Traditional Outsourcing is dying – What Next?

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The world today is witnessing an unprecedented pace of change. This is primarily driven by the exponential growth of technology, which is impacting every single aspect of people’s lives. This technology revolution is also completely redefining the traditional business models. It is amply clear that the driving force behind these sweeping changes is the strong need to reduce the cost of operations and improve customer experience. Outsourcing, as we have come to know it, obviously cannot remain insulated from these changes and is witnessing never-before-seen challenges.To put things into perspective, ScrumStart conducted a study by talking to hundreds of CXOs and global IT executives. The focus of this study was to understand the motivation of traditional IT outsourcing and what will be the fate of this model over the next five years. A couple of highlights of this study were as follows:

  1. Cost reduction still stands out as the biggest motivator for IT outsourcing. Majority of the executives are very clear that they like to see other advantages and take benefit from them ONLY after they see a clear cost advantage. In fact, other factors like lack of in-house expertise or convenience also had clear linkages to the cost factor, as many executives felt that the cost of building in-house expertise was more than the cost of outsourcing
  2. Though cost is the over-riding motivation for outsourcing, a huge majority of the executives (71%) were clear that they are not ready to compromise on the quality of work and flexibility, even if they get a slightly lower cost alternative

Considering these inputs and analyzing the current industry trends, some very interesting inferences can be drawn:

  • With the current pace of technological advancements, many functions that were being outsourced may be automated, as this leads to further cost reduction. This will have an overarching adverse impact on the existing jobs and the overall outsourcing industry
  • Traditional outsourcing players have been primarily focusing on large companies and large deals. With start-ups and small & medium enterprises (SMEs) redefining the way business is conducted using technology, the financial pressures on these large organizations is increasing and they have started transferring the stress on the outsourcing partners. This is leading to large deals drying up and constant erosion of margins for the traditional outsourcing players
  • With the increased focus on talent, innovation and speed of execution by upcoming start-ups and SMEs, traditional model of IT outsourcing – where the focus is only on cost arbitrage – will not suffice. Newer models of outsourcing, like the Virtual Captive model, will end up giving far more benefit than any traditional IT outsourcing engagement

Unless, traditional IT Service providers rework on their business models, their existence is in threat. With increasing automation and alternative models available for better cost advantage, it appears that the traditional IT outsourcing model will soon become irrelevant.