Back office buying behaviour on the up but profitability still suffering, says KPMG
· Customer care programmes fall down pecking order as businesses focus on tech support
· ‘Back office’ beginning to be front of mind again as economy shows signs of recovery
· Increase in demand for support services tempered by determination not to pay market price
14 May 2013 – Bullish predictions of growth in the ‘back office’ services sector are beginning to emerge, but hope of an immediate upturn in fortunes is being tempered by the rising number of contracts falling under the banner of ‘renege or renegotiate’.
KPMG’s latest report also reveals that ‘back office’ suppliers are suffering as a result of technological advances. According to the findings, clients’ demands for automated systems and a thirst for ‘cloud’ based options are combining to supplant people with systems, meaning that long-term management contracts are not always required.
Lee Ayling, a partner in KPMG Management Consulting, says: “Clients are not shy to play the ‘contract cancellation’ card in an effort to reduce costs. Of course, they won’t pull out of a contract without finding alternative services that can keep their business running efficiently, but many are becoming adept at gaining the upper hand in contract negotiations. Given the fractious nature of the economy it is hardly surprising that suppliers are willing to strike a deal – but both sides need to watch this trend to ensure the pursuit of value doesn’t lead to a drop in service quality.”
More than two-thirds of those interviewed (68 percent) expect to see an increase in demand, from customers, for business and IT services between now and December 2013. Such a positive outlook is a climb from 59 percent at the end of the previous financial year. The optimism also represents the highest level of confidence since July 2011 (74 percent).
Based on conversations with their clients, service providers suggest that IT remains the most sought after area where support is needed (52 percent). It is closely followed by demand for assistance with finance projects (40 percent). However, in a worrying sign that customer service and employee engagement are falling down the priority list for many organisations, requests for help with customer care programmes and HR are low, at 10 percent and 8 percent, respectively.
The findings go on to show that despite the optimism displayed about future business opportunities, many suppliers have endured a tough start to the year. Asked to comment on actual growth in Q1, 2013, 60 percent cited pipeline growth – down from 78 percent in the previous quarter. Perhaps just as worrying was the note that 8 percent reported a fall in activity – double the amount recorded in the previous survey.
KPMG’s global Pulse survey also indicates that buyer pricing pressure, currency exchange rates and new technologies are hitting profitability. Amongst those businesses securing new deals, just 38 percent say profitability is improving. This figure drops to 21 percent amongst services providers securing extensions to current contracts – a fall from 54 percent, last quarter, and the lowest figure for 2 years.
In an effort to improve profitability many suppliers suggest they are looking to increase the ‘scope’ and range of deals they offer and contracts they provide. Yet despite adopting an innovative approach to service level agreements, 29 percent believe their ability to increase their workload will decline. It’s the highest figure since July 2011.
Ayling concludes: “Service providers are understandably focusing their attention on growing business amongst existing clients. For one thing the pursuit costs are lower, but it’s also a sensible move as buyers are looking to reduce their supplier base and cut back on spending levels. There are signs that the economy is set for growth but we are still in a market where short-term savings seem to be the order of the day. Until this changes we are likely to see the balancing act between service provision and cost reduction continue to play out as contracts come up for renewal.”
KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with over 11,000 partners and staff. The UK firm recorded a turnover of £1.7 billion in the year ended September 2011. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 152 countries and have 145,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG International provides no client services.