October 31, 2011
Time and again, we come across press releases from India’s biggest corporate houses announcing deals with large providers that are labeled “strategic” or “total outsourcing” partnerships. The hallmark of a typical strategic deal is a long-duration sole-source partnership with one large provider for infrastructure and/or applications. The provider is then made responsible for evolving a medium- to long- term technology roadmap for the buyer, and managing the execution of the roadmap through itself or other vendors.
Some of these partnerships are truly “strategic,” wherein providers genuinely share risks and rewards of the implementation, while many others are simply monikers for large, long-duration asset heavy deals with straightforward delivery objectives. Yet both cases seem to go counter to the trends in the mature sourcing markets, where buyers have long since abandoned such heavy-duty contracts.
There seems to be an interesting pattern among these buyers. They are typically telecoms or financial services companies that are trying to gain a foothold in newly deregulated or traditionally underserved markets with suddenly lowered entry barriers. These were large markets for basic, standardized products and services with low margins, where only a few would ultimately survive. In their race to be the “kings of the hill,” companies could afford to be customer-agnostic, as long as they got their basic services and sales models right. There are two important technology implications for companies in this phase:
- With heavy investments into sales and marketing, they start looking to other departments such as IT for investment avoidance. There is a tendency to put in place a leaner internal IT group, which is not equipped to handle a large set of provider relationships. Further, under budgetary pressures, they tend to view ideas on outsourced asset ownership and control more favorably.
- Facing haphazard and chaotic growth, management typically struggles to match capacity with demand. They increasingly look for partners that can bring predictability to their operations, with plug and play set-ups at service levels that are just about acceptable to end users.
Large IT providers that hear these management challenges when pitching are in a position to strike these large long-duration deals. And with well-structured contracts, the partnership may actually work very well…for at least the initial few years.
Problems in these deals start to manifest when companies are faced with two inflection point challenges:
Inflection in strategy: Sooner or later, slowing industry growth will bring the companies to re-evaluate their businesses. As already seen in the Indian telecoms industry, intense competition causes price points to steeply fall close to marginal costs, and companies then begin to shift their focus from chasing growth to profitability. This is the point at which companies typically start to pay attention to their customers and try strategies for differentiation – either through price skimming for value-added services or by offering adjacent products and services. This may involve following their profitable customers across their lifecycle at non-traditional touch points to fulfill unmet needs. At the other end, consumerization of technology will offer disruptive opportunities to reach customers and offer commoditized services at throwaway prices with minimal service costs.
To execute these strategies, companies will find they need to play in an ecosystem of alliances with partners requiring seamless transition of customer data to facilitate these decisions. Additionally, as they move towards customer-centric models, they will find a need to revisit their one-size-fits-all standard service models for technology and process infrastructure.
Inflection in technology: Buyers in strategic IT deals also implicitly assume that a seasoned IT partner will automatically bring cutting-edge innovative solutions as technology evolves. There are three important behavioral reasons for challenging this assumption:
- First, when there is a disruption in the underlying technology itself, it often arrives loaded with a lot of skepticism and lack of perceived commercial value right until the point it disrupts. Incumbent providers (with no better ability than buyers to foresee the end states) are likely to under-estimate comparative benefits of these disruptions in their assessments.
- Second, even in cases where the end states are clear, IT partners may suffer from conflicts of interest that prevent them from evaluating competing organizations or technologies for innovative solutions.
- Third, in the specific context of the account, the provider account organization tends to get settled into a well-oiled machine. With rising costs, it is motivated to scale down its “strategic thinking” on the account, and push more and more work under the factory mode.
No matter how “strategic” the relationship, IT partners often tend to advise or shape outcomes that are directionally well-guided by their contract clauses. When the buyer is grappling with strategic or technological inflection points that have not been foreseen at the time of contract inking, the partner is likely to default to choices that are limited by its own publicly held worldviews, capabilities and vested interests. While the choices may not necessarily be wrong, they do not benefit from a cross-pollination of ideas and approaches that the buyer would have had access to in a more open relationship. As Indian consumer markets and technologies rapidly develop, buyers may find this limitation increasingly unacceptable.