Heading into 2014, new trends in IT outsourcing suggest that small or midsize software development companies in London and other Western hubs could gain competitive edge over their offshore or giant global counterparts. That is, if they know how to surf the waves of change.
Switching Software Development Partners Becomes Easier
Not long ago, the mere thought of changing IT service providers sent chills down any CIO’s spine. Replacing the entire IT supply chain carried innumerable risks and took ages, seriously disrupting business flow.
Nowadays, thanks to diversification in software development services, such big steps are not necessary. As Thomas Young, partner with outsourcing consultancy Information Services Group (ISG) puts it, “Back in the day, when you switched providers you had to switch everything. But as the service supply chain continues to fragment, customers are much more likely to switch out components. It’s the difference between switching out the stereo in your car and switching out the whole car.”
IT Collaboration: Dating, Not Marriage
Other factors contributing to this trend include the changing nature of IT collaboration and new pricing models.
As the relationship between IT vendors and buyers evolves from a rigid system of hundred-page contracts, formal requests for proposal and complicated command chains to a more flexible and interactive process, switching providers entails less disruptive change. “If the old agreements were like marriages, these new agreements are more like dating. They have an easy-on, easy-off mechanism”, Young says.
Furthermore, over recent years, software development has become less labor-intensive, which means that IT outsourcing companies can cut their prices by up to 60 percent, says Young. As a consequence, long-term contracts with fixed labor prices will seem more of a liability than an asset, and clients will be inclined to provider-hop.
Why It Pays Off to be Small and Central
Those hardest hit by the changes are most likely to be offshore outsourcers, say, in India or the Philippines, whose business model hinges on a competitive advantage due to low labor costs. According to Young, “The service supply chain of tomorrow relies less and less on labor… I’m seeing a lot of innovation in this area, with some vendors reducing workloads to the point where they need half the staff.”
But giant IT service providers may also lose big time, due to their sheer size. For them, the risk is not that they can’t come up with new, innovative solutions to keep clients, but that they can’t implement them in time. That’s why smaller, more nimble software development companies, in London or at other central locations, can gain the upper hand in the global competition.