New report a wake-up call to outsourcing providers
Our management consultancy columnist, Mick James, this week talks to Phil Morris, chief executive of specialist outsourcing advisors Morgan Chambers, about the upcoming watershed year for the established outsourcing players.
A few years ago, I would have predicted that the outsourcing market would evolve into a rather dull zero sum game played between a handful of massive competitors on a largely commoditised playing field. A recent report from specialist outsourcing advisors Morgan Chambers suggests that this picture is rapidly changing, and that the world of outsourcing is about to become very interesting indeed.
With £7bn worth of contracts up for renewal in the UK, and organisations showing high levels of dissatisfaction with their current providers, there's a lot to play for. But what's really changed is the emergence of a whole range of competitors offering clients real choice—and consistently scoring higher than the established firms in areas like customer satisfaction and innovation. The winners are a rapidly emerging tier of niche suppliers, aggressive Indian suppliers and hungry competitors such as HP, who are not afraid to innovate and are investing heavily in the quality of their relationships with clients.
According to Morgan Chambers chief executive Phil Morris, the buying cycle also favours the newer competitors.
"These renewals are the end of wave one, which started with some very big deals," he says. "But at the moment there aren't a lot of large deals up for renewal, not so many billion plus contracts."
It's also no longer a market in which bigger is automatically perceived as better.
"There's a lot of snake oil peddled about economies of scale which is just rubbish," says Morris. "People now talk in terms of suppliers being 'best at something and big enough'. From the point of view of having a best in class smaller supplier to provide a niche service, the additional cost is in supplier management on the client side--and that's where people haven't invested enough in the past anyway."
Inertia and the pain of switching still give suppliers a massive advantage, but this is rapidly being eroded.
"In general over 90 per cent of deals go to incumbents, but in the future this proportion will be significantly lower—maybe three-quarters or even two-thirds," says Morris. And he adds that, scratching beneath the headline figures of renewals, there's even more gloom for incumbents.
"Very few contracts will be let in their current state—less than 20 per cent. And in the current modern model of not having everything with one supplier, people will only leave the stuff that works with the incumbent. All the basic stuff they will leave, but the sexy stuff—relating to value-add, changes in service or geographic scope—will go somewhere else."
Morris says the report has come as something of a wake-up call to the industry.
"All of them are looking at these results in detail and asking how they are going to cope with the level of competition," he says. "I'm amazed at the number of suppliers who have read that set of numbers about what's coming up for renewal, but didn't have a set of numbers themselves and are asking, what's our percentage of that?"
The coming year will be something of a watershed for the established players.
"It requires a culture change from the point of view of how they are perceived by customers," says Morris. "The results are quite clear—it's all about relationship quality."
He adds that how the industry handles itself during this period of transition will be decisive—being a "good loser" will be very important.
"A key skill will be transitioning to an obvious competitor at the end of a deal,” he says. “A lot of clients are asking for references about that. At the moment it's at the whim of the supplier how painful they make it—but the reputational impact will be huge."
While outsourcing contracts have become a lot more sophisticated and flexible in recent years, suppliers need to apply some of this thinking retrospectively to still-running deals.
"I've seen contracts torn up and terminated because a supplier wouldn't walk away from a current contract and make it flexible enough to meet business needs," he says. "At the moment governance is positioned completely wrongly—it's mechanical, it's about reporting against fixed control metrics—it needs to be refocused on business issues."
Morris believes it's time for the outsourcing industry to mature, particularly in equipping clients with the skills they need to assess and manage contracts. Many clients are not only unaware of how out of step their current contracts are with market pricing but aren't taking action early enough to benefit from the increased competition in the marketplace.
"They often leave it to the last six months to decide what they are going to do when they need at least 10 to 12 months to restrategize and run a market competition," he says. "It constantly surprises me how little focus or work organisations put into the contracts that they strike."
All views expressed in this article are those of Mick James and do not necessarily reflect the views of Top-Consultant.com and Consultant-News.com.
- Source: Consultant-news.com, Thursday February 15 2007