What I’ve predicted for several years is now happening and the global services industry is experiencing a pricing war. The industry’s core arbitrage marketplace is moving from modest pricing competition to an intense pricing war. Providers’ prices are coming down not by 3 to 5 percent but in some cases by 20 to 30 percent. I’ve blogged about this inevitability for some time, and the last six months showed rapid movement in a downward spiral. Pricing disciplines that providers previously exercised are collapsing. Why has pricing become so precipitous?
Who is driving the intense pricing competition?
Mature enterprise clients, which are on their second or third generation of sourcing, are instigating this market move. They themselves face unrelenting cost pressures and point to providers’ high margins as proof that there are plenty of gains to be had. At the same time as they eye the margins, they are convinced that the next generation of cloud, automation, and as-a-service offers provide breakthrough cost advantages; and they seek to combine all this into step-change gains.
With these raised expectations also comes a willingness to switch providers and a realization that the barriers to switching have been greatly reduced. This is evident in our statistics, and I blogged last year about the increasing anti-incumbent bias.
Factors exacerbating the downward spiral
In addition to enterprises’ effort to drive pricing down, other market forces add to the momentum toward a pricing war. As enterprises’ willingness to switch providers increases, incumbent service providers are increasingly in an untenable situation. Investors reward firms that demonstrate growth; so providers can’t afford to have lower-priced competitors capture large chunks of their existing revenue. In addition, the maturing arbitrage market no longer gains share from traditional models at the same rate.
As the prospect of losing existing customers becomes increasingly painful, a retain-at-all-cost dynamic is increasingly the tone forcing account teams to drop price for existing customers while encouraging providers to use lower prices as the way to win new customers.
All these actions create a downward spiral that feeds the enterprise customers’ belief that pricing must come down. And voila! We have gathering momentum on a pricing war.
I think the implications for the industry are very significant. The days of relying on contractual switching costs to protect providers are over. Switching costs have eroded and providers are left with no choice.
I think the new normal will be much more competitive pricing – certainly for mature clients, but also it will spread to new clients. Clearly the idea of getting COLA adjustments is an uphill climb.
I’m not saying there is a race to the bottom in all market segments. Certainly providers in the growth areas such as as-a-service models and digital technologies and value-added areas will be able to command high margins. The challenge for the industry is that the core of business is in the quickly commoditizing spaces with a customer base that is unwilling to pay a premium. We must accept that this is happening.
It brings to my mind words in a Dylan Thomas poem: “Rage, rage against the dying of the light.”
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