Tim WilsonA recent survey from KPMG has found a significant amount of dissatisfaction on the part of outsourcing clients – as well as a willingness to change providers. In fact, almost a quarter of surveyed customers would consider a move should they not receive the process standardization, automation, or transformation promised.
“There are more players in the market now, and more pressure on them,” says Patrick Heffernan, a practice manager and principal analyst at research firm Technology Business Research (TBR). “This is because the move to the cloud has put more traditional outsourcing shops in a bind.”
In effect, the ability for enterprises to put more capabilities into the cloud, and for cutting-edge outsourcers to leverage the technological and business innovation that the cloud provides, means that outsourcers can no longer remain complacent. A ‘business-as-usual’ attitude simply won’t cut it, with customers expecting innovation and change within the lifecycle of an outsourcing contract.
“It reminds me a bit of what happens sometimes with the big tax audit firms,” says Heffernan. “They can keep prices high as long as they act like a cartel, but then smaller firms come along to force price reductions – for a while, at least.”
Alarm Bells Ring
The study, titled the “2014 State of Outsourcing,” resulted from a survey of 312 companies. It found that, should an outsourcer fail to meet compliance requirements, 37% of customers would be likely to fire the provider.
“This raises some alarm bells,” says Heffernan. “Earlier this year TBR had two big clients – these were large consultancies – who wanted us to assess contract retention rates.”
Both clients were active in IT outsourcing. One had a massive BPO practice and wanted a data dump on IT services contracts. The other was one of the big four consultancies and was looking for information on cross-industry contract retention.
“My guess is they may have been providing bleeding edge services, and found that their clients were saying they were unhappy and wanted to switch,” says Heffernan. “That would explain why they needed to know how well their competitors were doing, and what the baseline was.”
The KPMG survey found that 28% of customers were willing to consider a switch if a provider was unable to provide greater flexibility to achieve scale. Another 27% were willing to leave if operating costs were not reduced, and 22% said they would consider a change if requirements for standardized or transformed processes weren’t up to scratch.
From Heffernan’s perspective, these findings are largely due to the disruptive nature of the cloud.
“Cloud revenues are going to cannibalize outsourcing and IT revenues,” he says. “The numbers from this survey are high, but could be accurate given that these issues have been brewing for a while.”
It should be noted, too, that many of the numbers are not only with regard to dissatisfaction, but also reflect what a client might do if they were to be dissatisfied with a provider. Seen in that light, the responses appear more sensible. Still, the problem is real.
“This might represent some pressure on offshore vendors, too,” says Heffernan. “It tells me that clients are pushing back a little harder to ensure they get what they want.”
Cloud is a Game Changer
When addressing scalability and flexibility, the cloud is particularly disruptive. It allows for multi-tenant architectures, scaling by CPU, full leverage of virtualization, and flexible pricing. In this world, reduced operating costs are easier to come by, and clients are right to demand more from their providers.
“From an outsourcing perspective, we will see more competition coming from low-cost areas like the Philippines, Vietnam, and China,” says Heffernan. “These jurisdictions will challenge nearshore providers, with risk being an important differentiator.”
That’s to an incumbent’s advantage, given the risk inherent in switching outsourcers, but if an incumbent provider is not getting the job done, there isn’t much to lose, either. Customers need more than basic operational support – they need engagements that are transformative. Clearly, a lot of providers are talking the talk, but not walking the walk.
The result, according to the study, is that customers are going ahead and seeking their own software as a service (SaaS) solutions, with some exploring larger scale infrastructure as a service (IaaS) engagements, and even platform as a service (PaaS). The winners, for now, are cloud providers like Amazon Web Services (AWS), which can deliver advanced solutions and analytics at lower cost than big outsourcers.
However, with compliance at the fore there is room for outsourcers to respond with industry-specific solutions – something where a large public cloud provider like AWS is at a distinct disadvantage. To win the day, then, outsourcers don’t only have to get to know their customers better: they also have to truly partner, and deliver on a larger, shared corporate vision.
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