Companies to reassess IT outsourcing approach

22 March 2021 3 min. read

The Covid-19 pandemic and the restrictions on movement brought in to combat it have seen a boom in outsourcing over the last year. However, while employers have turned to IT service providers for additional support amid the crisis, many are now looking to renegotiate their relationships with IT outsourcers, including reassessing payment structures, and expecting providers to shoulder more risk in the future.

As the global economy continues to struggle in the wake of the coronavirus, firms around the world are looking to cheaper, short-term solutions to staffing issues. The impracticalities of recruiting and on-boarding during an international lockdown have increasingly been seen as an additional strain for many companies whose bottom-lines are under pressure – as well as the long-term costs incurred by permanent hires for projects with shorter end dates.

In line with this, research from Boston Consulting Group (BCG) has discovered that Covid-19 has left businesses leaning on IT providers – with 79% of organisations requesting help from their IT service provider over the last year. The global study, which covered 200 large enterprises in sectors including finance, utilities, and technology, found that as enterprises requested support from service providers to ease the impact of the pandemic on their business.

The pandemic affected digital transformation

The chief driver of this spike seems to have been the increased digitalisation necessitated by the lockdown. Over the last year, BCG found that 61% of respondents accelerated their digitalisation initiatives, while 91% will accelerate some aspects of their digital transformation agenda in 2021 and 2022.

Transformative projects to digitalise a firm in response to the level of home work now required from staff has long-term impact, but is short-term in its execution – making permanent hires to enable such transformation impractical. As a result, many firms sought to outsource work correlating to this line of work. Indeed, businesses continued to highlight the importance of working with service providers to deliver on critical digital transformation projects, with 61% telling BCG that they accelerated parts of their digital transformation.

Sukand Ramachandran, Managing Director and Senior Partner in BCG’s Digital practice, commented, “IT service providers have played a key role in supporting businesses throughout the pandemic, from delivering additional capacity & capability, taken on lenient payment terms,  sometimes proactively creating and offering new solutions to plug the gaps that were revealed in many organisations’ operations.”

Many companies will renegotiate service provider contracts in 2021

However, while the outsourcing sector has seen a boost in work so far, the continued pressure on clients’ income during the pandemic means that the sector may still face a turbulent future. Many companies were already forced to take unprecedented steps to survive, with 79% saying that they asked service providers for help in some form. These included 47% who asked for longer payment terms, and 45% who asked for price reductions, as well as 41% who asked for free support for more processes or additional services. Looking ahead, clients may well expect even more from outsourcers for less, as they look to accelerate their recoveries.

According to BCG, 62% of its sample are very likely to renegotiate outsourcing contracts, with 59% saying changes in the contractual terms and conditions, 56% stating pricing structure, and 48% citing delivery model were all up for discussion. At the same time, companies said that they are looking to service providers to shoulder more risk, particularly when it comes to maintaining the continuity of business operations.

Sukand concluded, “Post-pandemic recovery, service providers will need to re-evaluate the role they play with customers. Many enterprises have become more dependent on service providers to maintain business operations and will expect them to ensure high(-er) operational resilience in the future.”