When the current economic and political turbulence turns into a formal recession is anyone’s guess. Enterprise IT spending will remain relatively strong. There are early indications that the nature of tech spending could change, namely that CIOs, Procurement, and IT buyers will ask their providers to put more of their revenue at risk – aka ‘skin’ in the game.
The logic behind asking for more provider ‘skin’ in the game.
Uncertainty increases as turbulence turn toward recession. Normally enterprises would pull back on spending. However, enterprises can be expected to continue IT investments in digital technologies. Companies in progress with digital transformation will need to complete it – quickly – as being half digital is the worst position a firm could be in.
Buyers naturally want more downside protection. That downside protection calls for providers putting more of their revenue at risk. There are several reasons for this move, in no particular order:
Immediate demand for digital transformation is off the charts. Normally, providers in a high demand environment would be charging a premium rather than putting revenue at risk. The pending recession creates an incentive to secure future revenue, particularly among less powerful providers. This sets the stage of trading future revenue with some downside risk.
Buyers want to keep providers focused on them in a high demand environment, particularly buyers at companies farther behind the digital curve. They want providers putting their best efforts toward them. Buyers should be willing to trade paying higher margins on digital transformation work in exchange for that focus. Having provider skin in the game, even at higher margins, helps balance that type of deal.
Providers in the past, have used a willingness to put skin in the game as a way of nudging clients off the fence. Not sure you want to do this, then let us share in some of the risk because it’s the right thing to do for your business and hey it shows our commitment. This ‘marketing’ strategy is more likely among the middle to lower end of the provider market as they seek to lock in deals.
Buyers, particularly procurement and IT, will see having skin in the game to ‘de-risk’ digital transformation. In a way it does, but only if the provider fails to execute, but seeking providers to be at risk will help justify digital transformation cost and disruption.
Skin in the game is not the same as committing to a business outcome.
Having skin in the game, is a common recessionary play. Putting revenue or margin at contractual risk is not the same a business outcome-based strategy. Outcome based arrangements like outcome pricing or outcome contracts base provider payment on provider performance