Published on the 22/04/2021 | Written by Heather Wright

Postpandemic outsourcing needs closer ties, more effort…

Planning on accelerating your digital transformation? Chances are you’ll be calling on service providers for a hand then, with a new report predicting a surge in outsourcing in the coming year.

The Boston Consulting Group survey of 200 businesses around the world, including 20 across Australia and New Zealand, says companies planning to accelerate transformation projects anticipate relying on service providers offering digital capabilities and business process services more heavily in the future – and there’s a correlation between an organisation’s plan to slow transformation projects and its inability to leverage service providers effectively.

While the pandemic saw companies forced to become more digital more quickly, it also saw many struggling to manage the forced digital transitions on the fly, BCG says. As a result many turned to their service providers to support them and, according to the BCG report, Postpandemic Outsourcing Trends for CEOs, have been expanding their relationship with the providers.

“There was no digital transformation without external parties.”

Heiner Himmelreich, Boston Consulting Group partner and director, technology and digital transformation, and co-author of the report, says there is an opportunity for Australian and New Zealand companies to get much more out of the tech supplier eco system, beyond stable operations and lower cost, but they need to put more effort into managing relationships with the vendor ecosystem.

Himmelreich told iStart the New Zealand and Australian findings were in line with the global findings, with no significant regional deviations.

He says digital transformation is a key driver for outsourcing.

“In 2019 we did a study on the role of vendors in DX: There was no digital transformation without external parties. So DX clearly drives outsourcing (acceleration, but also getting cost out earlier to fund the journey).”

Cost, access to talent and acceleration of change are the overall key drivers.

The report also reflects the state of companies’ digital transformations.

While much has been made of companies continuing their digital transformation projects last year even in the midst of the pandemic – and even often accelerating DX – the BCG survey found companies were selective about which projects they pursued. Sixty-one percent said they accelerated parts of their DX over the course of the year, although 42 percent noted they slowed down some projects.

“Thus, the popular perception that digital transformation has only accelerated in 2020 may be misleading, with some qualifications becoming necessary to understand the ground realities,” the report says.

“DX is still high on the agenda,” Melbourne-based Himmelreich says. “However, companies are more selective: They accelerated crucial elements of their digital transformation and delayed or cancelled others because of a change of priorities and/or lack of funding.”

“Importantly, most enterprises plan to persist with their digital transformation agenda; in fact, 96 percent of the companies we surveyed expect to accelerate the execution of their transformation-related projects over the next 24 months.”

The digital transformation, however, is clearly changing. That 96 percent figure isn’t companies saying they are pushing ahead quickly with all their transformation, just select bits of the work. In fact, 76 percent of respondents expect to slow down some of their initiatives during the next 24 months.

The immediate focus for many is in reinforcing the IT function, with more investments in cybersecurity (55 percent), given that people will continue to work from home; automation (49 percent); cloud migration to reduce costs (47 percent); artificial intelligence, machine learning and analytics (46 percent); and crowdsourced innovation (35 percent).

“That focus is consistent with their pre-pandemic agendas: 80 percent had been concentrating on cybersecurity, 76 percent had been prioritising moving to the cloud, and 72 percent had been focusing on deploying AI, ML, and analytics well before the crisis.”

And the reduction side of the equation? Of the 76 percent of companies slowing some of their projects, 25 percent say they’re reducing investments mainly in risk management, 23 percent in supply chain management and 22 percent in HR processes. The main reasons cited were lack of financial resources or a reprioritisation of strategic objectives.

“As a global fashion retailer succinctly put it: ‘We pushed ahead with all the initiatives that related to our customers and their digital journeys, but paused almost anything that wasn’t connected to our digital transformation’,” the report notes.

So where does outsourcing fit in?

The report says almost half of all the companies surveyed were outsourcing more work this year than they were doing internally.

Gartner too is bolshy about the prospects for outsourcing this year. It has forecast worldwide IT spending on consulting and implementation services to see a 4.5 percent compound annual growth rate through to 2024, after a 4.6 percent slump in 2020. Spend on IT-centric managed services, infrastructure and application support, which was down 1.1 percent last year, is forecast for a CAGR of 5.3 percent for the same period.

“We are starting to see a shift in priorities,” Himmelreich says. “Innovation is getting more important. A challenge and an opportunity for businesses and their suppliers.”

The challenge for businesses, he says is the need to be able to identify and contract non-traditional suppliers faster, especially compared to typical tender processes, and to manage the ecosystem – and not only one to one relationships with each vendor individually.

Dealing with ambiguity, such as how to contract and incentivise if the outcome cannot be precisely defined upfront, is also a challenge, he says.

BCG says companies outsourcing strategies need to include a focus on resilience, with staying in business and bouncing back from adversity two key considerations when refining IT outsourcing strategies, and companies need to be selective about partnership.

“Our survey shows that companies work with as many as five service providers, on average, but developing deeper relationships with fewer partners may be the way to go. That will help create ecosystems of digital innovation for many companies.”

On that front, Himmelreich notes that while most Australian and New Zealand companies were very satisfied with the support they got from their vendors, with some saying that within their vendor portfolio some vendors went above and beyond where they did not expect it, others weren’t so generous.

“A few tried to exploit the situation – and those have been replaced,” he says.

BCG says companies will also need to change the nature of contracts to share more risks and rewards with service providers.

“Our survey shows that executives expect a rise in the use of outcome-based contracts (47 percent) and joint ventures (47 percent).”

Himmelreich says Australian and New Zealand organisations should continue with their DX efforts, but put more effort into managing relationships with vendor ecosystems.

“For your tier-1 vendors, move from a transactional relationship to a strategic one,” he urge.

“For some it may be perfectly fine that they are transactional, but if I want to get more out of the vendors I need to invest more. Some companies have vendor days (or captain tables) where they share their key challenges and the vendors have an opportunity to provide proposals how to address them. This requires preparation, trust (sharing issues) and follow-up beyond the vendor day to move from ideas to initiatives. This also means that vendor management functions need proper resources.”