Mid-2018 Outsourcing Update: Glass Half-empty? Or Time to Redefine The Glass?

Mid-way through 2018, Dave Brown at KPMG shares findings that indicate what global organizations anticipate as sophisticated new technologies and automation change the outsourcing business.

outsourcing glass half empty

As we assess the current state of outsourcing, one thing is clear: before we can measure whether the glass is half-full or half-empty, we need to define the glass—or, more specifically, the next-generation outsourcing market.

Things are changing. So assessing the current and future market demand for outsourcing first requires updating the definition of exactly what outsourcing is in the era of intelligent automation.

Midway into 2018, we are seeing that this is another year of continuing flux and evolution for the Nearshore and offshore shared services and outsourcing markets. That’s pretty much what we expected. As we discussed in a previous blog, several factors are driving change today:

  • Increasingly sophisticated intelligent automation (IA) technologies, such as robotic process automation (RPA), machine leaning, cognitive computing, and artificial intelligence (AI), that can enhance and/or replace human labor at a lower cost.
    • Evolving data and analytics and IA technologies that can enable human labor to provide greater insights and value-adding strategic services, as well as, in some cases, completely eliminate the need for human labor.
    • Populist, protectionist, nationalist, and other “-ist” market trends that continue to view outsourcing and the use of third-party labor negatively, and, more recently, angst over the impact of IA on the workforce, such as layoffs and retraining/reskilling challenges and opportunities.

Results from the 2018 edition of a global market study on sourcing trends, conducted annually by KPMG and HfS Research, illustrate some of the trends. Findings from the study show that current and projected demand levels for Nearshore and offshore outsourcing are mixed. In fact, 40% of organizations expect significant increases in demand for outsourcing (up from 13% in 2014) and expect 23% anticipate significant declines in demand for outsourcing (up from 8% in 2014).outsourcing plans

Across most functional areas, the use of offshore is expected to decline, particularly in areas such as IT and network infrastructure support and IT application maintenance and development. This is because much of the work traditionally done by low-cost labor will be automated and also due to diminishing potential returns from labor arbitrage as offshore labor rates rise.

Marketing was another area that reflected a substantial anticipated decline in offshoring for similar reasons, but also because respondents recognized that there would be limited availability of higher-end skills in offshore labor for these activities.

While some organizations may consider managing automation on their own, our experience has shown that many companies really struggle with this. So, if a third party can meet your terms and conditions and provide the highly skilled labor and automation to achieve the results you want, go for it—outsource these functions. However, it is important to note that the pool of potential outsourcing candidates is changing as more data analytics and IA specialist vendors and service providers enter the market.

Checking out a newer model

Overall, organizations are continuing to move toward more centralized service delivery models that leverage all three main models—global business services (integrated shared services and outsourcing delivery), functional shared services, and more traditional centralized models. This is partially because moving to a more sophisticated model involves upfront investment in people and systems, as well as maneuvering internal politics and garnering adequate executive support for these changes.

It’s a gradual process. But slowly we are heading in the right direction, moving toward having fewer models, greater visibility, end-to-end services managed as a portfolio, and improved centralized governance capabilities—an aspirational goal.

Before we assess outsourcing and shared services demand, let’s define the models involved:

  • Traditional outsourcing and shared services focused primarily on cost-reduction and process-efficiency gains. These will be achieved via economies of scale and lower-cost offshore labor and labor arbitrage gains.
  • Next-generation outsourcing and shared services focused on both cost reduction and potential process efficiency gains. Cost-reduction and efficiency gains will more often result from the use of advanced data and analytics and RPA. Machine learning and AI will enhance process effectiveness by delivering more value-added and strategic services.

Next-generation appeal

The core capabilities within next-generation outsourcing—advanced data and analytics and intelligent automation—are increasingly available to organizations, either independent of or part of their outsourcing efforts or through third-party service providers. As a result, more clients will consider new initiatives that leverage D&A and IA independent of third-party providers. But, at least in the near term, third-party providers will often have more of these skills than clients and, therefore, still will be able to compete effectively for new business.

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When it comes to their existing outsourced work, clients will push for greater use of data analytics and intelligent automation. However, they’re going to run into obstacles to doing so based on existing contractual terms, service levels, pricing, and governance models, and the like.

That’s why it’s in a service provider’s best interest to aggressively introduce D&A and IA into existing deals to keep the business and improve their competitive edge. Otherwise, service providers can lose next-generation outsourcing business to a variety of “competitors”, such as more aggressive and agile service providers, D&A- and IA-centric vendors and service providers, or internal client efforts.

The bottom line

The nature of what constitutes Nearshore and offshore shared services and outsourcing is rapidly evolving. It’s moving from a labor and labor arbitrage-based model focused on cost cutting and moderate process efficiency gains toward a model focused on using advanced D&A and IA technologies and services to deliver more strategic benefits and value.

This change accelerated in the first half of 2018 and will continue to do so over the next 18 months.

While the use of third-party service providers will continue to grow—although at a more modest pace—the nature, size, benefit, and deliverables of deals will continue to change. Overall, deals will be smaller, shorter, more tied to benefit delivered than time and materials, spread across a broader range of providers, better integrated across deals and with shared services efforts, and more strategic in nature.

As organizations shift their focus to achieving greater strategic value and insight through new technologies and solutions, they’ll look to service providers that can deliver. Legacy outsourcers—like legacy outsourcing and clients with legacy mindsets—will become the mid- to long-term losers in this evolution.

The better option is to refine your strategy based on a redefined, next-generation outsourcing model—and gain a clearer picture of how your buying decisions are measuring up in an era of automation.

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