Time for India's Outsourcers to Focus on SMB Client Segment

Small and mid-market businesses [SMB] are under-served due to the unique challenges in this client segment, but its time now to focus with customized products, pricing and sales units to trigger the next era of growth in outsourcing market. Industry estimates that less than 30 percent of SMB companies have used outsourcing as of yet. Small and Mid-market firms have their own unique problems and challenges which need to be addressed first by the service provider, before they can think about penetrating the segment.

Key drivers for outsourcing: According to government statistics, the US alone has almost eight million SMB companies. Key drivers for outsourcing in this segment are more or less the same as those of large firms – reduced costs, focus on core activities of the business, access to the talent pool across borders, etc., and the prime reason is to improve competitiveness in the market place.

Setting up captive centers is not a wise choice for SMBs: Outsourcing business models like setting up captive centers and exploring multi-location delivery models are ruled out, as mid-market firms lack the scale. They can't substantiate the cost incurred in setting up and running captive units in low-cost countries. Hence, the ideal choice is to leverage the third-party service providers.

Lost its influencing power: According to Forrester research, the phenomenal growth in IT outsourcing industry in past few years turned off the key benefits like flexibility and client responsiveness delivered by the top Indian outsourcing firms. In order to keep up with rapid growth, the top Indian service providers became more rigid with their non-strategic clients. The growth has eroded some of the benefits that clients use to receive, primarily flexibility and client responsiveness.

Clients spending less than $20 million per annum lost their influencing power with major Indian service providers. Indian service providers are growing at such a fast rate that they can barely keep up with their most lucrative clients so they never bother about their tier-2 clients. With this experience, clients have started to look at the array of mid-tier providers in India.

Mid-market firms have strong faith in outsourcing to service providers of same size - they don't believe in large global firms, as they seem to be not flexible to accommodate their requirements. They don't necessarily outsource to large global firms. There is a common belief that the large IT firms don't give adequate attention to mid-market businesses.

Small and mid-market opportunity galore: Small and mid-market firms cannot individually provide scale to the engagements. However, they are huge in number. They tend to be more cost conscious and may not provide the margins a service provider can achieve from large company deals. As a result, mid-market remains under-served by large vendors.

Mid-market firms exposed to the concept of offshore outsourcing are maturing day by day. Growing maturity in this segment is expected to increase demand for higher-end services like knowledge process outsourcing. Intensifying competition among traditional outsourcing firms and outsourcing vendors from low-cost countries like India, China and the Philippines are forcing large global vendors to look for opportunities in the mid-market segment.

Strategies to approach the small and mid-market segment: Strategic acquisitions of vendors focused on the small and mid-market space are gaining traction to achieve the balance and preserve the 'premium' image of the parent. This allows the 'branded' players to provide high-margin, bundled services to larger companies, and relatively lower-margin, customized offerings to medium-size companies.

Most of the mid-market segment is low in the offshore maturity curve compared to the large firms. As the large firms recognize that 'value' exists beyond mere cost savings, differentiated offerings are the wise choice to tap this segment. Outsourcing firms should set up a mid-market focused unit with a low-cost base unit to serve mid-market firms. Service provider's challenge is that there is no scope to gain scale of operations as mid-market firms lack the scale; it's wise to build a packaged software product or reusable framework focused on a vertical-specific mid-market firm.

Large outsourcing firms need to alter their account management model, as their existing account management model does not allow them to serve SMBs, due to the high cost of the account management overhead. To sum up, the key components to be successful in serving SMB market are standardization of offerings, personalization of service and low sales overhead.

Tactics to win small and mid-market business: First and foremost, one thing large outsourcing firms can do is clear the doubts in the minds of the small and mid-market prospects – that they don't get the required attention and response from the service provider. This can be highlighted with the sales units, offerings, client service groups and delivery units dedicated to small and mid-market firms.

Large outsourcing firms need to be flexible in contract terms to accommodate small and mid-market client requirements. They need to use a customized framework or a standard SMB focused framework to build contract terms for small and mid-market firms.

How to serve SMBs: The SMB market is a healthy outsourcing market that provides significant opportunity for the suppliers that figure out how to serve it. The critical elements to be successful in serving SMB market include:

• Building a cost-effective sales model
• Developing a relationship management model that delivers the required personal touch to the client
• Allowing the delivery resources to directly communicate with each other
• Standardizing the offerings

Despite a rising rupee, increasing cost of operations in India and recent the prospect of a slowdown in major revenue generating areas, the US has made Indian IT firms agile and more relevant to the various client segments. Indian IT firms are equipping themselves with strategic acquisitions, developing standardized products and reorganizing themselves to suit the SMB client segment. The time is once again back to focus on SMBs across the global to trigger the next era of growth.

Disclosure: None

Comments

[User 172866]

There are many companies that have already started following this approach. The Outsourcing world has more often concentrated on the Fortune 1000s. It's time that the fruits of this tree be shared with the SMB segment as well.

[Mohan]

This is an interesting argument though not really radical. The larger service firms go after larger clients (Global 5000, Fortune 500 etc) for a reason: economies of scale. The SMBs are served by niche players, possibly SMBs in service sector themselves.

Again, examples of big fish entering smaller ponds or the vice-versa are not hard to find either.