The incumbent's dilemma: Enterprises changing service providers at an accelerating rate
The following is a guest article from Todd Lavieri, president, Americas, at technology research and advisory firm ISG.
Enterprise clients, in their quest for better quality and new solutions, increasingly are looking beyond their incumbent providers at contract renewal time.
Ten years ago, enterprise buyers renewed sourcing contracts with the incumbent provider 80% of the time, often without any competitive bids. When they did bring in competitors, the incumbent usually retained about 80% of the business, on average.
Today, those numbers are being turned upside down. According to new ISG research that looked at nearly 200 ISG-advised deals involving incumbent service providers over the past 30 months, buyers are seeking competitive bids on about two-thirds of expiring contacts. Of those, incumbents lost the entire deal nearly half (47%) of the time, and an additional 7% lost part of the deal.
With more than 5,000 IT outsourcing contracts up for rebid by 2018, the competition is likely to get very hot. Why are we seeing favor shift so dramatically away from the incumbent?
Three main drivers: 1) the slipping quality of delivery, 2) a cry for innovation and 3) a need for account management and investment in the final years of the contract.
Quality and new ideas
First, quality. For outsourcing buyers, high-quality services are table stakes, but what do buyers mean when they talk about quality? They want new insights, new ideas and new approaches to their problems. They want healthy and continuous communication with their providers. They want the day-to-day delivery team to deliver the vision the sales team promised at the outset. And patience is growing thin.
Provider relationship benchmark studies often uncover client satisfaction issues. The chance to secure better contracting terms, improve service delivery performance and free themselves from a deteriorating relationship with the incumbent were the top three reasons buy-side enterprises sought to renegotiate, according to ISG.
In cases in which the incumbent lost all scope to a new service provider, the buyer claimed poor customer satisfaction and service delivery performance were the factors that drove them away. And in cases in which the incumbent managed to retain all scope, the buyer claimed it was largely because of the service delivery relationship.
The new application of technology
Second, innovation. This is what lies beneath all the talk about quality. In a client meeting a few months ago, a large incumbent service provider was presenting its approach for how it would deliver its services over the next three to five years.
The presenter talked about automation, robotics, cost reductions, cognitive solutions and other ways the partnership would boost innovation and efficiency. When the presenter was finished, one of the client representatives raised his hand and said, "That’s all great, but why am I just learning about these capabilities now? You have been working with us for seven years. Where have these ideas been?"
Clients are hungry for innovation. They know no one provider has a monopoly on good ideas, and they are increasingly open to engaging with new firms to help realize their future plans.
Incumbent providers must not wait until the sales pitch for the renewal to bring innovation. If an incumbent service provider doesn’t know the top three to five innovations its clients are shopping for right now, it is effectively planting the seeds of its own demise.
Investment over time
Which leads to our third point: account management and investment. Since the first two years of a large contract have relatively low profit margin for the provider, they count on the profits generated in the final two to three years. But continuously delivering innovation and legitimately addressing a slip in quality, especially in the final years of an outsourcing deal, is expensive.
An investment can particularly sting when it has to come precisely at the moment the monetization of the contract is slated to happen. And, in the midst of all this, the traditional IT buyer is being replaced by an already-impatient business buyer, a shift that is forcing the incumbent to quickly learn a new language while it is busy trying to salvage the deal.
This is the dilemma incumbents face.
The fact is, many providers do deliver quality, innovation and investment to their clients. ISG research shows that, in many cases, during the contract renewal cycle, incumbents not only win the renewal, they actually expand their scope of work. But if they want to buck the current shift in buying, incumbent service providers will need to start doing things differently: learn more about the business drivers for IT solutions, perform quality and relationship reviews independently and conduct a detailed customer satisfaction analysis.
Incumbent service providers must be unafraid to invest mid-contract, present advanced capabilities along the way and pilot change. Once it comes to renegotiation, even if the incumbent comes to the table with new ideas, the business buyers will ask why they didn’t see this kind of thinking in the previous four years. And, then, it just may be too late.
When an enterprise chooses to renegotiate its IT services, it does so in search of better—better contracting terms, better performance, better communication or better solutions. Today’s business decision-makers are less and less averse to change, and the cost of switching providers is no longer the deal breaker it once was.
This means companies are increasingly willing to invite new service providers to sit at the renegotiation table and square off with their incumbent. To avoid this fate, incumbents need to deliver quality every day, insights and new ideas every quarter, and innovation every year.