Revenue vs. Margins – the Game is Changing

Outsourcers have traditionally delivered services to conform to the client’s way of doing things, even if the client’s way of doing things is highly inefficient and could be greatly improved. After all, the client “has always done it that way” and, more importantly, the “customer is always right.”

Up to a point, the model works for both sides.  Clients achieve some savings, because service providers are good at what they do.  Providers, meanwhile, are able to grow revenue by delivering more and more resources to meet the client’s increasingly complex and customized needs.

This traditional approach is rapidly changing, as standard services delivery models are fundamentally transforming the nature of IT outsourcing relationships.  Specifically, “my mess for less” is giving way to a collaborative approach, whereby clients and providers recognize the benefits of standardized processes for IT service delivery. Clients are acknowledging that their way of doing things isn’t necessarily right, and that they can achieve significant savings by implementing “vanilla” processes across business units. Service providers, meanwhile, are seeing that they can leverage economies of scale by standardizing across multiple clients.

Clearly this is a game-changer, as the move to a collaborative effort to reduce costs and drive efficiency stands the traditional business model of outsourcing on its head. Rather than maximizing revenue per client (by adding more people to run inefficient operations), service providers are focusing on increasing margins.  (Here’s a clip of ISG Americas Chairman David Whitmore discussing the impact of service standardization on service providers. Click here for a longer version where he discusses utility computing models.)

When we started talking about this emerging trend a few years ago, skeptics argued that this was the stuff of ivory tower theory, and that providers would never accept shrinking revenue.  Today, in the real world, we’re increasingly seeing providers moving towards this higher margin/lower revenue model. Some providers see the inherent benefits and are leading the charge; others are grudgingly responding to competitive pressure.

The pace of change can only accelerate as SMAC technologies enter the mainstream, and as operational transformation increasingly becomes the rule rather than the exception.  For example, in the healthcare space, my colleague Al Denis recently described how service providers are working with healthcare insurers to develop outcome-based delivery models. Clients and service providers are sharing the expense and risk of developing and implementing scalable outcome-based delivery operations, which are threatening the incumbents that have gotten fat and happy off the “our mess for less” approach.

And speaking of game-changers, automation is further changing the rules, as the fundamental model of labor arbitrage is becoming increasingly obsolescent.

2014 promises to be an interesting year indeed.

About the author

Kathy works with enterprises across ISG’s client base to address unique business challenges leveraging our Data & Analytics methodologies and tools. Whether she is developing and deploying delivery methodologies or serving as the go-between for global teams to ensure end-to-end service delivery, she earns rave reviews from her clients. Throughout her more than 20-year career in information technology management and business operations, Kathy has linked IT to business value and assessed the performance of internal operations and outsourcing relationships. Her industry expertise includes oil and gas, aerospace and defense, retail, finance and local government.