Over the past two years, digital transformation strategies have accelerated as fundamental to business survival. Companies are expected to spend $6.3 trillion on direct digital transformation investments between 2022 and 2024, according to research firm IDC’s most recent predictions.
As IT organizations accelerate their digital initiatives at scale, their relationships with IT service providers have grown more important. IT outsourcing is no longer just a lever for faster, cheaper technology services, but a key partner in driving business growth, improved customer experiences, and competitive advantage. And, at a time when enterprises are struggling to find and keep digital talent, third parties are becoming that much more essential in providing the kinds of skills today’s enterprise IT needs.
“The IT outsourcing narrative for the last decade has been closely tied to digital transformation, but digital transformation is now horizon one. It is no longer some sci-fi that will happen in three to four years, but is simply essential for survival,” says Saurabh Gupta, president of research and advisory services at HFS Research. “The emerging phase of IT services will need to balance people, process, technology, data, and change management to really deliver on the enterprise innovation agenda.”
Here is a look at the technologies, strategies, and shifting customer demands shaking up IT outsourcing right now — and the once-hot developments in outsourcing that are beginning to cool.
Plenty of traditional IT outsourcing deals continue to get done in 2022. But customers and providers at the leading edge of IT outsourcing are exploring a new kind of partnership replete with value-generation constructs, says Craig Wright, senior partner in the advisory and transformation group at West Monroe.
In this kind of arrangement, the service provider is willing to invest in creating unique solutions for client-specific needs and is compensated through gainshare rather than resource unit-based pricing.
Cold: Pricing flexibility
The pandemic drove many enterprise customers to ask for price reductions from their IT service providers — and, in true partner fashion, many agreed to do so. But as inflation takes its toll, many outsourcers are having trouble maintaining those lower prices.
“A price rise — if not across the board, for majority of workloads — is in the cards,” says Yugal Joshi, partner at strategic research firm Everest Group. “Enterprises and service providers will have to work together to arrive at a mutually beneficial construct — which appears very difficult.”
Hot: Talent management — and accompanying costs
Historically, when an IT organization outsourced a function, the hope was that it could hand off all the human resources headaches as well. Given the challenges of the talent environment today, however, customers will want to ensure their third-party providers are on top of their games.
“Given the very real risks to service continuity and scalability faced by the victims in the talent wars, it is critical that your outsourcers’ operational metrics, key performance indicators, and governance agendas focus on total talent indicators covering business as usual/steady-state resources, flex/project resources, and recruitment/retention to proactively mitigate current and future attrition,” says Wright of West Monroe.
IT leaders should also understand that their providers will have to do (and pay) more to retain top talent.
“We are at an interesting juncture where the rising demand for third-party technology services to accelerate innovation agendas post the COVID-19 pandemic is getting met with increasing supply constraints amidst the great resignation, wage inflation, and geopolitical uncertainty,” says Gupta of HFS Research.
The vast majority (85%) of enterprises surveyed by HFS Research plan to increase their IT budgets over the next 12 to 18 months even as attrition levels in major offshore hubs are hitting historic highs. “This will mean price increases that service providers will need to pass to unwilling customers [in] an inflationary economy,” Gupta says.
Cold: Cloud migration as a growth driver
Cloud adoption continues apace, but the challenging work of massive migrations may be decelerating, according to Joshi. “Most service providers, too, are preparing for the world where migration will continue to be a big business, but not a strategic growth driver.” Joshi says.
The next phase of enterprise cloud adoption will focus on specific functions, industry use cases, and net-new cloud services.
“Service partners who have the ability to shape a client’s vision and work closely with cloud vendors to bring platform-centric solutions that exceed the business case will succeed,” Joshi predicts.
But expect to see shorter and smaller engagements going forward. One caveat for buyers: The cost of selling these services will likely increase for providers, so expect them to try to pass along those expenses.
Hot: Fallout from the Ukraine crisis
Beyond becoming a humanitarian crisis, Russia’s invasion of Ukraine already has the IT outsourcing world on edge, and the fallout for both enterprises and outsourcing providers will continue to be considerable.
“The completely unnecessary and bloody mess that Russia has created by invading Ukraine will likely have a crippling effect on Ukraine’s emergence as a technology hub and a ripple effect on global technology and business services,” says Gupta, who suggests that Western multinationals may likely become nervous about other Eastern European delivery centers that border Russia and Ukraine, including those in Romania, Hungary, Slovakia, Poland, and Belarus.
“This might mean a slowdown in large-scale innovative initiatives (perceived to be risky), but a pickup in short-term tried and tested — read: commoditized — services,” Gupta adds.
Cold: One-stop shopping
It’s becoming increasingly challenging for IT service providers to be all things to all customers in a rapidly evolving technology market. As such, enterprise IT organizations are increasingly engaging with specialist IT providers that bring technology- or function-specific domain expertise to the table.
“Despite the fact that enterprise application vendors keep adding functionalities and acquiring companies to sell more software to clients, enterprises plan to leverage best-of-breed solutions going forward,” says Joshi.
Service providers that build an effective ecosystem of software partners, hyperscalers, startups, domain experts, and academia are more likely to succeed versus service providers that try and do everything themselves, Gupta adds.
One major caveat, though: “As the world enters into recession and high inflation, this trend can quickly reverse,” Joshi says. “The procurement and CIO organization may become the dominant buyers again — and who prefer broad-based bundled buying over best of breed.”
Cold: Offshore-first approaches
Offshoring will continue to play an important role in IT service delivery but is no longer considered the answer to everything. “Expect greater localization of talent as agile delivery takes center stage,” says Gupta.
Hot: The cybersecurity paradox
Cyber risk has been at the top of the C-level agenda for some time, yet few enterprises have been willing to pay more to their service providers for this complex and critical task. “Many of them, especially in Europe, want regional or local delivery, however, and will not pay more than a 10% to 20% premium irrespective of the service delivered,” says Joshi. “This dilemma is getting exacerbated with increasing instances of even security vendors getting hacked in the recent past, nation states using cyber war as a potential weapon, and the increasing cyber complexity of businesses.”
Cold: Work-from-home service delivery
While everyone won’t be rushing back to fill the campuses of the top global service providers, companies are reevaluating the right in-person and remote work mix for their future.
“Enterprises have seen the benefit of work from home enabled by their service partners and how it helped them run operations smoothly,” says Joshi. “However, the quality and customer experience witnessed a degradation across the board.”
Customers are asking outsourcing partners to bring their people back to delivery centers, says Joshi. Gupta says his research suggests that 40% work-from-home may be the best ratio.
Hot: Advanced automation
Given the scarcity of talent, forward-thinking enterprises are looking to deploy advanced automation not just to increase efficiency, but to reduce headcount.
“This has a material impact on outsourcing relationships which continue to be people-based,” says Joshi. “Service providers have to help enterprises reduce the number of FTEs in-house as well as in their third-party relationships using automation. They have to proactively invest out of pocket and share automation gains with clients.”
Cold: Siloed IT services
Traditionally, enterprises might have considered splitting IT services strategically, whether that meant retaining IT infrastructure in house and outsourcing applications development and maintenance (ADMS), vice versa, or outsourcing both to separate vendors. These days, however, segregation of IT infrastructure and ADMS procurement makes less sense to customers “as cloud-driven transformation takes center stage,” says Gupta.
Hot: The metaverse
Amid a lack of clarity around what the metaverse will mean in the enterprise, the concept has swept across enterprises and providers alike. Prashant Kelker, chief strategy officer and leader of ISG’s Digital Advisory Services, has written that now is the time for Fortune 500 companies to create new metaverse experiences. “Web3 offers a new way that combines the best aspects of the previous eras,” Kelker writes. “It’s very early in this movement — but it’s moving fast.”
CapGemini named the metaverse one of the top three technologies of the next decade. It’s also critical to Accenture’s IDEAS framework. And companies such as TCS and Tech Mahindra have already created metaverse capabilities.
“Despite its fuzziness, many enterprises are working with their service partners to evaluate potential use cases, build proofs of concepts, and get business buy-in,” says Joshi. “As the concept matures, newer engagement models will emerge focused around business impact, customer addition, and other metrics based on specific use cases.”
Cold: Management by SLA
As IT leaders look for more strategic value from their outsourcing providers, they’re reassessing these relationships — and how they incentivize them.
“In most instances, this is about holding service provider accountable for more than just the SLAs and the KPIs,” says Joshi of Everest Group. “Many enterprises are also realizing the way their contracts and pricing are structured doesn’t leave much space for service providers to add value.”
There remains a gap between what the business wants from its IT service providers and how it sets up these contracts. “However, enterprises are realizing this and want to course-correct,” Joshi says.