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At the beginning of the COVID-19 pandemic in early 2020, most businesses cut back their operations in response to falling demand, while at the same time taking actions to ensure business continuity. Now, as we emerge from lockdown conditions, business leaders are beginning to scale up operations in a phased manner.
For many organizations, outsourcing is a key element of business operations. Therefore, in this uncertain environment, a key priority for business and IT leaders is to manage their outsourcing spend.
In a recent Research Byte, COVID-19 Impact on IT Organizations and Service Provider Relationships, we discussed the impact of the pandemic on enterprises and their relationship with managed services providers over the short-term, intermediate-term, and long-term.
This Research Byte focuses on strategies for business and IT leaders in managing their outsourcing spend and how they can achieve savings. Using a focused negotiation strategy in the middle of this crisis, IT leaders can avoid a reactionary approach in their discussions with service providers.
As the pandemic disrupted business operations and led to lockdowns, an immediate concern for businesses has been to conserve cash. IT leaders have shared these concerns with their service providers and have negotiated measures to conserve cash. For example, many buyers have been able to negotiate payment terms of 90 days or more depending on their industry and cash flow strategy.
Though many providers have already extended temporary discounts to their customers, in many cases buyers can still pull this lever. A key factor in favor of providers in the current environment is that most buyers prefer incumbents, as they want to avoid the risk of disruption and are reluctant to switch service providers. Mature service providers recognize the role they can play in helping their clients avoid financial distress. They understand it is in their interest to offer temporary discounts to their strategic clients.
As of July 2020, there has been gradual ease of lockdown restrictions, but COVID continues to have a significant impact on businesses even as work-from-home continues to be the norm. Organizations need to plan beyond the immediate distress and focus more on operational changes. Buyers will need intermediate strategies to manage their outsourcing relationships for the next 6 to 9 months.
All organizations need to recognize the effect of falling business volume. As discussed in our recent Research Byte on the COVID-19 recovery, the impact of the pandemic varies across industry sectors. But nearly all organizations will experience fluctuation in demand, with initial volumes for IT and BPO services falling. IT leaders need to calibrate their outsourced services to this variation in demand. We expect that buyers can negotiate a medium-term reduction of 16% to 24% in their outsourcing spend due to declining business activity. Some immediate measures can include suspending support of devices in “shuttered” facilities.
Buyers should also renegotiate their service provider contracts if there are changes in their operating models. For example, a major shift to work-from-home demands for technologies to support such an operating environment. Most mature providers have been able to ensure business continuity for their clients by swiftly adjusting their operating models. In the current economic environment, both end-user enterprises and service providers need to assess the financial terms and conditions of their contracts and identify those clauses that need to be modified in light of changing operating models.
Finally, many organizations have service provider contracts with benchmarking clauses to align their contract price and service levels to market and best practice. These organizations should invoke these clauses since the metrics are dynamically changing. Adjustments here can lead to annual savings from 14% to 29%.
The business world has largely realized that while we can survive the pandemic, we all must adapt to a “new normal.” Organizations need to seek long-term improvements in service provider delivery, and the cost of those services need to be calibrated accordingly.
The most important strategy is to accelerate digital transformation. Most organizations were already pursuing digital transformation before the pandemic, but the pandemic has accelerated the trend. Digital technologies that were already gaining ground are now seeing accelerated adoption as the world continues towards recovery. Service providers are aware of this and are reworking their core offerings to make greater use of digital technologies such as artificial intelligence, automation, the cloud, and unified communication. Longer term, acceleration of digital transformation will bring operational efficiencies across their client engagements, and customers should be sure that providers pass on the cost savings.
More specifically, widespread adoption of remote working will have important long-term effects on outsourcing budgets, with important implications for both clients and providers. From the client perspective, many companies will see only a limited return to shared office space, and with much-reduced density. To provide better social distancing, most organizations will only want to occupy their offices at a maximum of 50% of their pre-COVID capacity. As a result, for example, the requirements for deskside support and walk-up kiosks will be greatly reduced. Providers of these services should implement lower-cost options for depot and remote support, which they can deliver more cost-effectively.
From the provider perspective, while offsite delivery has long been a key strategy, it will now inevitably become the norm to a much greater extent. Most leading service providers are making organizational changes to facilitate working-from-home for their own employees, reducing the use of their own office space. These changes will make remote working the “new normal” by reducing the need for travel and physical meetings in large groups. While subject to a provider’s ability to manage these organizational changes, we expect that, in the long-term, the cost of service will fall. This cost reduction will benefit both the customers and providers. While such initiatives were always seen as a natural progression to a digital workplace, the lessons learned from the pandemic have affirmed the commitments from IT leaders and expedited their implementation.
As businesses across the globe are working to adjust their cost structures, including their outsourcing spend, they need to see the big picture and understand these short-term, intermediate-term, and long-term strategies that can help them optimize their outsourcing budgets.
Analysis by Anuj Jain, Benchmarking Practice Lead at Avasant.
There are several reasons that IT organizations should benchmark their service provider contracts on a regular basis. With Avasant's AvaMark benchmarking platform, you can receive benchmarking of outsourcing contracts on a one-time or an ongoing basis. For more information, see Benchmark Your Service Provider Outsourcing Contracts.