It’s outsourcing – but not as we know it

Cisco predicts that by 2019, 90% of mobile data traffic will be driven by cloud applications growing at a CAGR of over 60% in the next five years. Within the same timeframe, Gartner predicted spending on enterprise application software will grow to $200B (from $150B in 2015). It is also interesting to note that by end of 2017, 88% of the global SMB sector (that contributes to over 50% of the global economy) will use cloud-based applications. Combined with advances in automation, robotics and cognitive processing, the World Economic Forum predicts that five million jobs are expected to be lost worldwide by 2020. Given these seismic shifts in the global technology landscape, wholesale transformation of the IT outsourcing industry is guaranteed.

800 page contracts are a thing of the past

Over the last two decades, every major global company has gone through multiple iterations of IT outsourcing primarily driven by the need to reduce costs, thanks to the tumultuous global economy during this timeframe. As a result, large service providers were conveniently forced to invest in a “factory model” that primarily replicated their own version of global delivery processes in multiple offshore locations. Most of their “innovation” went into continuously optimising their staffing pyramids and aggressively hiring resources in offshore locations around the globe. With established revenue streams through long standing outsourcing contracts, these service providers had little motivation to invest in true innovation that would deliver tangible and ongoing business benefits to their clients.

As these established service providers struggle to cannibalise their revenue streams and transform themselves away from traditional outsourcing models, a multitude of next generation service providers are likely to capitalise on the “as-a-service” opportunity to deliver exceptional business value at unprecedented price points, and interestingly, without a 800 page outsourcing contract.

Contracts values will fall, as ability to innovate grows in importance

A clear indicator for the future of outsourcing industry is that fact that today, outsourcing contracts are gradually diminishing in contract value. In fact, when I worked as an outsourcing sales executive with the world’s largest IT service provider, where I spent a decade in leading complex outsourcing sales pursuits, I saw the size of deals and the contract terms nose-dive quite dramatically over that 10 year period. The days of CFOs signing seven-year IT contracts worth hundreds of millions of dollars are long gone. Additionally, long term contracts signed just a few years ago are now being re-negotiated on a constant basis. This is all because the rate of change happening both in the technology industry and in business verticals is outpacing the ability of the established IT service providers to address the evolving needs of their clients.

Outsourcing in the future will not just be about cost savings. Nor is it merely about helping clients to transform, or helping them grow. But it is all of the above in a fast paced manner. As political boundaries give way to global economic expansion (e.g. Uber, Facebook, Google and AWS), IT companies must be able and willing to provide services where needed, when needed and how needed. Outsourcing companies must come together on a demand basis and deliver in real time with unlimited scalability. This is where the large IT service providers are likely to face challenges with their irreversible investments in the traditional offshore centric “factory model”.

The next generation of outsourcing companies must develop pre-emptive delivery processes that are focused on IT debt elimination – where the productivity is measured not by how many technical issues were fixed, but how many technical issues did not need to be fixed!