Outsourcing in the 2020s: cloud and Covid shake up contracting

In recent years, the concept of “outsourcing” has become a confusing term. Is turning over data center operations to Amazon Web Services a form of outsourcing? Of course, though it doesn’t fit the profile that normally involves a team of outside professionals working intimately with the business. Does employing APIs for selected data sources or specific pieces of functionality qualify as outsourcing? Not in the conventional sense — though it could be considered “microsourcing.”

What’s notable is these technology approaches are not even considered revolutionary or game-changing anymore — they are simply expected, as enterprises seek the next new thing that will provide them advantage. That’s the word from a survey conducted by Deloitte. At the same time, there’s been a return to basics when it comes to outsourcing engagements, which includes a focus on “shoring up value and driving down costs.”  

“We are seeing contradictions,” the survey’s authors, Miles Underwood and Mike Stoler, both with Deloitte, report. “Clients are keen to continue to embracing disruptive technologies. Cloud and automation continue to be a driving force for change. Microsourcing continues to expand along with the ecosystem of specialized services providers.”

Over the past year, with the impact of the Covid-19 crisis front and center, companies have continued to look to outside resources to help manage their transition to disruptive technologies. Most new outsourcing arrangements include cloud and robotic process automation (RPA) — to the point in which they are simply givens in any arrangements. “As they become more proven and familiar, they’re less of a transformative driver than two years ago, and are now effectively table stakes for all transformations,” Underwood and Stoler observe. “Organizations are looking forward to the next major technology catalyst to power the evolution of their business.

Around 90% of executives see cloud as one of the primary enablers in their outsourcing journey — the same level seen over the past two years. In addition, there has been a clear progression in the adoption of RPA through outsourcing. More than 75% of respondents are actively considering or pursuing RPA in their sourcing arrangements. Enterprises “are now focused on solving the tactical challenges of RPA adoption, such as developing and maintaining a positive business case, defining provider responsibilities, and assigning data ownership.” 

Still, they struggle with justifying the expenses that go into RPA implementations. “Some clients find it difficult to justify the investment, as they don’t see a positive business case in the short term,” Underwood and Stoler observe. Most enterprises, 53%, say their savings from RPA installations were less than 10%. Of course, “RPA adoption is not just about cost savings. It can also free up the workforce to focus on more strategic issues. Doing so can lead to greater employee and customer satisfaction, with substantial improvements in enterprise value.” Along with ROI, enterprises are also concerned with the data ownership issues that arise with widespread RPA implementations. 

Microservices also stands out as technology implementations delivered or supported by third parties. However, these are still the early stages of capabilities delivered through microservices, with 10% of companies and service providers identifying this as a technology to watch. The Covid crisis has pushed cloud even deeper into enterprises, and microservices will play an “increasingly larger role in the landscape by providing end-to-end solutions tailored to a customer transformation journey, rather than bolt-on capabilities applied to legacy solutions,” the Deloitte authors report. .

Trends shaping third-party IT arrangements over the coming year include the following:

• More virtual companies means more outsourcing. “Covid-19 has banished the idea that physical colocation of resources is necessary to develop a trusting relationship in the workplace. This will likely lead to an increase in outsourcing. A remote work culture is gradually being ingrained within companies, and this will help them access global talent from the most cost-effective locations. It would also allow companies to hedge their risks by diversifying their delivery locations.”
• Cloud truly brings flexibility. Flexibility has been a cloud vendor pitch point for years, but there is logic to the pitch. “Organizations that have migrated their functions and processes to the cloud will be in a better position to scale their technology resources with the changing demand. This will help them not only pay for what they need, but also provide technology resources required to meet that demand. They will also be in a better position to adjust their technology footprint once the pandemic has subsided.” 
• Outsourcing should be short and flexible. As mentioned above, outsourcing now applies to a very broad range of services. Among lawyers participating in the Deloitte survey, half indicate that “one of the most significant lessons for the future was to push for shorter and more flexible contracts-a theme that had wide support across both client and service provider interviewees. As organizations embrace agility and disruption, outsourcing contracts must facilitate these philosophies and be structured to recognize the increased commoditization of the services provided.”
• Preparedness for future Covid-like events is key. One Covid-like event is definitely enough, but the past year has been the ultimate lesson on the importance of business continuity, “Business continuity planning will evolve rapidly, and already is, to cover future global pandemic scenarios and will include testing of service providers’ ability to deliver from home offices, maintain their own supply chains, and deliver both desired data security and work productivity.”