EquaSiis Brief

Analysis and Commentary on the Global Business and IT Services Markets

The Situation: The Top Five Challenges Facing Offshore IT

Service Providers in Today’s Economy
Abhishek Sharma, Consultant, EquaTerra
Stan Lepeak, Managing Director, EquaSiis Global Research

The global economic turmoil of the past year has had a severe negative impact on the business
and information technology (IT) service provider market. Customers have completely changed
their business practices, moving from a nearly “anything goes” mentality to tightening their belts
and finally to survival mode. Few enterprise buyers have been immune to the downturn. In fact,
some of the biggest names in the financial services industry – one of the largest markets for third-
party IT services – have fallen on hard times and, in more than a few cases, fallen apart.

Overall IT budget growth levels are down – or at best flat – across the board for 2009. Most
customers have reduced discretionary spending to a trickle and shelved long-term return on
investment (ROI) projects for the foreseeable future. While budgets for services are experiencing
fewer cuts than those for other areas like hardware procurement, successfully completing sourcing
efforts is still a challenge for buyers given operational disruptions and uncertainties within their
organizations.

The Context
Offshore IT service providers face considerable challenges in this market downturn given their
customer industry exposure, service portfolios, size, value proposition and operating models.
Proactively addressing these obstacles is the best way to overcome them.

What should the business and IT service provider community, especially India-based providers
and others with extensive offshore offerings, do to adapt to and succeed in the current market
environment? Tackle its challenges aggressively and head-on.

There are numerous risks today, many of which were nonissues a year ago, that are serious
concerns for service provider management. Providers must change their business models and
increase their emphasis on retaining customers and taking market share from the competition.

The Advice
Offshore IT service providers face five major challenges – and they should take specific steps to
mitigate them.

Five major areas of concern confront the business and IT service provider community. Providers
must aggressively and thoroughly address each of these issues to ensure their ongoing
competitiveness.

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Concern 1: Customer Retention
One of the first steps customers take when trimming their IT budgets is provider consolidation and
rationalization. Any moderate to heavy users of third-party IT services are either planning to
reduce the number of providers they work with or already in the process of doing so. As a result,
there is increased pressure on outsourcers to maintain their share and avoid being cast out.

Retention and share of spend growth is dependent on a number of factors, including the criticality
of the work performed, the total financial outlay, the depth and quality of the customer/provider
relationship, and the ability of the provider to proactively articulate the value it brings – and will
continue to bring – to the buyer.

Mitigation
• Outsourcers need to analyze the work they perform for their customers and determine its level
of mission criticality and then use hard metrics to illustrate the integral role of their services in
the buyers’ continued success.

• Senior management should regularly and meaningfully engage with their customer
counterparts to maintain the executive connection and reassure buyers of the provider’s
continued support, viability and strength.

• Providers must analyze current buyer situations, identify their most critical business needs,
and determine if the services currently supplied conform to these requirements. If the work
being performed does not meet a customer’s critical needs, service providers must attempt to
proactively redirect their efforts.

• Providers in today’s market should only pitch new services and projects that are directly tied to
a buyer’s most critical business issues. They must focus on customer needs – not their own
capabilities or current favorite offerings.

Concern 2: Pricing
Providers are naturally concerned with maintaining their billing rates. In some situations this is
wishful thinking, and in others it is unwise to pursue the issue too forcefully. While taking a major
or long-term loss on any customer is unacceptable, losing business outright is worse than
accepting lower margins in the short term.

During tough times, buyers often compare their own profit margins against those of their provider
set and seek reconciliation in rates. Rising wages due to increased competition for offshore talent
pushed billing rates upward over the past few years, and now customers want to renegotiate. This
is a more viable option for providers today given current exchange rates and drops in demand that
have eased labor shortages and wage escalation.

The number of price benchmarking requests in the market is on the rise as buyers try to ensure
that they are not overpaying. Even if outsourcers’ pricing is in line with market benchmarks, they
are faced with pressure to reduce their billing rates by 5 percent to 10 percent or more.

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Mitigation
• Providers should proactively initiate pricing discussions with their customers each year as a
best practice to ensure that there is no brewing discontent.

• Depending on their relationship with a buyer, outsourcers should be as transparent as

possible about the pyramid pricing model they use and supply granular details. All other things
being equal, customers tend to remain loyal to more transparent providers.

• Service providers must be open to buyers’ requests for rate revision discussions. They should
explain the current breakdown of charges in detail and be creative about possible ways to
reduce costs.

Concern 3: Payment
While some IT service providers are in dire financial straits today, there are many more buyers in
this situation. Providers need to scrutinize and assess the financial strength and viability of their
major customers and prospects and use discretion when pursuing new business, maintaining old
business, and defining the terms and conditions under which they undertake both efforts. They
need to focus on the likelihood of delayed payments, disputed billings and payment defaults.

Mitigation
• Providers must proactively profile and rank the key financial attributes of all major customers
and prospects to identify high-risk accounts and develop thorough risk profiles for them.
Pursuit of new business or expansion of existing work efforts should require executive
approval.

• Outsourcers must fully understand terms and conditions, remediation options and avenues for
recourse and exercise them if a customer’s financial or other key commitments begin to slip.

• For seriously problematic customer accounts, service providers should intervene at the
executive level to review the situation and identify the best solution. In some cases, however,
it will not be possible to salvage the relationship, and providers should move to execute
contingencies as soon as possible.

Concern 4: Sales Optimization and Increasing Bid Conversion Rates

The cost of sales efforts in the IT services industry is extremely high. Bid cycles often run for
months, and manpower, travel and general expenses add up. Given the high growth rate of the
industry, though, this was never historically a roadblock – there was something for everyone, and
it made sense to bid wherever a reasonable opportunity existed.

When growth is limited, however, the financial impact of a lost bid increases significantly. It is
more important than ever for providers to manage the sales process closely, both to save money
and as part of a broader initiative to more effectively profile and vet prospects in the future.

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It is also imperative for outsourcers to improve or minimally maintain bid conversion rates. With
increasing maturity in offshore services – and customers unimpressed by simple labor arbitrage –
it is extremely important to plan and execute each step of the bid cycle carefully. Providers must
focus on the selection process from start to finish.

Mitigation
• Service providers should develop a filtering process to estimate the sales costs for each bid
and reject those where the anticipated costs are too high and the chances of selection are
below a certain minimum percentage.

• Providers should maintain an open and collaborative rapport with sourcing advisors and solicit
their opinion regarding the competition.

• Outsourcers should consider creative and pragmatic ways to manage the sales process. For
example, they can use collaborative technologies to host remote working sessions with
buyers, which will allow them to send only the most critical staff to customer sites.

Concern 5: New Service Innovation

Even while fighting fires in tough economic conditions, service providers must not lose sight of the
long-term business value that they can bring a buyer. While customers are more focused on price
today, they will still form lasting strategic relationships based on value. When economic conditions
improve, outsourcers that have taken a long-term view toward operational and corporate
excellence will have an edge over the others.

It is tough to strategize and focus on capability enhancement when circumstances are squeezing
profits from every angle. However, service providers that continue to develop now will emerge
leaner, more agile and better equipped to succeed in the years to come. While much of the
industry’s growth up to this point can be attributed in some part to the first wave of offshore
outsourcing, expertise-driven, focused providers offering transparent value to customers will drive
– and reap the benefits of – the next phase.

Mitigation
• Providers must focus on short-term customer needs and emphasize the value of the services
they currently provide while continuing to identify and discuss future strategic goals.

• Service providers need to work to understand buyers’ long-term goals and objectives and
determine how the services they provide can help customers achieve these milestones.

• In this market, outsourcers should only discuss innovation in concrete terms. Additionally, any
innovation must be tied to tangible deliverables, not vague, open-ended goals such as
process transformation.

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What’s Next?
Current market conditions are challenging, but thinning the offshore service provider herd is
beneficial to the market, the providers that survive and the buyers that use them.

Most offshore IT service providers spend too much time doing one of two things – lamenting the
impact that tough economic times are having on their bottom lines and business models or soft
peddling the market’s true impact. Instead, providers should devote their time, attention and
resources to addressing and mitigating near-term challenges and concerns and gearing up to
capitalize on new opportunities as the market improves. Now is the time for proactive and targeted
aggressiveness, not reactive and unclear positioning.

Related Research
The Top Ten Things Outsourcing Service Providers Should Do in Tough Economic Times

The Top Five Challenges Facing Offshore IT Service Providers in Today’s Economy www.equasiis.com | 5
 About EquaSiis Media Contacts
EquaSiis, an EquaTerra company, provides software and services that Ron Walker, EquaSiis
improve the business support services lifestyle for shared services, +1.858.486.6035
outsourcing practitioners and service providers. The software, ron.walker@equasiis.com
EquaSiis Workbench and EquaSiis Enterprise, is a framework for
Lee Ann Moore, EquaTerra
collaboration used during the service delivery assessment and
+1.713.669.9292
sourcing process to assist in analysis and decision making for shared
leeann.moore@equaterra.com
services or outsourcing. EquaSiis provides intelligence and
optimization for the delivery of business support services across the
entire organization. The company also offers service providers market
intelligence, research, customer satisfaction and trending data through
its Insights group. For more details about EquaSiis’ research offerings,
please contact Stan Lepeak, stan.lepeak@equasiis.com.

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