The need for speed, innovation and agility is expanding the market for outsourcing, explains a new ISG Research report.
Digital transformation contributed to a revival in large contracts with a single service provider, the report said, but noted the overall trend of shorter, limited-scope contract awards continued in 2017 as enterprise buyers sought to maintain flexibility and maintain leverage over service providers.
“Enterprises increasingly see outsourcing as a way to increase their pace of innovation and support their strategic initiatives,” said Paul Reynolds, ISG partner and chief research officer (pictured left). “This is expanding the market for outsourcing services, not cannibalizing it. Digital technologies are unlocking new value from traditional outsourced services, and the need for companies to have a flexible, digital-friendly IT infrastructure is spurring new sourcing for cloud and other services.”
Not that cost-cutting is no longer a primary focus, Reynolds said. “Enterprise customers do not want either innovation or cost savings. They want both. And they are increasingly seeking greater than 10 percent savings on service prices when renegotiating with incumbent service providers.”
The ISG Momentum® Market Trends & Insights® Annual Report documents overall 2017 contract award and spending totals by region, vertical industry, ITO, BPO, specific service line and service provider, and provides up to 10 years of historical data for perspective. With a blend of ISG’s proprietary data, original market research and market intelligence, the report provides insight into what is driving outsourcing activity and what new opportunities are emerging.
Some key 2017 developments and 2018 influences are highlighted below and explored more fully in chapters throughout the report.
- ITO activity was very strong around the world. Each region increased its total contract value (TCV) from ITO contracts by at least 9 percent, and EMEA, the largest regional market, grew by 18 percent.
- ITO significantly outperformed BPO worldwide in 2017, although the Americas BPO market expanded by $3.1 billion.
- The Asia Pacific region continued to increase its share of Forbes® Global 2000 companies, but the region’s outsourcing penetration rate among those companies remains low.
- Clients increasingly want to use outsourcing to expand their pace of innovation and to support other strategic initiatives. The continued shift away from focusing on outsourcing as a cost-saving mechanism is opening opportunities for new types of services and technologies.
- Organizations that want to embrace DevOps are contracting with service providers to help them make the transition. Two-thirds of outsourcing clients expect to have DevOps teams in place within 18 months, ISG research found. Service providers need to be prepared to offer flexibility in how ADM services are delivered and priced.
- Clients do not want either innovation or cost savings. They want both. And they are increasingly seeking greater than 10 percent savings on service prices when renegotiating with incumbent service providers. To meet this requirement and keep the customer engagement profitable, service providers will often need to rely more on automation and other innovations, and to change how they work with clients to collaborate more closely.
- Approximately 65 percent of current outsourcing engagements are at risk of not being renewed with the incumbent service provider, according to ISG Research. Problems in the relationship, new competition, the incumbent’s inability to match prices or savings offered by competitors, and client desire to try new providers or technologies are leading factors that put renewals at risk.
- More clients are seeking outcome-based contracts. Service providers can gain an advantage in the market by highlighting their success in outcome-oriented engagements, and by proactively proposing new metrics and structures to clients.
- ISG expects automation to play a greater role in outsourcing services that focus on support, both for IT support and customer engagement and support. Service providers’ automation capabilities and intellectual property are becoming more important to clients during the selection process.
- As clients become more strategic, service providers are investing more in advisor relations programs in an effort to increase market awareness of their differentiating features. ISG especially sees renewed focus on advisor relations among large Western service providers.
- The growth of robotic process automation will increase the downward pressure on service prices in 2018. RPA demand remains strong and is expanding to more functions.
To view an executive summary of the report, click here.
The Full Report
The latest ISG Momentum® report is part of an ongoing series of market research reports that focus on outsourcing activity by service line, vertical industry and geographic location. To learn about these or other ISG Momentum® services and information products, please visit the ISG Momentum® Research page on the ISG website.
Understanding the Changing Environment
To meet this requirement and keep customer engagements profitable, service providers will need to rely more on automation and other innovations and change how they work with customers to collaborate more closely, the report said.
A prime example of this change is the growing customer preference for outcome-based contracts. Service providers, the report said, would do well to proactively propose new metrics and pricing structures to their customers, or risk losing their business.
Approximately 65 percent of current outsourcing engagements are at risk of not being renewed with the incumbent service provider, the report said. Such market volatility—driven by competitive pricing and offers of greater savings and innovation—will play a key role in determining which providers win their share of the $25 billion of outsourcing contracts up for grabs in 2018.
Higher levels of automation and other innovations are becoming table stakes in service proposals, which reduces the opportunity for them to be differentiators, the report said, citing the example of analytics now being built into many solutions.
ISG expects automation to play a greater role in outsourcing services that focus on IT support and customer engagement and support. Service providers’ automation capabilities and intellectual property are becoming more important during the selection process, the report noted.
For their part, service providers expect as-a-service offerings, robotic process automation and intelligent automation to exert the most downward pricing pressure on outsourcing services in 2018.
Agile development capabilities are an increasingly important area of consideration for enterprises. Two-thirds of enterprises expect to have DevOps teams in place within the next 18 months, ISG research has found, and they are looking to contract with providers that will help them make the transition to more agile environments. To meet the demand, providers will have to be more flexible in how they price and deliver Application Design and Maintenance (ADM) services, the report said.