“Covid-19 has acted as an IT transformation accelerant, forcing customer and supplier change.” With these words, a client at a recent ClearEdge Advisory Board meeting neatly summed up what is happening across organizations today. Specifically, we have observed the post-pandemic world is characterized by three macro trends across our client base and the IT suppliers that they work with:
An acceleration of IT transformation activity
An improvement in how Sourcing organizations work with their stakeholders
A change in IT supplier behavior and strategy due to client business challenges from the pandemic, as well as the economic impact on their own business models
The sudden increase in remote working, as well as the immediate and pending financial impact on clients’ businesses, has driven a rapid acceleration of IT transformation activity and thereby a significant increase in demand for the services and technologies that enable that transformation. This has manifested itself in an immediate and high demand in the following major areas:
Remote productivity tools, devices, and security programs to enable work from home
Increase and change in remote support
Acceleration in the adoption of Cloud and SaaS solutions
In addition to the marked acceleration of IT transformation activities, we have seen an improvement in how sourcing organizations are working with their stakeholders, as well as many changes in supplier behavior in response to their customers’ financial challenges and the pandemic’s effect on their own businesses.
The immediate need for IT transformation, coupled with company mandates to reduce operational expense, has brought down a lot of organizational process barriers. This has led to improvements in alignment with Business and IT stakeholders, and the sourcing and financial teams that support them. This is a good thing: people are working together on common business goals and addressing the dual imperatives to cut costs and optimize resources.
Things like vendor lock in, price transparency, and contractual inflexibility are being newly examined in light of down-sizing and shifting business priorities in the post-Covid era. In fact, if anything positive comes out of the pandemic from an organizational perspective, it is that clients are now seeing how much can be accomplished when they join forces and align how they interact with their suppliers.
The Services Industry
The services industry has been the hardest hit by the pandemic. Whether it is a retail store, hotel, airline or restaurant chain, their customers – and revenue – virtually vanished overnight. Similarly, the IT services market, whether it be outsourcing, professional consulting, staff augmentation, has also been significantly impacted -- probably more than any other IT category.
Many clients are deferring or cancelling projects due to financial pressure, and service providers have responded by reducing prices. Some are lowering IT staffing resource rates or offering more flexible contract terms. These suppliers are eager to keep their people billing and maintain a revenue stream – even a reduced one. We are seeing firms like McKinsey and BCG offering dramatic reductions in consulting engagement costs, to ensure that their resources – who are so expensive to recruit, train and compensate -- are kept busy. We have also observed some smaller firms willing to deliver projects at cost, just to keep the revenue stream going and offset labor costs.
In spite of these efforts, we have seen an increase in layoffs and furloughs across the professional services industry. The supply of services has simply outpaced demand for IT labor. We expect this trend to continue, so we are urging clients to take advantage of this situation and whenever possible by renegotiating contracts and competing projects and services among suppliers.
At the same, many clients are outsourcing more -- not just IT, but business processes as well. They are finding ways to get work done more cheaply, which improves their flexibility and allows them to focus on core business.
However, this puts increased stress on client RFP and contracting processes, which can be complex, challenging and time consuming with Services transactions. This can lead to clients “fast-tracking” this process, which comes with significant risk. These transactions must be methodically planned out in detail, and in many instances, this is not happening.
Some Services vendors are offering to extend or restructure contracts to improve margins and safeguard their annual revenue stream. To win new business, they are showing a willingness to wave start-up fees and provide initial discounts just to get in the door. Again, this leads some clients to bypass the proper due diligence associated with the service, causing potential cost increases and missed business expectations later in the contract. We understand the desire to save money, but caution clients to never cut corners in this process.
Because the IT Services industry is dealing with the economic pressure that nearly everyone else is experiencing, we are seeing an uptick in industry shrinkage and market consolidation. This means there’s additional risk for buyers, and clients must look closely at the stability of their Services suppliers.
And finally, we are seeing suppliers starting to expand their services portfolios in an effort to respond to the new business climate. A number of vendors are looking to enter the outsourcing market, as these services provide a potential new and annuity-based revenue stream and greater opportunities for upselling. We believe this trend will continue.
We advise clients to take full advantage of the current turmoil in the IT services industry and ensure that the impact of Covid-19 on their business is being addressed, recognized, and minimized. Leverage is presently on the buyer’s side and must be harnessed as you plan and renew IT Services agreements.
Chris Powers is a Managing Partner and leads the Cloud ERP, Professional Services and Outsourcing Practices at ClearEdge.
This blog post was inspired by the webinar, Continuing Impact of COVID-19 on IT Spending. You can access the full recording to this webinar below or by contacting your ClearEdge representative.