A significant trend in the services world is that margins are coming down, and there is a lot of discussion today among industry players about how to improve margins. In an effort to arrest or slow this margin pressure, some providers are moving into programs to address the falling margins. There are a significant number of levers available to service providers to lower their cost and maintain or raise margins. However, these are only short-term plays, and I think they may be overlooking a troubling long-term issue.
Moreover, the margin pressure is underpinned by a growing recognition in the customer base that providers do not need to sustain high margins.
As firms see their margins come under pressure, they pull such levers as reallocating locations, reworking their pyramid structures, using more aggressive visa-based strategies for their onshore landed populations or investing in power tools and productivity vehicles to make their operations more efficient. There are a significant number of levers to lower a provider’s cost and, in the short run, maintain or raise margins.
Many providers today are successfully slowing the trend, and it’s very impressive that they generate these programs and activities to recapture their margins.
But these improvement programs only slow the trend of falling margins; they don’t arrest or reverse the trend.
The troubling long-term issue
The overall story of services is that once the industry is in a race to the bottom, competitive forces pressure the providers to pass their margin improvements through to their customers. It’s an absolute necessity for providers to undertake margin improvement programs, but they are only short term in nature. Eventually providers end up having to give it back to customers in order to maintain wallet share.
A smart margin move
Interestingly, Cognizant and TCS got an early start on programs to improve their margins, but they were not short-sighted in their strategy. They used their surplus margins to invest in growth engines, further exacerbating the margin pressure on the rest of the industry players.
Photo credit: Marlon Malabanan