A subtle evolution is underway in the world of outsourcing. Client satisfaction levels are starting to increase; portfolios are starting to be rebalanced; and motives for outsourcing are starting to shift.
According to a survey released late last year by KPMG International, outsourcing is alive and well in the UK. Partly driven by buyers’ needs to respond tactically to continued market turbulence by cutting operational costs and improving flexibility, the survey shows that more than three quarters of UK organisations plan to maintain or grow their use of IT outsourcing between 2012 and the next couple of years.
And while, for the most part, outsourcing decisions are still aimed at securing cost savings for the wider organisation, our survey shows that other factors are now also driving the outsourcing decision for business executives.
Service quality and capabilities gain on cost savings
Beyond cost savings, organisations are increasingly focused on achieving two things from their IT outsourcing agreements: better quality services and access to skills and capabilities. Almost half (46%) of the 230 UK respondents in our survey indicated that their decision was – at least in part – driven by growing demands from customers for better quality services. Some 51% admitted that they didn’t possess the right skills in-house to keep pace with the rapidly shifting technology environment.
Underlying this trend is the fact that most corporates are now feeling growing pressure from the increasing utilisation of Cloud and App-based technologies. And, as such, many are keen to tap into capabilities and the increased confidence that outsourced providers can offer.
Progress on key performance indicators
What’s more, in many key areas we are seeing satisfaction with service providers – a perennial concern of clients – increase. The survey, which studied 630 ‘client-provider’ contracts worth £14 billion (or about half of the total outsourcing market in the UK), found that clients are seeing improvements in the price and flexibility that they are receiving from their providers. This seems to indicate that service providers have listened to the feedback from their clients and have since made significant advances in sharpening their ability to deliver against client expectations.
Improved satisfaction levels are also being eked out by actions on the client side. When asked to assess their own ability to manage and govern their service providers, more than two thirds of respondents rated their management skills as either excellent or good (an increase of 5% over the 2010 survey).
This can only be beneficial to the overall value of the sector in the UK. In our experience, there is a direct correlation between the quality of client-side governance capabilities and buyer satisfaction. This means that organisations are not only better at managing their contracts and providers, but that their expectations of service quality are also somewhat more realistic. And as corporates improve their outsourcing governance further, we are likely to see heightened satisfaction levels in the market.
Continued shifts in the market will drive increased satisfaction
However, some room remains for improvement, particularly in providers’ ability to deliver innovation in services and their willingness to share commercial risk. Both will be critical to success if providers hope to build longer term outsourcing relationships in a market increasingly defined by quality improvements over cost savings.
Perhaps in response to these perception gaps (but also as a result of range of macro-economic trends spanning everything from the growth in on-shore service providers through to wage inflation in traditionally low-cost markets), we have also seen a rebalancing of client IT portfolios between in-house activities and outsourced services provided either offshore, near-shore or onshore. In fact, 11% of respondents in the 2012 survey said that they intended to return some aspects of their service delivery in-house while – simultaneously – the growth in offshoring slowed by around 8%.
Working together to improve value
For UK organisations, the lessons of this survey are clear. Satisfaction in outsourced service providers can be enhanced when both clients and providers work together: clients will need to hone their governance capabilities and reset their expectations based on their internal objectives for outsourcing; providers will need to listen carefully to client feedback and find new ways to drive innovation and ‘put skin in the game’ to retain their clients.
Looking back across the life of the survey, it seems clear that UK service providers and their clients are on the right path to create a level of convergence between expectations and reality. How long it will take, however, fully depends on how quickly clients and providers can adapt to the new outsourcing environment.