A decade or so after offshoring became a viable business option, a new outsourcing practice is currently emerging. Some American buyers are adding IT or BPO Tier 2 service providers to their provider mix.
“Now I always plan on having a mixture of both,” reports Michael Stern, IT director, Quality Assurance Competency Center for Dignity Health, a service provider in the healthcare vertical. “It’s always good to have different partners,” adds Veresh Sita, global CIO for Colliers International, a commercial real estate services firm, “We need an ecosystem of partners.”
The trend started in 2005 before the financial crisis, observes Sanjay Tugnait, head of operations for iGATE. “Outsourcing buyers wanted specialized providers. They didn’t care if they were really small companies,” he recalls.
Tugnait said this specialization was how the Tier 2 players originally got work from buyers ecstatically happy with their larger Tier 1 global providers. Once buyers got results they liked, “many decided to also hire partners with a different business model.”
There are many benefits to this emerging strategy, say both buyers and providers.
1. Friendly competition
“You should have one cat among the pigeons,” says Vivek Gupta, chief executive, global infrastructure management services of Zensar, wryly. He notes many companies are signing statements of work with Tier 2 service providers like Zensar, a global IT services company, because “having a Tier 2 player among the larger global providers keeps the big ones on their toes.”
In Stern’s experience, larger service providers often focus mainly on the structure of the contract. Tier 2s are much more flexible, he observes. Adds Yogendra Goyal, head of sales, North America, for WNS, “These providers tend to be more amenable to buyer needs, especially in contracting.” And they are “more adaptive to requests,” notes Tugnait.
Sita of Colliers, who worked for a global provider, says the large players have a playbook. Today, however, he feels the playbook is not enough. “Buyers and providers have to rewrite the rules because we live in a different world,” he observes.
3. Domain knowledge
Goyal says Tier 2s have “extreme domain knowledge.” By definition they are niche players. “We are a mile deep and an inch wide and not the other way around,” the WNS executive says.
Goyal notes outsourcing buyers have more access to CXOs at Tier 2s than they do at the larger providers or Tier 1s, where it’s typical to only be able to interact with senior account management. “Having access to senior leadership promotes the health of the partnership,” he has found.
Sita says he has personally called and actually talked to the CEO of Zensar, his provider, on a Sunday evening. “I have no trouble getting to a decision-maker to make something happen. In my experience, only Tier 2s can do that,” he says.
Stern believes working with Zensar feels more like a partnership than his relationships with some of his larger providers. They tend to be more “willing to go the extra mile,” he notes. And they seem to “spend more time trying to understand our needs.”
Stern says pricing is more competitive when there is real competition. He adds the larger global players typically want to charge “for everything they provide.” Tier 2s, on the other hand, are more willing to provide value-added services outside of the contract at no additional cost.
Stern says staffing needs ebb and flow during the life of an IT project. In his experience, Tier 1s either charge him for their idle full time employees (FTEs) or assign them to another account. This forces him to have to ramp up again. Zensar, on the other hand, either shares the cost of the idle FTEs or assigns them to study the process at hand and come up with improvements. He likes that “because we don’t lose our knowledgeable resources.”
He also feels Tier 2s have lower churn and attrition rates.
The healthcare executive says Tier 2s can ramp up faster than Tier 1s, in his experience. “They actually have deeper benches for what we need,” he has found.
Gupta of Zensar says “most buyers want to be among a supplier’s top 25 clients.” Adds Tugnait, “No outsourcing buyer wants to be marginalized.”
Goyal points out the Tier 2s have much smaller minimum tickets than the larger Tier 1 global players. “We can start with big numbers but we can also start small,” the WNS executive says. Tier 1s typically have larger minimum baselines.
Many of iGATE’s early buyers were actually large companies that just didn’t have a big spend. Today their engagements have grown to tens of millions of dollars, Tugnait reports.
11. Risk Mitigation
It’s always good to have more than one service provider working on your account in case something goes wrong with one. Didn’t your mama always tell you not to put all your eggs in one basket?
Next issue: A case study with Zensar/Colliers International to see in granular detail how these relationships work.
Question: Do you use Tier 2 providers? How? Why?