If your company is a buyer of outsourced services - or a provider of outsourced services - you likely know that yesterday’s recipe for success no longer makes sense. It was a nice business model while it lasted, but the forces of progress have moved onward. Re-invention is at work.
Like other industries that rely almost entirely on technology, the outsourcing industry has evolved at a rapid pace as each new wave of technological capability comes to reality.
Many now recognize that the outsourcing industry is the implementation arm for new service models made possible by technological innovations.
For the past twenty years, large services companies with a heritage in “systems integration” found that their core competencies in knitting together a complex rubric of pieces and parts were ideal for the outsourcing industry. You could succeed by being good at managing complexity, either as a buyer or as a provider. You could earn nice margins in the grey area between yesterday’s mess and tomorrow’s promise of industrial-grade utilities.
More recently, many companies turned to the outsourcing industry to manage down their legacy operations. The theory was this would free up time and resources for the adoption of disruptive new capabilities.
Today, the outsourcing industry is spending more time than ever before at the front-end of the technology adoption lifecycle. This is true for the development of automation and for the application of analytics.
There’s a lot of talk around robotics and automation of work processes. Superficially, this is about replacing people with ‘bots’. That begins to challenge the fundamental labor arbitrage lever of outsourcing. Much of the promised new world capability never materialized because the industry stalled at squeezing wages for the elusive margin.
Here’s a comparison of outdated outsourcing models versus the latest thinking from progressive buyers and providers.
1. New: Micro-scale specialized arrangements for built-for-purpose services versus the old: large-scale contracts for generalized scope
2. New: Transactional modularity providing maximum flexibility to the buyer; rapid adoption of new service platforms versus the old: long-term commitments; half the term devoted to transformational programs
3. New: Economies of automation (eliminating work) with focus on productivity versus the old: economies of standardization (procedural efficiencies) with focus on unit costs of effort
4. New: Optimizing bundled business services; measuring value delivered and total cost of operations versus the old: optimizing commodity volumes with committed purchases of scale
5. New: Integration of services platforms that are specific to the functional domain versus the old: holistic enterprise applications
6. New: Bundled and turn-key services that are paid for based upon attainment of desired effect versus the old: asset focus; counting and charging for pieces and parts
7. New: Agility through a future state model; flexibility to create new capabilities over time versus the old: lower cost for today’s environment; optimizing the known
8. New: Ease of switching; maximum freedom to realign the service components of the enterprise versus the old: transition & termination complexity; hostage-taking
Each of the “new world” characteristics enables the buyers of outsourcing to increase the degree to which they run their companies on the balance sheets of their service providers. Make no mistake, that’s the economic underpinning of any services proposition.
More to the point, the successful industry service providers will embrace this new responsibility through confidence that their expertise in the bundling of components into business-relevant services can yield higher margins. Alas, that’s the litmus test that determines survivors of reinvention versus those holding onto yesterday’s vapor.
To take advantage of these new approaches, buyer organizations need new skills and the talent for services integration. If you want to accelerate an IoT aspiration, for example, you’ll need built-for-purpose partners that are linked up to deliver specialized services.
These shifts are just getting started. We will continue to see exciting new forms of outsourced services, new means of adoption and integration, and enhanced commercial terms. We’ll also see many new players on the field of competition.
Peter Allen has many years of operating experience as a top executive and strategic advisor for companies of all shapes and sizes, and in assessing sales and marketing effectiveness. He is now a Boston-based Managing Director at Alvarez & Marsal.