Points of View
More IT Outsourcing / IT Services Research
Price cuts and flexible pricing models; it’s time to strike a deal with your provider
The COVID-19 outbreak transformed businesses; many closed their doors, while others slashed spending and preserved cash to help them ride this wave of uncertainty. Inevitably, a lack of enterprise spending will be concerning to almost every service provider that deals with expensive and lengthy contracts—many enterprise clients will be hesitant to commit. To address clients’ uncertainty, service providers must change their approach to pricing models to entice enterprises to commit to multi-year engagements. For the savvy enterprise, this presents a great opportunity to partner with a leading service provider with a more flexible pricing model and potentially significant savings.
Even before COVID-19, enterprise clients were voicing dissatisfaction with leading service providers’ pricing models
Developing a pricing strategy can be challenging for providers as they deal with complex engagements that can span several years. However, they cannot afford to avoid the pricing task; for many enterprises, pricing can be the make-or-break point for a deal. Unfortunately, current inefficient pricing models often leave enterprise clients unhappy with the burden of extensive up-front costs alongside continued expenses throughout the engagement. Many conversations between HFS analysts and enterprise clients have included this lament; Exhibit 1 explains that inflexible pricing models are the area in which enterprises are the least satisfied. Nevertheless, the services market’s volatility presents enterprises with an opportunity to push service providers to finally address these challenges and introduce flexibility into their pricing models.
Exhibit 1: Enterprise leaders say a lack of flexible pricing models causes the most dissatisfaction (pre-COVID-19)
Please rate your satisfaction with your current service providers in each of the following areas.
Sample: Global 2000 Enterprise Leaders = 335
Source: HFS Research supported by KPMG, “State of Operations and Outsourcing” 2019
The exact impact of COVID-19 is impossible to predict, but we can be certain that it will significantly impact the services market
Because the services market spans virtually every industry, it’s incredibly difficult to put it under a single umbrella and accurately predict the overall impact. For example, while the travel and hospitality industries have effectively ground to a halt, many banks are looking toward service providers to help them deliver emergency stimulus packages. However, if there’s anybody fit for the job of making a prediction, it’s our Chief Data Officer, Jamie Snowdon. In a recent POV, he outlined several scenarios for the market over the coming years, shown in Exhibit 2. Scenarios 0-1 are expected to be similar to a “normal” recession, while scenario 2 is similar to a bad recession and scenario 3 represents major disruption. It’s clear that regardless of the scenario, COVID-19 will severely impact the market and force service providers to adopt outside-the-box thinking, particularly around pricing, if they hope to weather this storm.
Exhibit 2: COVID-19 will impact the services for years to come
Source: HFS Research, 2020
Leading service providers’ earnings calls are very telling, and this quarter, one consistent story was about COVID-19 and its impact on pricing models
While it’s been several months since the COVID-19 outbreak began and we’ve all been working in home offices for what seems like forever, we’re going to have to wait a little longer to see the pandemic’s full impact on this market’s quarterly earnings. Since we’ve just finished results season for Q1 2020, providers have at least had the opportunity to discuss their expectations. While virtually every provider has chosen not to offer guidance for the coming months, many commented on the conversations they’re having with their clients:
- KC McClure, CFO of Accenture, suggested that Accenture has a good relationship with its clients, and it knows how to ensure that it’s making “the right arrangements for both them and for us.”
- Abidali Z. Neemuchwala, CEO at Wipro, explained that a lot of requests his firm is getting are near-term postponements or deferments of discretionary spending. He also claimed that Wipro is being proactive and seeking opportunities that will drive cost savings for clients and revenue opportunities for itself.
- Brian Humphries, CEO of Cognizant, advised that Cognizant had seen some requests for furloughs and rate concessions, but not yet a meaningful amount.
- “Tiger” Tyagarajan, CEO of Genpact, explained that Genpact was constantly considering total value created for clients, even if it meant moving away from definite pricing models towards flexible alternatives, and that the firm is seeing an uptake in outcome-based deals as opposed to price concessions.
While we’re only teetering on the edge of a global recession, it’s clear that even the leading service providers are having conversations with clients that want to re-address their existing deals or strike a bargain when signing a new one.
The Bottom Line: Despite the outbreak of COVID-19, every enterprise must continue to pursue digital transformation, and it’s time to strike a deal with your provider if you want the best bang for your buck.
These are tough times for everyone; regardless of your industry, it’s likely that every service provider will understand the struggle you’re currently enduring. However, every business must continue to pursue digital transformation if they hope to thrive beyond the current pandemic and oncoming recession, and, unfortunately, this means digging deep into pockets when cash is the key to business survival.
However, fortunately for enterprises, every smart service provider is accepting that adjusted pricing models are essential; solutions could range from temporary price reductions to a complete pivot to outcome-based offerings. It’s time to push your provider for a deal that suits you and, if possible, ties their success to your own.