What is Happening?
The IT and business services market is an extraordinarily competitive and unforgiving marketplace for incumbent providers that are not meeting client expectations. According to ISG research, two out of every three ISG-advised contract renegotiations over the past two years resulted in the enterprise buyer inviting new service providers to compete with the incumbent provider, and, in nearly half of these cases, the incumbent lost all the scope. One-third of the time, the incumbent lost some scope to another provider. Only 14 percent of renegotiations resulted in the incumbent retaining the entire scope, and only 7 percent of the time the incumbent saw an increase in scope.
Why is it Happening?
When analyzing this trend at an individual deal level, price, performance and relationship appear to be the three primary drivers for the increase in competitive renegotiations:
- Price. In response to the massive competitive pressure to explore digital solutions across the business, enterprises are looking to take cost out of non-strategic areas and re-invest those savings into digital initiatives. Enterprises are looking to reduce costs by 20, 30 and 40 percent, even those in existing generation-one and two outsourcing deals.
- Performance. A general lack of performance (or the perception thereof) is a key driver for enterprises that decide they want to bring in fresh thinking. Outsourcing buyers that can measure or even simply perceive a lack of innovation, a lack of understanding of their core business, or too much focus on day-to-day problem resolution from a service provider that doesn’t understand or resolve underlying root causes increasingly are interested in the idea of a competitive renegotiation.
- Relationship. Complacency in the relationship was a key theme for incumbents. Providers that do not understand underlying client messages, are insensitive to concerns, don’t proactively build relationships with key leaders or don’t have a proactive relationship plan are driving buyers to re-evaluate existing relationships.
While it’s no surprise that enterprise buyers want more competition in contract renegotiations, what is even more interesting is the fact that the risk of change is not a primary deterrent for a client to move to another service provider. Figure 1 below shows that, in more than 60 percent of deals in which the incumbent lost some or all of the scope, the client viewed the risk of changing providers as either moderate or high.
Figure: Risk is not a Significant Deterrent to Changing Providers Source: ISG Research.
This willingness to take on provider switching risk may be a leading indicator of an even broader trend occurring in the market: the global economy is changing at a pace where it is now riskier not to take a risk. Digital Business is transforming entire industries in a matter of months – not years – which means that enterprises need to adapt faster than ever before. Therefore, one could argue that at a more strategic level, enterprises buyers are willing to take on a high level of switching risk in order to avoid the even greater risk of business stagnation.
Of course price, performance and relationship are important. But what we may be seeing here is a view that these areas are simply table stakes – services commodities. Further exacerbating this challenge for providers is the fact they themselves have matured their transition capabilities to a point where the cost, time and risk of switching seems acceptable to enterprise buyers, as compared to the risk of not changing their business to adapt to Digital Business opportunities.
This is a sobering assessment for large Western and Indian Heritage firms that are also under siege from hyper-scale clouds, innovative SaaS companies, smaller platform-based managed services companies and niche providers offering digital solutions that augment the work of humans. But fact remains: if a client is unhappy with your services, it’s highly likely they will invite new providers to bid on the work. When (and not if) this occurs, you have a 50/50 chance of losing all of the scope you own today to another provider.
So while focusing on price, performance and relationship are critical to keeping clients happy, it is continuous innovation that we believe will help service providers win and retain clients in the future. Continuous innovation focuses on helping clients adapt to rapid business change today, rather than solving to what an RFP indicated months or even years ago. However, this is much easier said than done, because continuous innovation is a two-way street. Providers will need to invest ahead of the curve in differentiated, vertical-specific IP, and buyers will need to standardize processes and leverage shared systems. Meeting somewhere in the middle is where the risk, and the opportunity, reside for both providers and buyers.