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The Incredible Shrinking Incumbent's Advantage

By Esteban Herrera, Partner

Just five years ago, incumbent outsourcing service providers retained their contract at the point of renewal more than 80 percent of the time. A provider had to be a complete disaster before clients would consider tossing them out. Today, not even 50 percent of incumbent providers retain the business, according the most recent ISG Outsourcing Index. In other words, if you are on either side of an outsourcing relationship, there is an equal chance you won’t stick around when the term expires.

Here’s what has happened:

1. Pricing has declined. Today, you can get so much more for your IT dollar than you could five years ago! In a buyers’ market, incumbent providers that don’t proactively offer significant reductions, ideally well ahead of renewal time, and offer updated, state-of-the-art solutions will likely find themselves replaced.

2. Costs of switching have dropped. Conventional wisdom used to be that it was too expensive to change providers. The pain of losing the institutional knowledge and suffering through the draconian wind-down terms weren’t worth the effort. No longer. Mature companies have figured out that, while switching costs are material, they are definitely not prohibitive. Moreover, hungry challengers are happy to help absorb some of those costs in exchange for taking a new logo away from a competitor.

3. Multi-sourcing has become the default strategy. Years ago, people like me advised to never split up IT infrastructure across providers. Sourcing maturity and the evolution of the solutions have caused a diametric shift; when possible, most large enterprises prefer a multi-provider solution for its best-of-breed capabilities and built-in competitive tension. Application services have always been better candidates for sourcing to multiple providers, with many companies having split their portfolio along logical lines for years. The exception to the trend seems to be BPO, which is increasingly industry-specific and increasingly sold as a platform, inclusive of the software, hardware, labor and network required to run the process. Providers who offer these platforms and do it well will be the sticky ones for the next decade.

4. The devil you don’t know might be better. Unfortunately, many sourcing relationships are set up to be adversarial, and the wear and tear on both the buyer and provider teams can be irreparable. Many times, companies are just interested in a fresh start with a new team that they haven’t been arguing with for the past five to ten years.

5. Incumbent arrogance. Often, clients want to stay with their existing provider, but the provider’s refusal to implement new solutions and come to the table with better approaches than those used in the past ultimately costs them the business. Or worse the incumbent provider fails to notice the undeniable data regarding the loss of their advantage and fails to provide a spirited defense of their business that was theirs to lose.

The big winners here have been enterprise buyers who have more options available to them than ever before. The big losers have been the western-based IT services providers, which have seen their market share erode more than 20 percent over the past four years.

If you are a buyer, you owe it to yourself to understand the current market and the opportunities it affords you. If you are a service provider, you must first make sure your head is fully out of the sand and then go to work every day as if you were competing for the business all over again. Find improvements to the solution and make it stickier all along the way, not just at the end of the term.

Many fields offer nearly insurmountable advantages to incumbents; outsourcing is no longer one of them. To discuss further, contact me.

This post originally appeared on WIRED’s Innovation Insights blog.

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