by Stephanie Overby

Grading our 2016 IT outsourcing predictions

News Analysis
Dec 16, 2016
OutsourcingTechnology Industry

We predicted this was the year that security and integration challenges would become key considerations, companies would embrace robotic process automation and offshore captive models, and the IT outsourcing contracting process would become more agile and accommodating. Now it's time to revisit our predictions.

evaluation ts
Credit: Thinkstock

Earlier this year, and its outsourcing experts made several bold (and a few slightly less daring) predictions for IT services in 2016. We suggested that this year, IT organizations would operationalize their vendor management approaches. (Not exactly.) We said that security would be top of mind, and integration challenges would increase. (It was, and they did.) And we envisaged the arrival of a faster, more flexible contracting process and a kinder, gentler vendor approach. (Neither, alas, came to pass.)

We revisited all of our prognostications from last year and found that while we were largely on the right track, some trends are taking longer to translate into lasting change than others. Half of our predictions were right on target, three were off base, and the remaining two were just beginning to take shape at year-end. As we pull together our forecast for 2017, here’s how all those 2016 predictions panned out.

Right on target

Security takes center stage

Top of mind from the boardroom to the break room and poised to become an even greater risk as telematics and the internet of things (IoT) technologies multiply, we thought that security would become a higher priority in third party contracting.

“This prediction was spot on,” says Christopher A. Seidl, partner and chair of the global business and technology sourcing group at Robins Kaplan. “This year, hackers got more creative and people were pointing the finger at vendors as the cause of some (but certainly not all) issues. Also, regulators got tougher this year.”

From a massive distributed denial-of-service (DDOS) attacks initiated by connected devices to the hacking of the Democrat National Committee (DNC) emails, security was a major concern this year and will continue to be for the foreseeable future, says Steve Hall, partner with outsourcing consultancy Information Service Group (ISG). “Providers who offer the best security protections and risk mitigation around security of data will win out over less secure, riskier solutions,” says Rebecca Eisner, partner in Mayer Brown’s technology transactions practice.

Offshore captives come back

As the enterprise appetite for digital transformation has grown, so too has interest in the offshore captive model for delivering IT services. These wholly-owned subsidiaries are uniquely qualified to play a pivotal role in the digital transformation of their parent companies. “We are seeing this trend among clients, as more and more companies with large offshore bases are realizing that captives can generate substantial efficiency benefits,” says Marc Tanowitz, managing director with outsourcing consultancy Pace Harmon.

Production workloads — and more — hit the cloud

Noncritical systems were the first to hit the cloud, and we predicted that production workloads would migrate there.

In 2016, large enterprise clients went “from seeing cloud as a risk to seeing cloud as either risk-neutral or cutting both cost and risk,” says Kevin Rang, partner in Mayer Brown’s technology transactions practice. “As cloud services continue to mature and general acceptance as a platform continues to take hold, we expect this trend to accelerate.” Organizations of all sizes are now hosting mission-critical enterprise applications in the cloud. “The next challenge will be assessing and mitigating the risks to corporate security and trade secrets,” Seidl says.

Integration challenges surge

Customers adopting an increasing number of emerging digital technologies and working with a wider portfolio of IT service providers are did indeed face greater integration challenges. “We saw clients rapidly hire integrators both to configure new digital services and to reform data flows,” says Brad Peterson, partner in Mayer Brown’s technology transactions practice. “ Moving production workloads to digital platforms made old data flows obsolete and create new needs to extract, transform and load data between systems.” And creating and maintaining partnerships among providers continues to be a challenge, Seidl says.

The service provider universe expands

We thought that while CIOs would continue to turn to ITO, BPO and cloud service providers, they would be sourcing services from an ever-expanding list of emerging and digital technology providers this year, including more product oriented vendors.

That was certainly true, although some of those providers have been better partners in digital transformation than others. “Customers have continued to look to a wider array of service providers to provide innovation and transformation,” says Seidl. “But some are still struggling with how to define and motivate innovation, especially within the contract.”

Off the mark

Multi-speed IT hits outsourcing

We predicted that IT outsourcing clients want to call it, outsourcing clients will recognize the need to take different approaches to managing the “run the business” part of IT and the “change the business” part this year and demand a bimodal approach from their service providers.

We were wrong. While organizations are using agile and DevOps approaches internally to accelerate delivery, they’re not yet demanding a two-speed approach from third parties.

Vendors get soft(er)

We imagined that vendors, accustomed to placating customers by lowering prices, would have a come to Jesus moment in 2016 and begin taking a more accommodating approach to achieve further growth. That didn’t happen. In fact, service providers have, in some ways, become less flexible. “We’re not seeing a widespread shift toward flexibility among vendors,” Tanowitz says. “Rather, in many cases, vendors are becoming more rigid in their terms and service level agreements, especially regarding cloud-based applications.”

Agile sourcing emerges

As technology evolves more and more rapidly, we suggested that outsourcing decision-making would have to speed up to avoid getting left behind. However, the outsourcing RFP and contracting process has remained largely unchanged. “In my personal experience, outsourcing any services is taking just as long as ever,” says Adam Strichman, founder of boutique outsourcing advisor Sanda Partners. “There’s nothing agile about it.”

Companies are investing time in due diligence up front. “This strategy ensures their outsourcing investment will pay back in multiples on the back end,” Tanowitz says. “The philosophy of a dollar spent now saves ten dollars later applies, especially when assessing major technology alignment throughout an organization.”

Still taking shape

VMOs go mainstream

Multi-sourcing has certainly multiplied the vendor management workload, but IT organization are still trying to figure out their vendor management strategies.” “Multi-sourcing is likely here to stay, bringing along with it a host of vendor management challenges,” says Tanowitz. “As such, enterprises will continue to look for new ways to proactively address vendor management, including outsourcing functions like SLA calculation. We see this trend picking up steam, but it isn’t mainstream yet.”

“Having some centralized VMO personnel experienced with services deals—not just buying nuts and bolts—is becoming critical,” Strichman adds.

“We also saw a countervailing trend in 2016 for targeted specialized services, which we find are being managed by the business units using those services,” adds Paul Roy, partner in Mayer Brown’s technology transactions practice. “The key differentiator seems to be enterprise vs. specialized services.”

Automation will redefine relationships

As the advantages of the labor arbitrage approach to cost savings dwindled, we posited that automation would change the game in IT engagements and suggested that both customers and providers will have to rethink their deals to integrate more robotic process automation (RPA) and robotics into their service delivery.

It’s true that RPA and other forms of automation will be game changers in the industry. “While initially viewed as another labor arbitrage opportunity focused on reducing FTEs and cost, RPA has demonstrated the ability to have a direct impact on speed to market, accuracy and quality, customer satisfaction, compliance and auditability, and is emerging as a key differentiator for both buyers and providers of sourcing services,” says Craig Nelson, managing director at ISG. However, RPA is still in the earliest stages of adoption, says Tanowitz. “It has not moved the needle as of yet for outsourcing customers.”