The global IT services industry has emerged from two-plus years of a global pandemic to establish itself as even more vital to the success of enterprise IT organizations. As corporate IT looks to manage unrelenting demand for technology-enabled change in a challenging talent environment, outsourcing partnerships have proved pivotal.
“Companies are finding it exceedingly hard to find skilled talent especially in the US and Europe, and consequently outsourcing (and offshoring) are becoming important for companies to access talent in labor markets such as India,” says Jimit Arora, partner at Everest Group.
The resulting continued growth in the IT services market is just one way in which common presumptions about outsourcing have been turned on their head over the past year.
At a time of tremendous market activity and decision making, it’s important to re-examine the new realities of outsourcing. As outsourcing approaches continue to evolve, some long-held misconceptions persist while new illusions have emerged. Achieving desired outcomes when working with third-party providers depends on clear-eyed understanding of what’s possible and what’s not, what responsibilities remain with the buyer and what new capabilities are required, what’s changed about outsourcing models, and what remains the same.
CIO.com talked to IT outsourcing experts who work with IT buyers and vendors to help bust some of the most common myths around outsourcing today — and to aid IT leaders in setting up their outsourcing engagements for success.
Myth: IT outsourcing is dead
Au contraire. “It’s growing in a major way,” says Marc Tanowitz, managing partner of the advisory and transformation group at West Monroe. “As companies continue to focus on resiliency by becoming digital, the need for IT outsourcing, likely engaging with multiple service providers, will only increase as infrastructure and application maintenance and development needs continue to grow and the required skills continue to change.”
The outsourcing market is even strong than it was prior to the pandemic. The technology talent crunch is the great driver here, says Arora, and RFP and transaction activity is through the roof, according to Arora.
“IT service providers are in the best position to accommodate the rapidly changing hot skills required for the leading technologies,” Tanowitz agrees.
Myth: SaaS will replace IT services
“In fact, SaaS and IT services have a symbiotic relationship,” says Saurabh Gupta, president of research and advisory services at HFS Research. Fewer than 5% of respondents to a recent HFS survey said that SaaS is decreasing their outsourcing costs, while more than 80% expect to increase their third-party spending on SaaS implementations.
“SaaS has been successful in driving scalability and migrating capital expense to operating expense,” Gupta says. “But satisfaction with ease of use and ease of deployment continues to be low and enterprises need expert help.”
Myth: It’s all about cost savings
Speaking of outsourcing spending, it’s definitely not headed in a downward direction. Any assumption that commoditization of technology would result in rate reductions was wrong; they’re going up.
“As we think through the talent environment right now, the number one driver for IT outsourcing is the ability to access talent at scale and speed,” says Arora of Everest Group.
As digital transformation has cemented itself as a key growth driver for the business, companies are willing to pay a premium for the skills required. “The objective function has changed from savings to speed,” Arora says.
Myth: Less is more, and consolidation is king
For a time, IT organizations used outsourcing as a catalyst for consolidating IT systems across the board, thereby increasing efficiency and cutting costs. That’s not necessarily the case anymore. Specifically, many companies are taking a bifurcated approach to consolidation. In systems necessary to “run the business,” portfolio consolidation is still the name of the game, says Arora.
To that end, offshoring and IT managed services continue to be used to high degrees for back office systems. But when it comes to digital transformation — or “change the business” systems — there is greater portfolio diversification, more localized services or onshoring, and more of a staff augmentation approach.
“The earlier premise of ‘less is more’ might be true in the run portion of the business,” Arora says, “but in the change portion of the business it is fundamentally ‘more is more.’”
Myth: Agile and DevOps are not possible when outsourcing
IT’s overall response to COVID-19 overturned many of the assumptions about what can and cannot be accomplished with technology. So too has outsourcing’s response to supporting enterprises’ digital acceleration needs.
“The last two years have proven that location-independent agile and DevOps can also work quite successfully,” says Arora. “As companies look to ramp up, they are also looking to ramp up the amount of agile and DevOps across their outsourced estates.”
Myth: Outcome-based pricing is ideal
While most clients will say they are ready to pay for outcomes, it continues to be tricky to link outsourcing value into business outcomes beyond cost savings — especially when an IT service provider has control over only part of the input.
Even when a sourcing partner can impact outcomes, there may be disagreement over which entities and personnel really contributed the most to any given business outcome. Right now, there is a resurgence in old-school staff augmentation for new projects. “That’s okay,” says Arora. “It’s not important for every company to go down a managed services journey. In fact, attempting managed services early on in an outsourcing journey is a recipe for disappointment.”
Myth: Companies that outsource IT lose their best employees
The painful truth is that every organization is at risk of losing its top talent these days.
“Companies that don’t continue to engage their employees and offer meaningful work and opportunities will lose their best employees regardless of whether they do outsource IT,” says Tanowitz of West Monroe. “In fact, an argument can be made that outsourcing IT will allow companies to focus more sharply on those activities and competencies that key employees find fulfilling hence increasing retention.”
Myth: Location consolidation is a good idea
In the days before COVID, enterprises were working hard to minimize their outsourcing geographic footprint. Business continuity concerns highlighted by the pandemic had IT leaders rethinking that strategy —and Russia’s invasion of Ukraine has underscored the need for flexibility and geographic diversity.
Thus, IT leaders continue to disperse services not only across multiple locations within the same region but across different geographies. “Any kind of consolidation in today’s frequent Black Swan environment seems like a high-risk proposition,” says Arora. “Clients are looking for more location diversification and more supplier diversification to create services supply chain resilience.”
Myth: Things will go back to pre-COVID norms
The chances that the IT outsourcing industry will revert to pre-pandemic approaches have diminished. While the days of 90%-plus remote working ratios are likely over, it’s unlikely the pendulum will swing dramatically in the other direction.
“The cultural resistance to WFH is now gone,” says Gupta of HFS Research. “Our research suggests that the ‘goldilocks’ WFH ratio in the medium term is likely to be around 40%.”
