The IT services sector is experiencing erratic pricing as western suppliers attempt to retain their corporate customers amid huge competitive pressure from offshore suppliers.
Large corporates, once cautious about working with offshore players, today recognise operating model advantages over western players and no longer show trepidation because they have worked with offshore players for years now.
But things are changing, with companies such as Tata Consultancy Services (TCS) fighting for deals with established western firms as equals rather than upstarts. This is resulting in incumbent suppliers being forced to cut prices to retain large clients.
Losing major accounts is bad news for large western suppliers listed on the stockmarket because they need to retain revenue growth.
Peter Schumacher, CEO at management consultancy Value Leadership Group, which has spoken to hundreds of large European businesses about their IT outsourcing plans, said while there is still a lack of understanding about just how big some of the Indian suppliers are, it is beginning to sink in.
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“In Europe, customers recognise that offshore firms offer significant operating model advantages over western IT services companies, which are seen as still struggling to adapt their largely conventional and fragmented country-focused model to the new competitive realities,” he added.
“Meanwhile, the offshore firms have established very strong positions in key sectors, where the biggest customers see them as being on par with companies like IBM,” said Schumacher.
He said this is giving CIOs a bargaining tool when contracts are up for renewal with the large western service providers, which is causing erratic pricing.
“The stronger presence of the offshore firms has given clients enormous bargaining power, which they are using to extract pricing concessions and renegotiate contracts,” Schumacher added.
Outsourcing is not all about price
Recent research by the National Outsourcing Association (NOA) revealed that 54% of outsourcing buyers gave cost reduction as the main reason for doing so, while 36% said improved services were the main driver. The remaining 10% cited access to other value-add services as the top reason.
According to the survey of NOA members, suppliers are promising cost savings, with 60% offering savings of between 11% and 30%, but 57% of executives buying the services expect savings of between 21% and 40%.
But it is no longer just about price – although still the main factor, it is diminishing in importance. Offshore suppliers that have not readied themselves for changing buying habits will struggle.
While TCS is gaining huge ground on western companies, and was even described by one commentator as IBM Global Services’ biggest competitor, this is not the case for all offshore suppliers.
A lack of service innovation will hold many offshore suppliers back, according to Ilan Oshri, a professor at Loughborough School of Business.
He said the Indian suppliers have their own challenges in reducing their reliance on models that are based on the provision of low-cost skills: “From discussions we have had, it seems some of the Indian firms are under pressure because they are not pursuing strategies outside offshore models.
“Companies such as IBM have developed hybrid models that combine offshore delivery with innovation. IBM has been doing this for five or six years, but many Indian firms have not focused on that.”