operational performance for diverse users/environments, their value creation is inherently less scalable than specialized product development service providers. The use of Agile development methodology seems necessary but not sufficient for them to deliver on this customer promise while continuing to grow the business. In the context of rapidly changing technology industry (big data, IoT) which other types of “adjacent” (or non-adjacent) businesses (e.g. AGS) should EPAM consider acquiring to achieve both operational model and business model improvements? How will EPAM need to change themselves in order to grow organically rather than via acquisition?