Large organizations leaning heavily on IT service providers

IT service providers worldwide provided the scale of manpower required to navigate the pandemic-induced digital surge in 2020, and will continue to do so through this year. A new BCG survey presents the state of outsourcing in a crisis-stricken economy.

The common practice of outsourcing business services to people across the world was thrown into question after Covid-19 highlighted the risks of cross-border operating models. Against this backdrop, BCG surveyed 200 large corporations – 60 in the US – to examine the cost-benefit balance in today’s outsourcing market.

Disruption was inevitable: service providers globally struggled with high costs and the transition to virtual working – among other challenges – and nearly 70% of BCG’s respondents were negatively affected. Yet, the researchers found several factors that kept service providers in favor.

One is the intensified need for digital transformation. “Many companies realized that they had no option but to become more digital more quickly if they were to survive,” noted Hrishi Hrishikesh – a BCG partner & director for digital transformation based in New Jersey. “In addition to ensuring that employees working from home could operate critical business processes, such as order to cash, adroit companies shifted to online marketing, selling, and services delivery for the foreseeable future.” 

Over 60% of businesses accelerated some digital transformation initiatives during the pandemic.

Transformation at this scale and speed requires manpower, which came from service providers – who rallied to deliver support despite facing myriad challenges of their own. BCG highlights the example of an Indian delivery centre which booked an entire hotel for its staff to ensure a secure bubble for work.

Topping this off, 80% of businesses were able to work out special arrangements with their providers, such as discounts, postponements, or extra services. The result is a strengthened relationship between businesses and their service providers worldwide – one that will persist into 2021 and beyond according to the researchers.

Many, though, are building in-house capabilities to be more independent. Indeed, businesses that had a more diversified mix of in-house and outsourced services were actually better equipped to navigate the crisis last year. But the scale of transformation underway ensures that there is still room for external service providers. 

A staggering 96% of businesses plan to accelerate a select number of digital initiatives through 2021 and 2022. Focus areas include cybersecurity, automation, cloud migration, artificial intelligence and analytics, while myriad other efforts have been put on hold. The set of targets is vast and complex, and will likely require external support in many cases.

“The survey suggests that companies planning to accelerate transformation projects anticipate relying on service providers more heavily in the future, even as they build in-house capabilities in other areas,” noted Hrishikesh. The fact is that digital talent is at a premium worldwide, which puts a cap on the scale of capacity that can be built in-house.

So outsourcing will continue, albeit with some tweaks. Two-thirds of BCG’s respondents plan to renegotiate their contracts with service providers this year – revising terms and conditions, pricing, and delivery models. Some are planning to reduce or expand the scope of services, while disaster recovery plans are also high on the agenda.  

Given this secure status, Hrishikesh warns against complacency among service providers. ”The onus is on service providers to expand their skills and offerings. Coming out of the crisis, service providers would do well to be prepared not only to renegotiate costs but also to grab the capabilities-based opportunities that are bound to come their way.”