Intelligent Industry

IT Outsourcing: Don’t force your customers to look for a change

A few years back, IT Services deal renewals were usually to the incumbents. However, it is now estimated that approximately 2/3rd of multi-year IT Services contracts are opened to competitive bidding by customers and incumbents are losing about 50% of the deals coming up for renewal

By  Khem Aithani

Organisations avoid changing IT Suppliers, particularly those suppliers who are engaged in multi-year services deals. The reasons are many, but major ones are:

  1. Change brings discontinuity and disruption, which is avoidable
  2. Change is costly
  3. Current supplier comes to understand the customer and its systems and processes well, and a change will mean loss of ‘accumulated knowledge’
  4. Supplier change is a major initiative and diverts CIO’s time and energy away from the more critical digital transformation agenda

Why is it then that IT Services industry analysts and advisors state that customers are increasingly changing their strategic IT Services suppliers? A few years back, IT Services deal renewals were usually to the incumbents. However, it is now estimated that approximately 2/3rd of multi-year IT Services contracts are opened to competitive bidding by customers and incumbents are losing about 50% of the deals coming up for renewal. This supplier churn comes with other changes to the landscape of outsourcing- deals are being broken into smaller chunks and contracted for shorter lengths.

What are the reasons customers are being ‘forced’ to reconsider their long-term suppliers?

  1. Promises not kept: The last time around during the competitive bidding process, selected suppliers made many promises to win the deal. However, after the deal was won, suppliers’ management moved on to the next ‘hunt’. The account management team was left to its own devices, with a mandate to further ‘mine’ the account, with little incentive to revisit the promises and invest in customer delight. In the IT Services business, usually 80%-90% business is from existing customers and 10%-20% from new customers. However, the suppliers’ management effort and focus is not allocated in similar proportion. No surprise that some existing customers get disenchanted with the attention, or lack of it, that they receive
  2. Customers seeking transformation: Customers have embarked on their digital transformation journey. They are struggling with ambiguity, fast paced technology changes, new technologies, lack of skills, new ways of leveraging digital technology for business, implementation of AI, Automation, Cloud, mobile, etc. New age suppliers are engaging with these customers, educating and guiding them. The incumbent supplier has been missing from the CIO’s office during this critical time. No wonder the CIO sees a strong need to bring in a new supplier who understands the digital world
  3. Cost effectiveness: New suppliers are knocking at the doors of CIOs telling them the premium they are paying by keeping the incumbent supplier. Customer IT stakeholders resent the fact that the incumbent supplier did not pass on the benefit of automation or the lower benchmarked pricing to them
  4. Innovation: Most customers feel that their IT Services supplier do what they are asked. So if their incumbent supplier just delivers as per the contracted service agreement and do not come up with innovation or ideas for transforming services, then this lack of value addition allows competition IT Suppliers to transition such services painlessly delivering superior services at lower costs
  5. Industry knowledge: Most industries are transforming and IT is now an integral part to business. Each industry is seeing new models of doing business. IT Services suppliers who understand the industry well are better able to guide customers on how to transform and grow their business with the use of advanced technology. If the incumbent supplier has not built the requisite domain / industry expertise then the customer will look out for suppliers who have such knowledge
  6. Localisation: Global trend in protectionism is driving customers to re-evaluate their risks and sourcing strategies. Suppliers who have not re-configured their services delivery with suitable localisation to insulate their customers from these risks are likely to be considered for replacement
  7. Consolidation: Customers have expanded their IT outsourcing over years leading to huge numbers of IT suppliers in their vendor ecosystem. Many of these customers have embarked on rationalisation and consolidation of IT suppliers leading to better value and more manageable vendor landscape. Customers decide to keep suppliers who have delivered consistent value as well as are able to take on additional services with ability to scale

So, how can IT Services suppliers help their customers to avoid going through the painful process of supplier change?

  1. Keep your promises: When you win the deal, document all the promises made, explicit and implicit. Revisit and review promises together with the customer as part of the governance. Assume that the customer can decide to exit the contract next quarter. Demonstrate to the customer that you value them as much this quarter as you did during the selection process. Put in place a strong governance model. Allocate appropriate management focus in favour of existing customers
  2. Build digital transformation capabilities and make customers aware: Customers are seeking transformation and guidance. As an IT Services business, you have seen the disruption coming and have built digital capability. Engage with the customer educating them about digital transformation, new technologies, trends, your current capabilities and investments in expanding digital capabilities
  3. Be cost effective: You are competing in the market for new business and know the new benchmarks in pricing as well as in new commercial models. Revisit your current contracts and evaluate the possibility for any improvements in the commercial model. Approach the customer proactively with inputs on new benchmarked commercial models. This way you will avoid forcing the customer to show you the report from your competitor or a sourcing advisor detailing the consistently dropping price curve and how much more expensive your services are vis-a-vis the market
  4. Innovate: Keep the innovation agenda as part of your service delivery evaluation metric. Demonstrate small or big improvements or ideas for change to the customer on a continual basis. This will convey to the customer your ability to think for the customer
  5. Build industry knowledge: IT is now even more integral to business with digital transformation changing the landscape for most industries. Decide which industries you will specialise and invest in and demonstrate your industry knowledge by regular periodic interaction with the customer discussing industry trends and your advice on relevant initiatives for the customer
  6. Localise: Understand the risks for customers arising from protectionism globally and reconfigure your delivery infrastructure with localisation. This may also involve preparing for readiness for upcoming regulatory changes in various geographies
  7. Expand service portfolio: Impeccable consistent service delivery is a must to survive in the customer’s vendor list. The key to further growth in existing customer is to build capabilities in adjacencies around your current service area or another service area which is of critical importance to your customer. If you have been adding such relevant competencies in your service portfolio and have been walking that journey in full knowledge of the customer, and even better, with customer’s active support and guidance, you will likely be one of their preferred vendor during vendor consolidation

Good luck in your endeavour to keep your customer happy and to avoid your current deal from being brought to the market for competitive bidding.

( The author is an independent IT Services expert, UK (ex Senior Vice President, ITC Infotech)

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