Mckinsey: pandemic causes digital outsourcing, study suggests

One of the permanent effects of the pandemic is digital transformation. In a span of 2 years a large number of businesses adopted and adapted to technology.

The outsourcing industry is not immune to the effects of the pandemic. Outsourcing is in the midst of a pivotal moment. Traditional outsourcing, experts say, is on its way out. And a more tech-inclusive evolution in outsourcing is on the rise.

Management consultancy firm Mckinsey & Company, deep-dived into the potential of a tech-inclusive outsourcing. They say while most outsourcing firms are becoming more digital and technologically advanced with artificial intelligence and machine learning, there is still a significant room for growth in this aspect of the business. 

Their research underscores the fact that while the companies worldwide spend an estimated $230 billion on managing business processes only a small portion is allotted for tech spend.

Powerhouse tandem

Just a decade ago, firms outsourced business processes to save on cost. Automation on the other hand, is limited to basic tasks. Today, outsourcing and technology work is a powerhouse tandem that executes tasks in a more cost and time efficient manner.

McKinsey & Company’s study posits that new-age outsourcing will fully incorporate machine learning, automation and digitization. This sort of outsourcing is not yet common but in the very near future, it will be an outsourcing standard. 

So, at this point, this is still an untapped investment opportunity. It is an area of opportunity for both service buyers and providers where they can leapfrog ahead by generating differentiated advantages in operations and significant bottom-line value, the study suggests.

McKinsey & Company however, warns that the window of opportunity to capitalize on these advantages is closing. In several years, these deals will likely be table stakes. Companies can seize the initiative—starting today.

Cloud-based outsourcing

The study mentions that from 2016 to 2020, digital services grew from 30 to 70 percent of total contract value (TCV), and the number of new deals with a digital component has steadily increased to almost 50 percent. Companies report that this rapid growth is attributed to the fact that customer demand for digital products and services has grown exponentially. Another is the worldwide adoption of cloud technologies, across industries. In 2020, the analysis shows that cloud-enabled deals peaked at 67 percent of TCV in the private sector and 63 percent in the public sector.

Many BPM providers are leveraging cloud-based systems in specific applications, such as for accounting and credit and cash management—to reduce cycle times for data-intensive processes. BPM buyers and providers report that incorporating digital into an outsourcing contract can deliver two to three times more impact than under traditional models, while also improving the experience for buyers and their customers.

Hurdles

Yet digital also poses several clear challenges. Among those mentioned is weak sourcing capabilities. Some organizations may not have the in-house capabilities to source providers for next-generation digital services. 

Moreover, sourcing processes themselves increasingly need to incorporate digital and automation—a marked upgrade from the current, and largely manual, processes that remain in place at too many organizations today. In other words, to access digital from external providers more effectively, companies need stronger skills in using digital internally.

Building these capabilities can take up to a year. Yet there is a clear reward for implementing smarter procurement processes. McKinsey & Company’s analysis has found that using digital and automation in the renewal process for outsourced contracts can unlock three times the financial impact of traditional outsourcing arrangements, while also improving the experience for internal customers.

Digital outsourcing success

McKinsey & Company suggests the taking the following steps to ensure success in digital outsourcing: 

• Shared incentives aligned to innovation – the technologies and its applications are still evolving, the potential value they can unlock is in flux as well. Companies can structure deals to incentivize innovation through the full contract term, through arrangements such as gain sharing. 
• Redesigning digital journeys end to end – processes are increasingly being redesigned to capitalize on digital, companies can no longer outsource a single, fragmented slice of a process. Instead, for the highest impact, the provider usually needs to own—and transform—the entire end-to-end process, through optimization, digitization, automation, and the elimination of manual processes and work. 
• Joint accountability for digital transformation and adoption. Rather than the hands-off arrangements of the past, in which a company and provider often worked at arm’s length, digital sourcing calls for a joint governance structure. Dedicated teams with representatives from both organizations develop and monitor a comprehensive set of KPIs, including customer experience.

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