In the past decade, companies utilized business process outsourcing services primarily to save money. Process optimization was accomplished by the call centers in India using technology, but mainly through basic task automation. As technology advances, companies are increasingly outsourcing to take advantage of more sophisticated provider offerings. A few of these include custom industry solutions and advances in digital technology, such as artificial intelligence, analytics, and machine learning.
Business process outsourcing services are increasingly focused on business-process management (BPM) rather than traditional right-shoring and basic automation as pioneering organizations demonstrate. Service providers and buyers can jump frog ahead of each other by generating differentiation in operations and significant bottom-line value through these types of outsourcing deals. These advantages are closing in on us, but we still have time to take advantage of them. Within a few years, these deals will likely be considered table stakes. Now is the time for companies to take the initiative.
The cost of managing business processes worldwide is estimated at $230 billion. Call centers in India, for example, are in charge of customer service while back-office processes including claims, payments, finance, and procurement are in charge of back-office functions. In the past few years, only a small percentage of outsourcing deals explicitly include next-generation technologies. That share, however, is growing rapidly.
From a pool of more than 200 business-process-outsourcing deals that closed between 2016 and 2020, about one-quarter of such deals included at least one digital component (social media, mobile apps, analytics, automation, cloud, or the Internet of Things). Over the past five years, however, such deals have almost doubled. While the overall outsourcing industry is growing only by a single digit, that potential opportunity stands out sharply.
According to an analysis of total contract value (TCV), a similar trend is evident. In the five years from 2016 to 2020, digital services grew from 30 to 70 percent of TCV, and new deals with digital components increased to almost 50 percent (exhibit).
The rapid growth of digital in business process outsourcing service deals is attributed to several factors. Digital products and services are in high demand because of several factors. Globally, cloud technologies are becoming more prevalent across all industries. Private cloud-enabled deals accounted for 67 percent of TCV in 2020, while public cloud-enabled deals accounted for 63 percent.
By enabling the adoption of cloud platforms and services, further digital and data technologies are enabled. Several business process outsourcing service providers, for instance, leverage cloud-based systems for specific applications, such as accounting and credit and cash management, to speed up data-intensive processes. Another important aspect of digital outsourcing is that the results are high quality. According to buyers and providers in the call center industry, incorporating digital into an outsourcing contract can enhance customer experience by two to three times over traditional models.
There are, however, several challenges associated with digital. The first step is to gain executive support. Chief procurement officers and other senior leaders must have an aspiration to implement digital sourcing programs, along with explicit endorsements of the change, oversight during transitions, and the ability to focus.
Cultural challenges are inherent in any change program, so overcoming them is essential. Procurement teams often stick with their current suppliers even when times seem relatively calm. This is because of organizational inertia, relationships that take time to build, and an understandable desire for stability. A new way to work with all providers is offered by digital sourcing, which is more than just a provider. Working teams may argue that they do not have the bandwidth to support a digital procurement program in addition to the radical changes most organizations are experiencing on multiple fronts.
Weak sourcing capabilities are perhaps the biggest challenge. Next-generation digital services may be beyond the capabilities of some organizations. Rather than focusing on straight cost savings, this requires a different business case. Clients are placing a higher emphasis on end-user experience metrics, such as faster service and call times, and the positive feedback they are receiving from AI-based digital tools. Others seek providers who can deliver on transformation initiatives, based on the percentage of automation projects completed on time or the success rate of digitization initiatives. Additionally, this evolution requires a different set of providers, new contract structures that foster collaboration and shared accountability, and a higher level of integration between the provider and the organization. As companies used to do in the past, it is not turnkey outsourcing.
In addition, sourcing processes themselves need to increasingly incorporate digital and an automation-a vast improvement from the current, largely manual, approaches used by too many organizations. The company must develop stronger skills in using digital internally in order to effectively access digital from external providers.
A year may be needed to build these capabilities. Even so, implementing smarter procurement processes pays off in the long run. Analyses have shown that digital and automation can unlock three times as much financial impact for outsourced contracts as traditional outsourcing arrangements, while also improving internal customer service.
We identified four important elements of next-generation outsourcing deals based on our analysis of the deal landscape and the experiences of major outsourcing providers and buyers.
The focus is on transforming operations through digital technology: Outsourcing traditionally consisted of a straightforward transaction designed to generate marginal efficiencies. Providers were paid based on a straight rate for time and materials after receiving a list of well-defined tasks. The outsourcing model of radically transforming operations through digitalization is giving way to a new one: providers are taking on more complex processes and being paid based on the outcomes they deliver (such as natural language processing, robotic process automation, and artificial intelligence) and the technology solutions they use.
An incentive system aligned with innovation: The potential value these technologies and applications can unlock is in flux as well, as they are still in the early stages of development. By including gain-sharing agreements in their contracts, companies are able to incentivize innovation throughout the entire contract term. A provider may negotiate to retain some of the value generated by a process change that reduces working capital requirements or decreases days-sales-outstanding figures. All three dimensions of efficiency, effectiveness, and experience should be considered as part of an organization’s innovation agenda.
End-to-end redesign of digital journeys: Increasingly, processes are being redesigned to take advantage of digital, making it impossible to outsource a single, fragmented piece of a process and expect to see significant improvement. For maximum impact, providers need to be responsible for owning and transforming the entire end-to-end process, including optimization, digitization, automation, and eliminating manual labor. An invoice processing provider, for example, may experience initial issues due to nonstandard formats and, consequently, suggest upstream format changes to suppliers’ invoice submission processes. As the business and technology machine learning landscapes evolve, this expanded perspective helps build a mentality of continuous improvement, enabling the buyer and provider to collaborate to create even more value. Digitalization is radically changing processes, so companies cannot outsource one, fragmented slice of a process and expect significant results.
Adoption and transformation of digital technologies require joint accountability: With digital sourcing, a company and provider collaborate rather than working at arm’s length as they did in the past. Both organizations have dedicated teams that develop and monitor a comprehensive set of KPIs, including customer experience. Providing customers with access to the technology stack, or allaying data loss concerns to the chief information security officer, requires providers to be empowered to make some decisions on their own.
COVID-19 has significantly accelerated disruption in the BPM industry, resulting in significant financial and operational benefits for well-prepared companies. Reimagining all steps of the outsourcing journey and overcoming internal and external challenges will be challenging, but digital is the new standard for large outsourcing contracts. In our view, companies have a choice: they can take advantage of this shift and gain a significant advantage over their competitors, or they can risk losing out to the competition.