When telecom equipment major Alcatel, was looking to offshore tech support for its enterprise customers, it found that while offshore service providers offered competitive pricing, very few had the requisite skill sets to meet its specific needs. While scouting around for skills, the company found SlashSupport, a lesser-known provider based in the South Indian city of Chennai. The relationship started with a small pilot, and within two years, Alcatel invested $2 million to set up a laboratory at SlashSupport to provide Level 3 support to its high-end clients.

Why did a telecom giant with sales of over $15 billion risk giving over the support of its enterprise customers to a lesser-known overseas player? It was because SlashSupport was flexible enough to let Alcatel have a lot of say in the day-to-day operations — something that it could not have easily got out of a relationship with a larger provider.

Typically large players come with solutions that are mostly standardized and have little adaptability to the client situation. This is leading companies to work with smaller service providers, sometimes even with startups. Small providers go out of their way to excel at their work, create value and expand their business with the customer. Because sometimes their very existence depends on one customer, they are often willing to work beyond the defined project.

“The irony is that Tier 1 players usually come with requisite skill sets in established technologies like SAP, Oracle database and .NET, and when it comes to building customized applications they have little time or energy to innovate according to customer’s needs,” says David Bass, Manager Application Development, Times Customer Service, a Time Warner company.

Is Small Better?

Consultants define boutique players — as the smaller providers prefer to be called — as Tier 3 players, with revenues in the range of $20 million to less than a billion, employing less than a 1,000 people. These firms have specialized skill sets, often in a vertical industry, and operate in a limited geography. They may also include very small companies, even startups, catering to the small and medium businesses segment.

Not many companies are working with boutiques. They find it difficult to make a choice about being either a big fish in a small pond or a small fish in a big pond. Many find more security in working with larger and established players. “We use only large, established firms in the offshore space to mitigate risks. We want to ensure that these firms have the capacity to meet our requirements,” says David Levin, Director Application Infrastructure, Merrill Lynch.

Others argue in favor of boutiques, citing flexibility as the biggest draw. Boutiques can work very closely with the customer’s organization — often almost as an extension of the company — without giving the customer the liability of owning them. Alcatel gives an example of this flexibility. On finding out that it had left out a module during its training to SlashSupport executives, it asked to bring back the executives to the training room. “Slash was supportive,” says Steven Tufts, a former Alcatel executive and a key player in architecting the deal. “This would have been a nightmare had it been a Tier 1 player with all their systems and processes,” he adds.

There are others, like Germany’s Continental AG, which work with both types of providers. Continental outsources standard IT services to large players and niche application development to smaller providers. Its rationale is that experienced providers can do standard work without requiring any intervention from it. On the other hand, a high degree of involvement will be required from it for niche work, and hence Continental finds such work being better suited to be outsourced to smaller providers. “Big service providers are almost always metrics driven, and therefore quite inflexible,” says Paul Schwefer, CIO, Continental AG, Germany, about why he chooses to work with boutiques.

	“Make sure the top talent assigned to your project cannot be moved, even temporarily, to another customer without your permission. While this will not be possible for all of the people assigned to the deal, you can still do it with the top 20%.”
— Julie Giera, VP, Research, Forrester Research

Managing Boutique Providers

There are inherent challenges when working with boutiques, most of which can be overcome with due diligence and appropriate measures.

Checking on financial health. While this is true for all outsourcing contracts, it assumes higher significance with smaller providers for obvious reasons. Companies should check the profile of investors, the stability of the management team, the year-on-year performance of the company and its ability to scale.

Companies that have had successful pilots with boutiques have even invested in the provider to help it scale as the project expands. The returns that Alcatel got out of its investment of $2 million in SlashSupport far outstripped its initial investment.

It is also important to keep track of the company’s business development as smaller firms have less room for error. “If a project goes awry or the boutique signs a very large deal requiring lots of resources, a vendor like this will find it much more difficult to recover from problems or obtain additional expertise,” warns Julie Giera, VP, Research, Forrester Research. “The single biggest risk working with small companies revolves around their limited resources — both financial and human. Boutique firms often don’t have the added financial resources to recover if a large deal goes badly, ” she says.

Check attrition. Insist on dedicated manpower. Keeping a tab on the providers’ attrition is especially significant when working with boutique providers because it is people who are the basis of the relationship. Smaller firms typically have manpower with better skills since the staff gets to do more interesting projects as compared to larger firms where they get lost doing multiyear maintenance contracts, according to a recent research by TPI. While MNCs, Tier 1 and Tier 2 companies are aggressively hiring fresh graduates in their bid to expand to secondary towns and cities, smaller companies are focusing on ramping up their talent base and actively poaching experienced talent from Tier 1 companies.