EquaSiis Brief Top 5 Concerns for Offshore SPs Mar 2009 (E1002)

8/14/2019 EquaSiis Brief Top 5 Concerns for Offshore SPs Mar 2009 (E1002)

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EquaSiis Brief Ana lysis and Comm entary on the Glob al Business and IT Services Ma rkets

The Top Five Challenges Facing Offshore IT Service Providers in Todays Economy www.equasiis.com | 1

The Situation: The Top Five Challenges Facing Offshore ITService Providers in Todays EconomyAbhishek Sharma , Consultant, EquaTerra Stan Lepeak , Managing Director, EquaSiis Global Research

The global economic turmoil of the past year has had a severe negative impact on the businessand information technology (IT) service provider market. Customers have completely changedtheir business practices, moving from a nearly anything goes mentality to tightening their beltsand finally to survival mode. Few enterprise buyers have been immune to the downturn. In fact,some of the biggest names in the financial services industry one of the largest markets for third-party IT services have fallen on hard times and, in more than a few cases, fallen apart.

Overall IT budget growth levels are down or at best flat across the board for 2009. Mostcustomers have reduced discretionary spending to a trickle and shelved long-term return oninvestment (ROI) projects for the foreseeable future. While budgets for services are experiencingfewer cuts than those for other areas like hardware procurement, successfully completing sourcingefforts is still a challenge for buyers given operational disruptions and uncertainties within theirorganizations.

The Context

Offshore IT service providers face c onsiderab le cha lleng es in this ma rket d ownturn given their customer industry exposure, service p ortfolios, size, va lue proposition a nd op erat ing mod els.Proa c tively addressing these ob stac les is the be st way to ove rcome them.

What should the business and IT service provider community, especially India-based providersand others with extensive offshore offerings, do to adapt to and succeed in the current marketenvironment? Tackle its challenges aggressively and head-on.

There are numerous risks today, many of which were nonissues a year ago, that are seriousconcerns for service provider management. Providers must change their business models andincrease their emphasis on retaining customers and taking market share from the competition.

The AdviceOffshore IT service providers face five m ajor cha llenge s and they should ta ke spec ific steps to mitiga te them.

Five major areas of concern confront the business and IT service provider community. Providersmust aggressively and thoroughly address each of these issues to ensure their ongoingcompetitiveness.
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Concern 1: Customer Retention

One of the first steps customers take when trimming their IT budgets is provider consolidation andrationalization. Any moderate to heavy users of third-party IT services are either planning toreduce the number of providers they work with or already in the process of doing so. As a result,there is increased pressure on outsourcers to maintain their share and avoid being cast out.

Retention and share of spend growth is dependent on a number of factors, including the criticalityof the work performed, the total financial outlay, the depth and quality of the customer/providerrelationship, and the ability of the provider to proactively articulate the value it brings and willcontinue to bring to the buyer.

Mitigation

Outsourcers need to analyze the work they perform for their customers and determine its levelof mission criticality and then use hard metrics to illustrate the integral role of their services inthe buyers continued success.

Senior management should regularly and meaningfully engage with their customercounterparts to maintain the executive connection and reassure buyers of the providerscontinued support, viability and strength.

Providers must analyze current buyer situations, identify their most critical business needs,and determine if the services currently supplied conform to these requirements. If the workbeing performed does not meet a customers critical needs, service providers must attempt toproactively redirect their efforts.

Providers in todays market should only pitch new services and projects that are directly tied toa buyers most critical business issues. They must focus on customer needs not their owncapabilities or current favorite offerings.

Concern 2: Pricing

Providers are naturally concerned with maintaining their billing rates. In some situations this iswishful thinking, and in others it is unwise to pursue the issue too forcefully. While taking a majoror long-term loss on any customer is unacceptable, losing business outright is worse thanaccepting lower margins in the short term.

During tough times, buyers often compare their own profit margins against those of their providerset and seek reconciliation in rates. Rising wages due to increased competition for offshore talentpushed billing rates upward over the past few years, and now customers want to renegotiate. Thisis a more viable option for providers today given current exchange rates and drops in demand thathave eased labor shortages and wage escalation.

The number of price benchmarking requests in the market is on the rise as buyers try to ensurethat they are not overpaying. Even if outsourcers pricing is in line with market benchmarks, theyare faced with pressure to reduce their billing rates by 5 percent to 10 percent or more.


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Mitigation

Providers should proactively initiate pricing discussions with their customers each year as abest practice to ensure that there is no brewing discontent.

Depending on their relationship with a buyer, outsourcers should be as transparent aspossible about the pyramid pricing model they use and supply granular details. All other thingsbeing equal, customers tend to remain loyal to more transparent providers.

Service providers must be open to buyers requests for rate revision discussions. They shouldexplain the current breakdown of charges in detail and be creative about possible ways toreduce costs.

Concern 3: Payment

While some IT service providers are in dire financial straits today, there are many more buyers inthis situation. Providers need to scrutinize and assess the financial strength and viability of theirmajor customers and prospects and use discretion when pursuing new business, maintaining oldbusiness, and defining the terms and conditions under which they undertake both efforts. Theyneed to focus on the likelihood of delayed payments, disputed billings and payment defaults.

Mitigation

Providers must proactively profile and rank the key financial attributes of all major customersand prospects to identify high-risk accounts and develop thorough risk profiles for them.Pursuit of new business or expansion of existing work efforts should require executiveapproval.

Outsourcers must fully understand terms and conditions, remediation options and avenues forrecourse and exercise them if a customers financial or other key commitments begin to slip.

For seriously problematic customer accounts, service providers should intervene at theexecutive level to review the situation and identify the best solution. In some cases, however,it will not be possible to salvage the relationship, and providers should move to executecontingencies as soon as possible.

Concern 4: Sales Optimization and Increasing Bid Conversion Rates

The cost of sales efforts in the IT services industry is extremely high. Bid cycles often run formonths, and manpower, travel and general expenses add up. Given the high growth rate of the

industry, though, this was never historically a roadblock there was something for everyone, andit made sense to bid wherever a reasonable opportunity existed.

When growth is limited, however, the financial impact of a lost bid increases significantly. It ismore important than ever for providers to manage the sales process closely, both to save moneyand as part of a broader initiative to more effectively profile and vet prospects in the future.


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It is also imperative for outsourcers to improve or minimally maintain bid conversion rates. With

increasing maturity in offshore services and customers unimpressed by simple labor arbitrage it is extremely important to plan and execute each step of the bid cycle carefully. Providers mustfocus on the selection process from start to finish.

Mitigation

Service providers should develop a filtering process to estimate the sales costs for each bidand reject those where the anticipated costs are too high and the chances of selection arebelow a certain minimum percentage.

Providers should maintain an open and collaborative rapport with sourcing advisors and solicittheir opinion regarding the competition.

Outsourcers should consider creative and pragmatic ways to manage the sales process. Forexample, they can use collaborative technologies to host remote working sessions withbuyers, which will allow them to send only the most critical staff to customer sites.

Concern 5: New Service Innovation

Even while fighting fires in tough economic conditions, service providers must not lose sight of thelong-term business value that they can bring a buyer. While customers are more focused on pricetoday, they will still form lasting strategic relationships based on value. When economic conditionsimprove, outsourcers that have taken a long-term view toward operational and corporateexcellence will have an edge over the others.

It is tough to strategize and focus on capability enhancement when circumstances are squeezingprofits from every angle. However, service providers that continue to develop now will emergeleaner, more agile and better equipped to succeed in the years to come. While much of theindustrys growth up to this point can be attributed in some part to the first wave of offshoreoutsourcing, expertise-driven, focused providers offering transparent value to customers will drive

and reap the benefits of the next phase.

Mitigation

Providers must focus on short-term customer needs and emphasize the value of the servicesthey currently provide while continuing to identify and discuss future strategic goals.

Service providers need to work to understand buyers long-term goals and objectives anddetermine how the services they provide can help customers achieve these milestones.

In this market, outsourcers should only discuss innovation in concrete terms. Additionally, anyinnovation must be tied to tangible deliverables, not vague, open-ended goals such asprocess transformation.


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The Top Ten Things Outsourcing Service Providers Should Do in Tough Economic Times

Whats Next?Current ma rket c ond itions are c halleng ing, b ut thinning the offshore service provider herd is benefic ial to the m arket, the p roviders tha t survive a nd the b uyers tha t use the m.

Most offshore IT service providers spend too much time doing one of two things lamenting theimpact that tough economic times are having on their bottom lines and business models or softpeddling the markets true impact. Instead, providers should devote their time, attention andresources to addressing and mitigating near-term challenges and concerns and gearing up tocapitalize on new opportunities as the market improves. Now is the time for proactive and targetedaggressiveness, not reactive and unclear positioning.

Related Research


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About EquaSiisEquaSiis, an EquaTerra company, provides software and services that

improve the business support services lifestyle for shared services,

outsourcing practitioners and service providers. The software,

EquaSiis Workbench and EquaSiis Enterprise, is a framework for

collaboration used during the service delivery assessment and

sourcing process to assist in analysis and decision making for shared

services or outsourcing. EquaSiis provides intelligence and

optimization for the delivery of business support services across the

entire organization. The company also offers service providers market

intelligence, research, customer satisfaction and trending data through

its Insights group. For more details about EquaSiis research offerings,

please contact Stan Lepeak, [email protected] .

www.equasiis.com

Media ContactsRon Walker, EquaSiis

+1.858.486.6035

[email protected]

Lee Ann Moore, EquaTerra

+1.713.669.9292

leeann.moore@equaterra .com

Copyright EquaTerra 2009. All rights reserved. The prior written permission of EquaTerra is required to reproduce

all or any part of this document, in any form whether physical or electronic, for any purpose.
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EquaSiis Brief Top 5 Concerns for Offshore SPs Mar 2009 (E1002)

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