This year, we saw companies embrace increased standardization and cloud computing options of all flavors, use their leverage to renegotiate or rebid their deals, and settle into a best-of-breed approach to offshore outsourcing.
So what will 2016 bring? Our experts expect a number of shifts in the industry—including a focus on hyper-speed deal making, the emergence of new multi-sourcing headaches and potential cures, increased man-machine collaboration, and significant expansion of the service provider universe.
1. Security takes center stage
Security is top of mind from the boardroom to the break room, and it will influence outsourcing strategy in 2016. Indeed, security risk is poised to increase as telematics and the Internet of Things (IoT) becomes more prevalent in consumer and commercial products, says Paul Roy, partner in the business and technology sourcing practice of Mayer Brown. “Increasing numbers of threat actors will use increasingly creative ways to exploit weaknesses, often with devastating effect. Regulators will exact increasingly large fines for poor security. Service providers have often been the weakest link in a company’s security and will need to find better ways to address that concern.”
“The threat profile changes every day and with every added protection comes a new vulnerability, not to mention it is becoming harder and harder to tie products together to deliver a robust security solution,” says Rahul Singh, managing director at outsourcing consultancy Pace Harmon. “In 2016, we expect to see the rise of the Chief Security Officer and more enterprises opting for specialized security vendors with Security-as-a-Service capabilities that can protect data no matter where it resides.”
2. Offshore captives come back
Companies will leverage the experience they have gained in process maturity as a result of working with outsourced offshore teams and set up their own shops, predicts Randy Vetter, senior director with outsourcing consultancy Alsbridge. “The objective of this approach will be to reduce costs by taking away the provider’s margin, as well as increase flexibility by removing contractual constraints.” Companies are likely to get smarter about insourcing in general, says Alsbridge director Mary Patry. “Rather than insourcing as a knee-jerk reaction to a bad outsourcing relationship and repeating past mistakes, clients will benefit from lessons learned and be smarter about what and how they repatriate.”
3. Production workloads—and more—hit the cloud
There’s no denying Amazon’s first mover advantage with the public cloud. And IT shops who reached for the cloud first did so with non-critical systems. But in 2016, we’ll see more production workloads move to the cloud—and not just AWS, says Lynn LeBlanc, CEO of HotLink. “No CIO wants to cast all bets on just one cloud provider,” LeBlanc says. “IT pros recognize that the future of their data centers will embody many platforms, so we’ll start to see more CIOs experiment with other major public cloud options, such as Microsoft Azure and Google Cloud Platform.”
“In 2016 the potential to move outsourcing from the ‘lift and shift’ of non-core processes to something more substantial is entirely do-able in the cloud,” says Michael Corcoran, a senior managing director overseeing growth and strategy for Accenture Operations. “The as-a-service outsourcing model makes it possible to combine infrastructure, software, and business process to create a platform that is much more modular, scalable and intelligent. This platform can tackle higher-level processes, creating results that increase revenues, improve margins, enhance customer service, and move the business forward instead of running in place.”
4. VMOs go mainstream
Multi-sourcing has multiplied the vendor management workload. “As clients look for ways to address the challenges of overseeing increasingly complex multi-vendor service delivery models, the [vendor management office] will establish itself as a way to provide a high-level, enterprise-wide view while at the same time managing day-to-day operational details and multiple touch points between different providers in the service delivery chain,” says Mike Slavin, Alsbridge managing director.
5. Integration challenges surge
“Customers adopting an ever larger number of emerging digital technologies will face an ever-larger integration challenge,” says Rebecca Eisner, partner in the Chicago office of law firm Mayer Brown. “Many of the most powerful cloud technologies will require integration efforts comparable to those required to install ERP systems.” Because most companies do not have employees capable of managing multiple emerging technology platforms, they’ll have to outsource service integration, incident management, and change management. Expect increasing partnerships among providers, predicts Mayer Brown partner Brad Peterson.
6. The service providers universe expands
“Customers will buy from an expanding list of technology providers,” says Dan Masur, partner in Mayer Brown’s Washington, D.C. office. “Customers will continue to turn to ITO, BPO and cloud service providers who have blazed a digital trail for help in becoming digital businesses. They will source services from an ever-expanding list of emerging and digital technology providers. Pace Harmon’s Singh says we’ll see more product-driven managed services “as more product-oriented vendors, such as Cisco and others, move beyond just selling their products to also delivering services around their products. We are already seeing this on a small scale, but expect it to ramp up in 2016 as very large clients are growing their managed services capabilities.”
7. Multi-speed IT hits outsourcing
Gartner dubbed it “bimodal IT.” McKinsey named it “two-speed.” Whatever you want to call it, outsourcing clients will recognize the need to take different approaches to managing the “run the business” part of IT and the “change the business” part this year. “Clients will use the bi-modal approach to implement commercial and contractual mechanisms with vendors to clearly delineate the roles of the respective groups and to optimize the contributions of each to the business,” says Eleanor Winn, managing director at Alsbridge.
8. Vendors get soft(er)
“After 20 years, vendors who have been accustomed to bending customers to their one-sided terms by offering low prices will come to realize that further market penetration—particularly penetration into core functions or large companies--will require a more accommodative approach to meeting the needs of those companies,” says Peterson.
9. Automation will redefine relationships
“Having exhausted the opportunities to move work to lower-cost people, ITO and BPO companies are now focused on moving it to machines,” says Roy. “Buyers with contracts designed to purchase people will need to reconcile their contracts to this new world.” Both customers and providers will have to rethink their deals as they integrate more robotic process automation (RPA) into IT service delivery.
“Clients will rethink their sourcing strategies and how to build their RPA capabilities and providers will continue to build automation into their solutions,” says Craig Nelson, managing director with Alsbridge. “Both parties will have to redefine roles and skills requirements for human jobs, as well as manage the touch points between automation functions and jobs performed by humans. This will present a significant challenge for outsourcing relationships as agreements will need to be flexible to accommodate these highly dynamic environments.”
10. Agile sourcing emerges
With technology itself seeming to advance on a dime, outsourcing decision making will have to speed up. “Companies who decide on a digital strategy will execute quickly in 2016 to avoid seeing a technology shift or a competitor jumping ahead,” predicts Peterson of Mayer Brown. “We see increasing numbers of clients deploying substantial negotiating teams working on an agile basis to close smart deals fast.”