Incumbency is always source of great advantage in IT outsourcing deals. Incumbency is always defined by existing relationship with the client.
Almost all of IT outsourcing deals you will encounter incumbent who is well entrenched into client landscape. It does not mean that client do not want to make switch to new vendors as deal goes.
There are some factors which makes really difficult for them to switch.
- As soon as Incumbent gets the wind of competition, they re-work their margins and sweeten the offer to the client. Being entrenched gives obvious advantages in terms of key buyer relationships, so it is easy to get the message across.
- Incumbents also often showcase willingness to change or improve, like getting more automation in place or adding new management layer at no cost.
- Cost of switching is dis-proportionate to the benefits client is expecting to receive. Cost of switching is defined by transfer of assets/knowledge , service interruptions or contract complications around intellectual properties.
- Sometime client realize that their expectation of IT service does not match to what marketplace is offering, thus they lose incentive to switch to competition which can offer marginal improvements at best.
Incumbents also have facts rigged to their favour in outsourcing.
- Incumbents are often protected by long-term contracts with clauses around break-up costs, assets and intellectual properties.
- Key buyers who made decision in favour of incumbent previously are also prone to status quo bias and often resist the change.
- Relationships/allocations – In terms of allocating overall IT budgets, many corporate prefer to keep healthy mix of IT vendors in their landscape. Such decisions are driven by global IT procurement teams, rather than preference of local geography teams.
- Incumbent often also showcase disproportionate switching costs in terms of assets, knowledge transfers, thus killing business case for switching IT vendor.
- Incumbent also has in-depth knowledge of clients business/key stakeholders, thus can work relationships to his advantage to retain status-quo.
So, does it mean that it is impossible to unseat an incumbent ?
Here are some points if you are targeting incumbent in IT outsourcing deals.
- Key message is about ‘Differentiation’. It is about demonstrating new cool ideas (like digital, analytics) rather than showcasing incremental productivity-based improvements.
- Understand where client’s industry is going and showcase your capabilities as a partner, rather than service provider. It may mean helping to outline digital road-map of IT landscape or bringing new-age IT capabilities like analytics, design thinking.
- You can also shift stakes around ‘cost of staying’ with existing vendors. Showcasing ‘cost of staying’ vs ‘cost of switching’ metrics can be good conversation starters. Defining dissatisfaction with existing IT vendors in terms of key metrics such as SLAs, Innovation etc can be good starting point. If client mentions to you about ‘bad’ service, help him define what really ‘bad’ means whether it is missing SLAs or inadequate program management etc. You can use same metrics later to showcase your solution.
- Understand key decision makers and their style, whether they are process-driven or technology driven. At the end,the individuals make the decision and prone to perceptions. So, intelligently managing the perceptions is very important. For example, if CIO is technology person who rose through the ranks and likes to keep abreast with latest happenings, you will benefit by showcasing your capabilities around digital rather than rolling out financial savings brought by productivity improvements.
Being an incumbent always gives unfair advantage in IT outsourcing game whether it is digital or not. So, you should make fair assessment about your winning chances. If they are really low, you should ideally stay out.
After all, who really likes to be on losing side 🙂