| | By Mick James
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 | |
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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.
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"In general over 90%
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%. 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, | |
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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 | |
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| | 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 restrategise
and run a market
competition," he says.
"It constantly surprises
me how little focus or
work organisations put
into the contracts that
they strike."
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