Barely a third of outsourcing deals are now safe: Window-dressing legacy engagements is over

We’ve been talking about the legacy model of butts-on-seats “mess for less” outsourcing fizzling out for years, but somehow the same old candidates have clung on grimly to the same old model, relying on clients that still find a modicum of comfort negotiating rate cards down to the lowest common denominator, content to hobble along with average service delivery that just about keeps everyone paid… and somehow relevant.

As we’ve bemoaned the decreasing growth rates across almost all traditional areas of business and IT services, no one’s pressed the panic button to do anything wildly different.  In fact, many have used the recent stagnant times to merge with each other to eke out a bit more revenue growth and rationalize costs wherever possible.

Meanwhile, all the providers have slapped the lovely “digital” tag on pretty much ever new client dollar that wasn’t obviously a help desk deal or some server consolidation.  Yes, people, even good old app testing today has managed to be magically reformulated as a “digital” service by some.

The balance of power sits firmly with the enterprise clients, and many have no choice but to jump ship from the old model

Being realistic, the IT and business services business is no different than it was five years ago, except there is a lot more cloud… and a lot more window dressing.  But that is all changing, and our new research reveals a new services economy is upon us.

But, finally, many enterprise clients are wising up to the reality they now wield a lot more power over service providers as the market flattens to a state of hyper-commoditization and negligible-to-pathetic growth.  Many are, finally, awakening to a new dawn that service providers can (and most are) able to takeout delivery cost through better deployment of cloud, less costly SaaS apps, and applying robotic process automation to reduce manual workarounds and augment people delivery.

Simply put, if your long-time service provider is failing to deliver you any of these benefits to your business, or at least is making some strides to incorporate pricing that is tied to successful service execution and not only people effort, then it’s time to cut bait before you get fired yourself for perpetuating a legacy model that is depriving your firm from finding new thresholds of value your smarter competitors are already enjoying.

As this year’s State of Operations and Outsourcing study of 381 enterprise operations leaders across the Global 2000 reveals, only 30% of these relationships will continue to operate in the old model, while a similar number will stick with their service provider if they can have a shift towards business outcome pricing and a degree of automation applied.  27% have already given up on shifting the model with their current provider and have declared their attention to switch, while 17% want to end the misery and focus on bringing the work back inhouse, and look to simply automate it:

 

 

The Bottom-line: Outsourcing is finally entering the uncomfortable phase of change that’s threatened for several years, and it’s going to get ugly. 

Judgement day is now upon the industry once known as outsourcing and this one will get pretty ugly before it eventually finds a new groove, where enterprises and service providers find real value in each other again.

History has told us time and time again that nothing in this business changes until deals are lost and the C-Suite is forced to address why this is really happening… and actually act on it.  This is the fine balance in which we find ourselves today, where actions will change dramatically when 2% growth spirals into a 5-10% decline because that is what will happen to many service providers if they truly cannot pivot to deliver value beyond cheap labor.

Those providers which have the capability to make the necessary investments and adjustments will take a few hits, but rebuild for a new phase… those which think they can keep papering over the cracks, repeating to same old spin, but never fundamentally changing how they invest in solutions, talent and their clients, will quickly start moving backward (and fast) in the new services market that’s emerging.

 

(Cross-posted @ Horses for Sources)


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Founder and Chief Executive Officer of HfS Research, the leading global research analyst organization covering global sourcing strategies. Acclaimed Industry Analyst and Consultant who scribes the leading blog for the services industry "Horses for Sources".  Previously worked  at AMR Research (Gartner Inc),  Deloitte Consulting’s BPO Advisory Services, the  Everest Group and  IDC .  In 2010, Phil was named “IIAR Analyst of the Year” by the Institute of Industry Analyst Relations (IIAR). This is the most coveted global award for industry analysts in technology and services.

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