Digital Economy Dispatch #08417th April 2022

How Digital Transformation is Driving Outsourcing's Unexpected Renaissance

Like many people, I am often critical of outsourcing approaches and visibly wince when I hear the phrase “That task has been handed to our offshore team”. This comes from bitter experience. One of the last client-facing projects I supported a decade ago at IBM was writing a large outsourcing proposal to manage the IT infrastructure and operations for a multi-national insurance company. The prize was a 10-year contract for a fee of more than $100M. Consequently, writing our bid was an intense four-month effort with a team of a dozen people and a bid budget in excess of half a million dollars.

We lost. And the head of the proposal team was fired the next day. It was a sobering moment. We had used this opportunity to reconsider the global outsourcing marketplace and to redefine the processes through which offshore teams interact with their onshore colleagues. We had created farshore and nearshore centres of excellence to support a range of skills covering multiple time zones. And most importantly for our proposal, we included sophisticated governance mechanisms, defined several layers of Key Performance Indicators (KPIs), and used data-driven machine learning algorithms for predictive analysis to anticipate future needs. What had gone wrong?

Informal discussions behind the scenes gave us the answer. Apparently, the client’s review team simply turned to rate cards in each proposal to see who was offering the lowest price for each offshore skill to be included. We were more expensive. Game over. At that time, too many outsourcing efforts had devolved to largely become a spreadsheet exercise to drive down costs by pooling resources, reducing labour rates, and handing off standardized tasks to the lowest cost provider. While appropriate in some circumstances, it too frequently devalued on-going interaction, creativity, and innovation to keep expenses as low as possible.

The New Digital Talent Gap

We all know that creating and managing successful distributed teams is critical to the success of all large established organizations. There are many situations where this is being carried out well and achieving great results. I’ve seen numerous well managed approaches blending skilled staff across multiple locations. However, as my own experiences indicate, strategies have varied and what happened in the software industry over the past 25 years with cost-driven outsourcing encouraged rather blinkered decision making. It has been criticized as a primary cause of many failed projects and has created cultural clashes in organizations coordinating a variety of delivery partners from around the world.

Perhaps it is unsurprising, therefore, that the past few years has seen slow growth in leading outsource delivery companies such as TCS, Wipro, and Infosys. As The Economist reports, following the financial crisis in 2007-2009, revenue in those companies began to flatten out as their value proposition to provide large resource pools of cheap skilled labour became less attractive. As the cost base in countries such as India increased, the pendulum swung in favour of driving differentiation over scaled delivery and their approaches to outsourcing had to evolve.

Consequently, in the last few years there seems to have been a renaissance for outsourcing approaches. The “war for talent” is pushing availability and costs of retaining skilled workers to extremes. The need to source talent in new ways is becoming a key competitive area for many companies. Furthermore, digital technology is expanding the footprint of today’s workforce, redefining who can be classified as a worker, what is shared across a partner ecosystem, and how tasks are carried out by teams of workers from both within and outside a company’s traditional employment boundaries.

Far beyond contractually driven remote working schemes, tasks can now be outsourced to partner organizations, shared across geographically distributed teams, issued as challenges to broad communities and crowdsourced. The future of work is a digital hybrid workforce drawn from a collection of sources and managed using processes and tools built for agile delivery.

With these new demands, a more sophisticated perspective has emerged with outsourcing as a key component in the way a flexible, skilled digital workforce is created, managed, and evolved. The Economist notes that the accelerated demands for digital services caused by the pandemic have only served to drive this trend. Exports of Indian software services have rebounded in the past year to reach a new all-time high of $150B (around 5.6% of Indian GDP). Furthermore, revenues are expected to grow significantly over the next few years.

Globalization and its Implications

Behind much of the resurgence in outsourcing is the digital transformation taking place around the world. Human interaction globally has grown at an astounding rate, as can be clearly seen by the most recent figures for people connected online. As reported, in 2018 there was an estimated 3.9 billion people connected via the Internet, over half of the world’s population. Only 20 years ago this figure was less than 1%. Amplifying the effect is the growing trend toward urban living. In 2016, 23% of the world’s population or 1.7 billion people lived in a city with at least 1 million inhabitants; this is expected to grow to as much as 70% by 2050.

A variety of factors are behind the global shifts influencing the digitization agenda. In his book The World is Flat, Thomas Friedman argued that a collection of political and technological flattening forces has redrawn the global map for the Internet age. While some of his analysis has been openly criticized as myopic and too narrowly defined, the value of his observations is that they place the globalization theme at the forefront of the debate and highlight the importance of a global perspective in planning future strategy. His basic message is an important call-to-action:

Friedman’s work is just one of many examinations of digital technology’s global impact and the changing nature of work. It also builds on a broader set of fundamental observations that take a systems and service perspective on globalization. For example, more than 20 years ago Richard Normann questioned the role of the Internet in terms of three key concepts: place, time, and distance. He makes the point that these key concepts are redefined in a digital era where we think and act differently due to a revised understanding of where we are, who we are with, and how we view speed of action and decision-making. These observations were made in the context of us moving towards a service-based world, whose natural consequences can be seen in the popularity of social media channels and the rise of new business models such as outsourcing, crowdsourcing, and the gig economy.

As a result, the pandemic has had important effects on trends in outsourcing. As reported by BCG, the pressures to accelerate digital efforts forced a closer relationship with outsourced service providers experienced in managing widely distributed teams and hybrid ways of working. Moreover, many of those surveyed by BCG claimed that the strength of their outsourcing relationships was a key component of their success at adapting business activities during the evolving crisis.

Building on these experiences, a new era outsourcing has begun. Outsourcing is seen as essential in maintaining resilience and ensuring continued digital adoption in these turbulent times. Although the mix of local and outsourced tasks may vary, it is small wonder that over the next year 96% of those surveyed expect to increase digital transformation projects with their outsourcing partners.

The New New Thing

For many of us, decades old experiences with outsourcing large IT projects have left their scars. There is now an opportunity to look at outsourcing in a new light. Digital transformation accelerated by the pandemic is pushing organizations to deliver smarter, more adaptable approaches to serving their clients. This requires redesigning their software and IT infrastructure, migrating all services to the cloud, and creating efficient systems for managing vast amounts of data. For most, creating a large, local digital team is impossible. The scarcity of necessary digital skills will force hybrid working styles using blended teams from several organizations, working in multiple locations, coordinating dynamically to build and evolve solutions using the latest digital technologies. Outsourced service providers will undoubtedly be required to take a lot of the load. It is time to shake off previous outsourcing experiences and look to the future.

Digital Economy Tidbits

The UK Ministry of Justice Digital Strategy 2025. Link.

Over the past decade the UK Government has been at the forefront of digital strategy and digital government. And the Ministry of Justice (MoJ) has been one of the bellwethers, focusing effort on digital channels and digitizing back office processes. So, very interesting to see how they have framed their digital strategy for 2025. Expressed as a set of principles, or manifesto, it sets out the MoJ objectives for pushing forward on its digital journey.

At the Ministry of Justice, we have seen how digital services have transformed our users’ experiences and their journeys profoundly. Since the pandemic there has been a remarkable increase in the use of technology across all of our services, from remote parole and court hearings, to virtual prison visits, and a significant increase in virtual and hybrid meetings. I am therefore delighted that over the next three years, the Ministry of Justice will be building on these successes through continued investment in our digital and technology services.

Clinical AI Gets the Headlines, But Administrative AI May Be a Better Bet. Link.

A good article pointing out that it is the automation of the more mundane aspects of healthcare that will be where we’ll get the best results from AI.

No one will win the Nobel Prize in medicine for applying AI to health care administration. Accolades and much of the media and public attention will go toward clinical applications of the technology. We’re not saying that health care providers and payers should give up on clinical applications of AI, but the challenges and cycle times for developing and implementing those advances mean that many organizations will want to strongly consider administrative AI as well. If that type of AI can substantially reduce the cost of care, it could be as useful to the health care system overall — and many patients individually — as any clinical breakthrough.