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pricing

How Low Can They Go? Pricing and Margin Pressures Abound for IT Service Providers | Sherpas in Blue Shirts

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The business environment in which today’s IT service providers are operating is one of the most challenging in recent times. A host of buy- and supply-side factors are impacting the prices they can feasibly and competitively charge their enterprise clients in the U.S., and their margins are being constricted at every turn.

On the buy-side, ongoing commodity slowdown led to overall softening in the global services market in 2016. Uncertainties created by Brexit in mid-year and the U.S. elections in Q4 delayed decisions on new sourcing contracts and temporary cuts in discretionary spending in SI type engagements.

The quantum of large application outsourcing (AO)/systems integration (SI) deals (>US$100 million annual contract value, or ACV) as a percent of total deals fell from 3.3 percent in 2015 to a low of 1.7 percent in 2016, reducing the pricing cushion typically afforded by large deals. And because enterprises continue to maintain a portfolio of preferred AO vendors to foster price competitiveness and innovation, resulting in a price war for deals, the average ACV in AO deals dropped by ~20% in 2016.

Most enterprises are optimizing their portfolios of contracted relationships to reduce overall TCO by improving nomenclatures, rates, service levels, T&Cs, productivity, etc., leading to a dip in realized revenue per FTE for providers.

Additional downward pressure on realized revenue per FTE has resulted from an increase in brownfield automation, especially in compete situations and second generation renewals. And renewals fell sharply, from 55 percent in 2015 to just 27 percent in 2016, driving price wars among providers.

On the supply-side, although resource utilization increased for Tier 1 service providers from ~80 percent in 2015 to >82 percent in 2016, it is beginning to max out as a delivery optimization lever. Consequently, providers are trying to achieve higher efficiencies and sustain margins via better project planning, DevOps, agile staffing, and proactive use of automation.

 

Pricing pressures and automaiton and digital solutions for IT enterprises and service providers

There is extreme competition in most rebid and re-compete situations, which has led to an overall decline in pricing. We saw an average dip of 1-2 percent in AO /SI FTE rate cards, but bigger dips in overall account-level TCVs. And per rate cards, some enterprises have pushed for single onshore rate card that doesn’t delineate between local and landed resources, leading to cheaper onshore rates. That said, the new U.S. government may push for more onshore hiring and localized presence, including sanctions on landed resources. This may push onshore rates higher, marginalize the landed resource model, and put additional margin pressures on service providers in the second half of 2017.

All this paints a pretty gloomy picture for IT service providers. However, they have started pivoting towards a digital first future, which can help stem their margin and profit erosion, and reverse the worrisome growth deceleration. Most are growing their top line and/or capability portfolio inorganically. Most are also investing in and pitching automation capabilities in a bullish manner. While this may led to a near-term cannibalization of their traditional offerings, in the medium- to long-term it will help sustain their margins in a price competitive landscape.

Do you believe that a digital first pivot will help service providers get back to double digit growth rates?

Network Virtualization – How Long Will Senior and Specialized Roles Command a Premium? | Sherpas in Blue Shirts

By | Blog

In the network management space, Software Defined Networks (SDN) and Network Functions Virtualization (NFV) are set to be the next game changers. These technologies – both of which are moves toward network virtualization and automation – are witnessing high levels of demand, and are expected to play a key role in the virtualization of data center environments. While they need not be operational simultaneously, in many cases we have observed them to be deployed together, leading to significant synergies and positive impact on the overall network architecture.

However, as with any relatively nascent technology, there is currently a shortage of skilled SDN and NFV resources. This is especially true for senior roles such as business analysts, architects, and senior network architects. There are a number of factors that have caused this gap:

  • Most networking professionals have typically remained focused on equipment from a particular vendor, but the requirement is broader for SDN and NFV
  • SDN specialists need to understand both networking concepts and scripting / code development. Traditionally, these skills have co-existed but within separate parts of large buyer and service provider organizations
  • As the transition to SDN is a complex activity that impacts the entire IT environment, senior roles require leadership traits to be able to drive the associated change.

So what does this mean for pricing of resources?

We have seen an interesting trend in some of the large network services contracts we analyze each year. While service providers have maintained or even slightly reduced project services rates for junior resources, the pricing for specialized/senior resources has been consistently inching up.

The skills gap mentioned above is the major contributor to the higher prices. We have also seen contracts in several European countries that explicitly require use of local resources, which leads to further price increases.

On the positive side, an increasing number of engineers are opting for SDN/NFV certifications, some of which are being sponsored by organizations. Large enterprises and service providers are also bulking up their training capabilities to up-skill the current workforce.

Key considerations for enterprise buyers of SDN and NFV services

Enterprise buyers should keep a close watch on pricing for network project resources, as the dynamics could change over the next 12-24 months.

Factors they should consider include:

  • The current price premium is justified, but there could be a price correction as the supply of skills improves
  • The overall total cost of ownership (TCO) impact on a yearly basis, as well as individual day rates
  • Right-sizing the effort to ensure there is no over-capacity on the particular project/initiative.

It is clear that the networking infrastructure world is becoming more software oriented, and it is a case of “when” more than “if” the supply of skills will stabilize. Having the right skills on critical projects is of paramount importance. It will be interesting to see how the labor pool and pricing for these skills evolves.

If you have recently been part of a similar negotiation discussion, our readers would love to hear your experience!

Deep Discounts in IT Infrastructure Services Pricing – Is This the New Normal? | Sherpas in Blue Shirts

By | Blog

The IT services industry is going through a tremendous change with the onset of new technologies, geo-political uncertainty, and disruption of traditional business models.

Deal renewals have fallen significantly, leading to intense price competition among service providers trying to meet their top-line revenue expectations. As expected, the pricing pressure is higher in some of the more commoditized services such as IT Infrastructure operations. Indeed, recent Engagement Reviews for numerous North American clients suggests that pricing for some mature services within the IT infrastructure domain, such as storage and backup management, server management, and database management, has fallen significantly. Our analysis suggests that the Indian service providers have upped their ante, and have become even more competitive in terms of pricing.

As a case in point, the per instance pricing for virtual server management has fallen by 25-35 percent over the last 12 months. The fall in pricing for some other resource units has been even steeper.

Services Pricing 2017

What’s driving these deeply reduced prices? Numerous solution-related changes have impacted pricing dynamics in this market.

  • Maturity of internal automation/autonomics capabilities of service providers
    While these have largely been buzzwords in the last 12-18 months, we believe that the impact of some of these investments has finally started to show up in deals.
  • Further improvement of internal productivity
    Just when we thought that the solution effort ratios such as servers managed per FTE, databases managed per FTE, etc., had reached their true, optimum levels, we have seen instances of further changes in some of these solution metrics. Some of these can potentially be attributed to the above point.
  • Complete offshore operations
    We are seeing more and more deals where 100 percent offshore delivery is the norm. This enables service providers to quote very competitive per unit pricing. It will be interesting to observe how this metric changes going forward if new regulations come into play by the new U.S. president’s administration.
  • Increased competition, smaller deal sizes, and deal durations
    The past 12 months have been difficult for most IT service providers, with increasing competitive intensity and delayed enterprise decision making due to geo-political uncertainty. As a result, they are going all guns blazing to win new accounts.

Most of this low pricing has been observed in new deal situations. We have seen very few occurrences of providers proactively reducing prices in existing deals, unless faced with the threat of the deal going into a competitive situation. Of course, it would be unfair to expect service providers to reduce unit prices significantly in all deals, since each deal level pricing scenario is very contextual and a deeper analysis of the underlying environment is warranted.

Have you had discussions with your infrastructure provider about recalibrating prices?