What happens when you use third-party services in digital transformation?

Moving your company to a digital operational environment requires much more than changing its technology. The goal of creating and delivering new value for your customers also necessitates changes to your talent model, processes, philosophies and organizational structure. A complicating factor is the nature of the initiative – transformation is a multi-year journey, and your company won’t know at the outset all the details of necessary changes or challenges that will occur. Therefore, your approach to managing the changes required requires flexibility along the way.

Interestingly, in Everest Group’s recent Pinnacle Model™ research investigating leading enterprises on their readiness for digital transformation, the study’s participating CIOs often commented to us that they felt like they were on a discovery mission in terms of what would be needed to achieve the desired outcomes.

Using outsourced resources is a proven success strategy for providing the necessary flexibility for the digital journey. Our Pinnacle readiness study found that 90% of Pinnacle Enterprises™ – the ones that achieved superior business outcomes and faster time to market – used outsourcing to increase flexibility and deal with demand fluctuation. Only 40% of the other enterprises used outsourcing.

Keep in mind that your company does not need to build in-house all the capabilities required for its digital transformation journey. Moreover, not every capability will be required for the duration of the journey. It makes much more sense to tap into the capability of external service providers as needed.

Ways to leverage outsourced resources

In what ways do companies use outsourced resources during digital transformation? And what happens to existing outsourcing relationships that didn’t plan for these initiatives? Let’s look at a few case studies as illustrations.

1. Focus and innovation

Our Pinnacle study on digital readiness found that 81% of Pinnacle Enterprises outsourced to keep internal teams focused on the business during the transformation; only 32% of the other enterprises outsourced to achieve this goal. And 81% of Pinnacle Enterprises used outsourcing to gain access to innovation, compared to only 37% of the other enterprises we studied.

An example: Two primary activities were the focus of transforming a global diversified mining company to excel in a digital world: a redesign of the IT function and accelerated outsourcing. As they began the initiative, a lot of non-core work was already outsourced to high-priced local contractors. They decided to shift that work to two large service providers in India.

Besides eliminating the cost and non-loyalty aspects of the local contractors’ services, the company outsourced to achieve the following objectives:

• They wanted internal resources to focus on high-value work instead of non-core work.
• Culturally, the mining company was very cautious, especially with capital expenditures.
• They decided to take an evolutionary, rather than revolutionary, approach to avoid potential resistance if they overwhelmed the company with too much internal change all at once.

The company had a two-pronged strategy for choosing the two service providers in India. First was the obvious lower cost of offshore talent as well as the flexibility to add resources on an as-needed basis. Second, and more importantly, the company wanted strategic partnering relationships. They selected services providers that were willing to step up and accelerate building their own capability in digital technologies by acquiring companies that already had the capabilities the mining company wanted. The mining company invested the time and effort into building personal relationships and a high level of trust with the providers that would allow flexibility and moving to the next level together.

As another example of using outsourcing for transformation needs, a different company with global operations on multiple continents implemented an outsourcing strategy after rethinking its business processes for a digital world. In assessing some processes, they realized that standardizing some processes on a global basis was good for the company overall but not necessarily the best practice for some segments of the business. A practice that benefitted operations in one country, for instance, wasn’t beneficial for operations in another country. In redesigning their business processes for effectiveness in a digital environment, they decided to outsource some of the processes that needed to be specialized to better fit the needs of a country.

2. High impact with talent

In another of Everest Group’s Pinnacle Model studies, which investigated more than 50 companies that undertook Robotic Process Automation (RPA) initiatives, we found that the Pinnacle Enterprises achieved high impact due to their differentiated capabilities. One of those capabilities is the scale and speed of implementation. Did it make a difference? Definitely – they achieved 4X the return on investment in RPA than the other enterprises we studied.

More findings from this RPA study revealed the importance of outsourcing. Due to the relatively low availability of talent for implementing RPA, all enterprises we studied relied primarily on vendors or third-party service providers for talent during all stages of their RPA programs.

Our study found that 78% of Pinnacle Enterprises relied on service providers during the implementation and integration phase, compared to 55% of the other enterprises we studied.

Notably, Also, 63% of the Pinnacle Enterprises used service providers for assistance with training, compared to 35% of the other enterprises. The Pinnacle Enterprises were more focused on building internal capabilities for the future to drive automation initiatives and invested significantly in training resources and creating internal RPA champions.

Sometimes digital transformation affects outsourcing relationships already in place and necessitates altering those relationships and contracts. A large company in the financial services industry, for instance, met with its existing BPO service provider’s account manager to make them aware of the RPA initiative. The provider firm realized the repetitive, tedious work it was doing for the client was at risk because of the automation program the client was investing in. To the provider’s credit, it recognized this emerging digital technology was not going to go away and decided to embrace it and build a practice competency in it.

The provider asked how it could help the client in implementing the RPA technology. The client wanted to be able to rapidly deploy new applications outside of IT and core systems; but its development organization was fully booked and asking for development and business analyst resources for RPA within even a month would have been a struggle. Outsourcing was the remedy. The service provider supplied development and testing resources.

Another example of strategic use of outsourcing is the case of a services and products distribution company. Its digital transformation initiative focused on modernizing IT and the core business at the same time as it began innovating to create new digital products and services for competitive advantage. How did they manage to take on innovation at the same time as they dramatically modernized the IT department and eliminated almost two-thirds of the people in IT?

They engaged in deep conversations with three of their IT and BPO service providers, explaining that they wanted the providers to become strategic partners participating in developing the company’s digital innovation activities. They took two additional steps: they temporarily outsourced to a consulting firm to help define the new innovation strategy and they began forming alliances with other innovative companies in their industry. 

3. Build internal capabilities

Besides outsourcing to gain necessary new skills, the services and products distribution company also retrained the remaining members of the original IT team, giving them the necessary new skills. The investment in retraining was based on those employees’ loyalty to the company, their deep understanding of the business and their willingness to transform themselves to help transform the company for digital operations.

In another case of using outsourcing to build internal capabilities during a digital transformation, a mortgage business had a goal to develop a new business line selling automobile insurance. The plan involved upselling the auto insurance services to existing mortgage customers. But introducing the new line of business introduced the risk of losing existing customers – the more profitable mortgage business – if auto insurance customers had unsatisfactory customer experiences after they were in an accident.

In developing its vision and planning for the new services, the company recognized its differentiator in the new, already crowded market, would require quick assistance to customers at the time of an accident. To speed up time to market with the new auto services – and ensure excellent customer experiences – the company invested in outsourcing the claims-handling infrastructure and organization.

Bottom line

In Everest Group’s Pinnacle Model research on enterprise digital readiness produced a startling finding. In only 10% of the enterprises we studied were the CIOs and IT organizations ready for digital transformation. As your company undertakes transformation, you may want to follow the practices of the Pinnacle Enterprises. Our study found that outsourcing is one of the key enablers that led to their superior outcomes – higher ROI and faster time to impact.