The growing urgency of enterprises to digitally transform their business operations and enhance customer experience was the driving force behind much of the growth in outsourcing innovation, contract awards and spending in 2017, according to the ISG Momentum Annual Report released by Information Services Group (ISG).
Digital transformation contributed to a revival in large contracts with a single service provider, the report said, but noted the overall trend of shorter, limited-scope contract awards continued in 2017 as enterprise buyers sought to maintain flexibility and maintain leverage over service providers.
"Enterprises increasingly see outsourcing as a way to increase their pace of innovation and support their strategic initiatives," said Paul Reynolds, ISG partner and Chief Research Officer. "This is expanding the market for outsourcing services, not cannibalizing it. Digital technologies are unlocking new value from traditional outsourced services, and the need for companies to have a flexible, digital-friendly IT infrastructure is spurring new sourcing for cloud and other services."
Not that cost-cutting is no longer a primary focus, Reynolds said. "Enterprise customers do not want either innovation or cost savings. They want both. And they are increasingly seeking greater than 10 percent savings on service prices when renegotiating with incumbent service providers."
To meet this requirement and keep customer engagements profitable, service providers will need to rely more on automation and other innovations and change how they work with customers to collaborate more closely, the report said.
A prime example of this change is the growing customer preference for outcome-based contracts. Service providers, the report said, would do well to proactively propose new metrics and pricing structures to their customers, or risk losing their business.
Approximately 65 percent of current outsourcing engagements are at risk of not being renewed with the incumbent service provider, the report said. Such market volatility — driven by competitive pricing and offers of greater savings and innovation — will play a key role in determining which providers win their share of the $25 billion of outsourcing contracts up for grabs in 2018.
Higher levels of automation and other innovations are becoming table stakes in service proposals, which reduces the opportunity for them to be differentiators, the report said, citing the example of analytics now being built into many solutions.
ISG expects automation to play a greater role in outsourcing services that focus on IT support and customer engagement and support. Service providers' automation capabilities and intellectual property are becoming more important during the selection process, the report noted.
For their part, service providers expect as-a-service offerings, robotic process automation and intelligent automation to exert the most downward pricing pressure on outsourcing services in 2018.
Agile development capabilities are an increasingly important area of consideration for enterprises. Two-thirds of enterprises expect to have DevOps teams in place within the next 18 months, ISG research has found, and they are looking to contract with providers that will help them make the transition to more agile environments. To meet the demand, providers will have to be more flexible in how they price and deliver Application Design and Maintenance (ADM) services, the report said.
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