Application Outsourcing: Pushing Service Providers to Inject More Value

Unlike in the past, labor arbitrage, process efficiency, and standardization can no longer inject much value into application outsourcing (AO) engagements, according to new research published by Everest Group. A large many service providers are cutting short their AO engagements as they are finding it extremely difficult to meet customer demands.  Such contracts are later handed to incumbent players, says the research firm.

Buyers are leveraging their existing providers for next-generation services, especially mobility and cloud. Mobility accounted for more than one in five AO engagements, and about 40 percent of these engagements required delivery of social business applications. “Cloud adoption appears focused more on Software-as-a-Service deployment than the transformation of existing applications,” the report said.

The research firm suggests that buyers should put in more effort to drive AO productivity in addition to the typical strategies such as automation and provider consolidation. Interestingly, according to the research firm, buyers prefer shorter deal terms and invest more in application maintenance than custom development.

Buyers, the report says, are focusing on extracting more productivity in their application portfolios. This will not be limited to service providers but will also include their internal operations (e.g., global in-house centers). Next-generation technologies (cloud computing, mobility, and analytics) will witness further demand, but “bread and butter” capabilities will still comprise the core criteria for service provider evaluation.

“The transformation taking place in application outsourcing is a direct result of buyers pushing their incumbent providers to drive up productivity and deploy next-generation technologies,” said Jimit Arora, vice president at Everest Group who leads the report team. “A shift in buying centers is a part of this change, and we’re already seeing, service providers investing in targeting the “non-CIO” buying centers to offer next-generation services. Moreover, they will increase efforts to retain strategic clients by offering better commercial constructs.”