Are you adversaries with your software service provider? Here's how to change that
By Madhan Gopalan
Ness AVP, Financial Services
Part of my job description demands that I meet technology captains and their deputies of large financial services firms in New York and elsewhere. And I often hear they are less than thrilled with software vendors. ‘We are not getting the value we are seeking’, ‘We are looking for thought leadership, but rarely get it’, and ‘vendor is generally reactive, instead of being proactive’.
By contrast, I hear from friends in the IT industry that work for different companies who have the opposite viewpoint. ‘The clients treat us like dirt. Not just me, just about everyone in my team’ said one. ‘In the name of being direct, our client manager is brutal’ said another. I also heard the excuses about why they don’t get consulted on strategic initiatives, even though they are ‘consultants’ and instead of being treated like trusted partners, they are often asked to do what they are told.
How did we get to this point?
After a close observation of the trends in the Software services industry over the last two decades, I could see 'the butterfly effect' – a small change in one place had a large impact on a different place - between the set of events. IT Services industry, after blazing growth in the 90s, was hit by three big externalities – The dotcom bust of late 90s, the 9/11 attack and subsequently the market meltdown that started in 2007. Consequently, across the board, the strategy shifted from Investing in cutting edge technology to keeping the lights on with occasional investment driven by business needs.
This, in turn, forced Software service providers to evolve and innovate; business models changed, sourcing strategies changed, while offerings were laced with freebies such as Centers of Excellence, Learning Centers etc. However, almost all of them were easily replicated resulting in little or no differentiation between the providers.
When the providers ran out of steam and quarterly performance started becoming ominous, they started using their last weapon – price. As you can imagine, when price is the only differentiator, it can only go down. And, down they went. Some large multi-year deals were contracted at a low blended flat rate of $20 an hour irrespective of where the resources were – onsite or offshore. This helped the service providers to retain growth, although not at the same pace as the decade before. Financial services providers loved it, as they were able to keep the costs at bay without much ado.
But what they didn't realize was that the worst was about to begin.
The danger of a race to the bottom is you might win
The downward price spiral troubled software vendors; their margins shrank as they were unable to transfer their costs to their customers. That is when they started scraping the bottom of the barrel. During the early days, they hired freshers to support their scale and manage attrition. Over time, 60% to 70% of the yearly hires came from a college where they had been trained 3 to 6 months before being placed in client engagements.
Picture this: Suddenly two out of every three so called ‘consultants’ were involved in projects -- with little or no experience. A small wonder that technology chieftains are not getting the desired value from them. On top of all these factors, given the long-term nature of these contracts, they couldn’t do away with these vendors either. Result – their frustration peaked and trickled down the chain where my IT friends got the wrong end of the stick.
In such a scenario, here are a few things that both parties can do to make the deals work:
Suggestions for Capital market CTOs and CFOs
- Negotiate Service Level (SLA) based contracts with your vendors. The desired SLAs should include parameters such as quality, frequency and timing; as well as productivity improvements over time.
- Consider your vendor truly as a strategic partner. That means including them in your strategic meetings, staff meetings and so forth -- and seek their opinion. Consult them on engagements that are critical in nature. You are likely to get a better solution for your challenges.
- Be transparent about your thoughts and intentions with your vendors and provide periodic feedback. Vendors are likely to be a lot more receptive if they understand what they are doing wrong and what they are doing right.
- Understand that a flat or blended rate may not work in all the instances, especially, when you are looking for thought leadership in emerging areas. In such instances, you would be better off hiring the top dog and paying top dollar for actual expertise. Also, remember this: If you pay only peanuts, you will very likely only get monkeys.
Suggestions for Software service providers
- Understand the client's actual requirements. When the client expects thought leadership and value, it does not mean that you come up with cutting-edge technology solutions. All they are really looking for is practical advice on doing more with what they already have. For instance, you may be able to accelerate a given application development effort just by adding a few tools to the process. Surfacing this recommendation to your client will give them a sense that they are getting more bang for their buck. You should be able to do this with your existing resources without passing additional costs to your client.
- Encourage your employees on the floor to absorb the tribal knowledge - the business functions, systems, processes, and techniques used by your client. Also, encourage them to share this information (as long as it does not violate any compliance requirements) within your team. This will help you to reduce the communication costs in general also provide a greater sense of comfort to your client
- Give your client some breaks. When the client is looking for a solution for a business challenge, do the initial assessments from your end and provide recommendations with little or no cost. If that's not possible, the next best scenario is sharing the costs with the client.
- Looks for quality resources outside your comfort zone. For instance, a project manager in the construction Industry may serve equally well as a project manager from your IT program. And could have the added benefit of costing you less.
- Finally, remember this: If you don’t provide value when the times are tough, chances are that your customer will find someone who can, when the market recovers. I am sure you are smart enough to know that margins are important, but not at the cost of business.
In the end, both parties have to give a little. If everyone's miserable, it simply can't be a productive situation for anyone. Vendors, reach out to your clients and clients, you need to treat the vendor like a trusted partner. Otherwise, everyone loses and what's the point of that?
The author, Madhan Gopalan, based out of Hackensack, NJ, is an Associate Vice President with Ness Technologies. The views expressed here are his own and not necessarily that of his employer. He can be reached at email@example.com
Photo Credit: CanStockPhoto
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