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The IT outsourcing price wars are on

Stephanie Overby | April 8, 2015
Outsourcing customers are seeing some IT services prices dip as much as 40 percent. But industry experts advise caution during this period of industry transition.

To succeed in this new environment, outsourcing providers must adopt radically different business models. And that shift may come too late. "Some established, deep-pocket companies have not responded fast enough to market changes, because in the past they haven't had to--a tweak or two, and they were back on track," Halls says. "But now some appear to have missed the signals of a fundamental market shift, and they've lost share as a result." Hall expects to see further consolidation among the Tier II infrastructure providers and a shift to digital and engineering services for many of the other providers.

"The real differentiator is the provider's strategy and readiness to adopt automation and newer operating models," says Hall, noting Accenture's evolving digital services, Cognizant's industry-specific solutions, and IBM's growing SoftLayer and Bluemix services. "The suppliers most at risk are those that do not have clearly defined strategies and are still relying primarily on labor arbitrage or antiquated infrastructure support models."

There are huge opportunities in the market, particularly around the next wave of digitization, as the Internet of Things becomes reality. "The digitization opportunity suggests a massive amount of software needs to be built, calling on those with strong capabilities in the applications space."

Those providers that want to move beyond the prices wars will need to make investments in automation, analytics, and design thinking that could cannibalize their existing revenues in the short term, says Phil Fersht, CEO of outsourcing analyst firm HfS Research.

"The more processes can be automated, the more manual labor cost can be removed and the higher margin of the delivery," says Fersht. "While greater automated deals may get smaller in dollar value, they will get more profitable." A $10 million dollar deal that delivers a 20 percent margin becomes a $7 million dollar deal at 50 percent margin, for example. Service providers also need to reorient their talent around analytics skills and creative problem solving.

"The traditional value drivers remain relevant," says Augustin of Alsbridge. "Clients are still seeking superior vertical market knowledge, new offerings, innovation and outcome-based pricing. Providers that can successfully deliver on these areas can stay ahead of price wars."

IT outsourcing buyers beware
The providers bear most of the risk during these price wars. "They are betting on robotic process automation and autonomics, and they are on the hook to deliver the lower pricing," says Augustin. But while lower prices would seem to be a boon for buyers of IT services, experts advise that IT leaders consider the long term before locking in a low-cost deal.

"If their providers struggle to implement the RPA solutions, the deals could become unsustainable and eventually that will lead to a lose-lose situation," says Augustin. "Customers must also be mindful of proprietary solutions from providers that are emerging, as they can limit the flexibility to switch service providers over time. At this point, the robotic process automation and autonomics solutions are still relatively untested and unproven, so it is indeed still a period of transition with some risks for all parties."

 

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