How likely are IT service providers to offer discounts in an unprecedented global recession?
As the global economy slows, businesses are trying to cut costs, with IT services one of the first stops – but what are the chances of a happy outcome?
IT service providers often describe themselves as an extension of a customer’s business and refer to the organisations they serve, for a fee, as partners – but how willing will IT suppliers be to offer discounts to customers that are struggling during the Covid-19 pandemic?
Businesses across the world are fighting for their very existence, with business levels in some sectors flatlining. For example, IT services advisory ISG said that in the hospitality sector, occupancy rates have dropped by at least 85%, with hotels closing their doors and making job cuts. This has a huge knock-on effect in other sectors, for example when people aren’t filling hotels, it is inevitable that aircraft and other modes of human transportation are also empty.
Businesses hit hard by the pandemic-induced economic slowdown are turning to governments for financial help, and their major suppliers will be next on the list. And pretty high on the “suppliers to contact” list in the procurement department will be IT services suppliers, as IT spending takes up a large portion of the budget for today’s big businesses.
This is happening now, with businesses in some of the hardest-hit sectors looking to cut costs wherever possible.
John Westfield is partner and practice lead at outsourcing advisory ISG focused on the travel, transportation and hospitality sectors, which are some of the hardest-hit sectors in the global economy, with all three flattened by global lockdowns. “These businesses are aggressively pushing vendors for concessions and deep cost reductions or for payment relief through the remainder of the year to increase cash flow,” said Westfield.
Discussing his Europe, Middle East and Africa (EMEA) patch, Barry Matthews, partner at ISG, said the likelihood of struggling businesses getting discounts in the current climate is pretty high. “We are seeing such a challenging three to six months ahead and suppliers are trying to retain their customers in any way they can,” he said.
Discounts of up to 20% are being requested, said Matthews, and he has not yet seen a supplier refuse such a request. “It is such a difficult time and suppliers know they are going to have to retain their clients,” he said. “The mentality at suppliers is to look after existing clients because they know they will be seen as trusted partners and, when it is over, they will be in a better position supporting customers while they recover.”
But the onus is on CIOs to approach the suppliers, who “are not going to be shouting about it”, said Matthews, adding: “A true partner will offer flexibility now for a long-term partnership in the future.”
Read more about IT services in the Covid-19 pandemic
- IT services buying and selling will go through a transformation during the Covid-19 crisis.
- UK businesses receiving business process outsourcing and IT services from India will face disruption, but IT services from large IT suppliers less so.
- Indian government allows IT services firms to bring half their staff back to delivery centres.
But before asking for discounts, IT buyers have other options, including requesting extensions to payment terms and adding flexibility in other areas, such as service credits and debits. Service credits are normally given to suppliers when they perform well, and service debits are penalties when they are underperforming. “We are seeing a moratorium of these things during Covid-19,” said Matthews. “These things are not happening.”
Peter Schumacher, CEO at management consultancy The Value Leadership Group, agreed that the current climate has focused suppliers’ minds on helping their customers to manage the challenging environment by changing contracts to help businesses survive. “Customers are seeking discounts, deferring, slowing, re-prioritising their activities, cancelling discretionary projects and delaying payments,” said Schumacher. “The actions being taken by suppliers and their severity depends on the customer situation and the impact they are seeing.
“The world has not collapsed in all sectors. The pressure is greatest among customers in non-food retailing, hospitality, airlines, energy, auto and airline manufacturing. Other sectors, like telecommunications, pharma, FMCG, high technology and medical equipment manufacturing, are even experiencing growth and are looking to invest in new IT initiatives. Accordingly, suppliers with a diversified business portfolio will see less of an impact.”
Outsourcing lawyer Mark Lewis said it is important for CIOs to consider that their suppliers are also suffering in the current economic environment. “We are all in pain and there is certainly a discussion to be had about discounts and other options,” he said.
Lewis expects requests for discounts will be fruitful, but said it depends on the circumstances. “It could be that a service can’t be delivered as it was intended,” he said. “But it may also be that they can deliver to the service levels, but the customer can’t make the most out of the service, which is when you get into interesting conversations about whether it is morally, ethically or contractually right for a customer to ask for a discount when they can’t get the most out of the service.”
Creative ways of working together
Lewis said the Covid-19 pandemic is unprecedented and will lead to creative ways of working together for suppliers and their customers. “I think we are in the realms of suppliers just putting contracts to the side if they want to maintain a long-term relationship,” he said. “If the customers are important to the suppliers, they will be given discounts.”
But there are other ways that service providers can help customers without cutting rates, said Lewis. “The suppliers are also in pain and will want their revenues to be retained, but they could offer more for the same price. They could, for example, help the customers with additional projects to support them during the crisis.”
Lewis said that if suppliers make an effort to help customers beyond the contract, they will be respected and admired by customers. The Value Leadership Group’s Schumacher agreed, pointing out that suppliers that snubbed ailing customers during the global financial crash subsequently paid a huge price in lost revenue.
For suppliers that emerge from the crisis with satisfied customers, they will be the chosen partners to help rebuild, which will inevitably lead to significant IT investments. ISG said the pandemic, and subsequent lockdowns, will make all businesses rethink their digital transformations with a focus on operational resilience.
They will want to ensure that future crises of this nature will be less of a shock to the business, through projects around automation and enabling staff to work remotely when required. ISG said technologies such as automation software, digital labour, cyber security and e-commerce platforms will see “supercharged growth” when businesses emerge from the coronavirus pandemic.