Global business-services sourcing comes of age

The global technology and business-process-services industry, estimated to be worth up to $900 billion to $1 trillion per year, is expected to grow at an annual rate of about 5 percent over the next five years. But the COVID-19 pandemic, along with geopolitical and macroeconomic uncertainty, tested the resilience both of the industry’s clients and of the service providers—which stepped up their game in response. Our research indicates that more than 90 percent of global services hubs made the transition to a remote delivery model with virtually no loss of productivity, client service experience, or employee satisfaction.

With the easing of pandemic-era restrictions, enterprises are further accelerating their digitization efforts and planning for a world where hybrid working is increasingly the norm. That’s encouraging them to revisit several key decisions concerning future global delivery models. The growth of touchless customer interactions based on apps and self-service web portals is making the digitization of core processes a necessity, rather than a nice-to-have. In addition, the COVID-19 crisis altered demand patterns, increased cost pressures, and made seamless remote-delivery capabilities essential.

Partnership with service providers continues to be an integral part of many companies’ responses to these challenges, and providers are reporting expanding order pipelines. Large-scale service providers, for example, showed revenue growth of 5.1 percent for the first quarter of 2021, up from 1.6 percent in the previous quarter (Exhibit 1). Global sourcing deals are increasingly structured around targeted outcomes and delivered as a service. Instead of providing only skilled people, service providers will often supply process expertise and technology platforms as well.

Growth in the global services-sourcing market is accelerating, led by a new breed of digital-first providers.

On the other hand, the traditional service-provider advantages, including scale and access to talent, are being upended by end-to-end automation. Increasingly, depth of business and functional-domain knowledge, paired with the ability to pilot and scale up use cases deploying digital and analytical technologies, are becoming critical selection criteria for enterprise buyers. Digital-first service providers—companies with digital- and analytics-based offerings as a core value proposition—are now challenging incumbent players. Over the past five years, digital-first providers have grown by an estimated 22 percent, almost three times faster than comparable mid-tier incumbents.

Five discontinuities driving the future of global sourcing

A set of discontinuities is creating critical shifts in the way enterprises source services, and the way service providers evolve their value propositions (Exhibit 2). First, tech-native companies are blurring boundaries to create new revenue pools. We believe these players are likely to drive nearly 75 percent of enterprise spend by 2030. Second, the pace of technological change is accelerating, with technology cycles expected to shrink by 50 percent over the next decade. This further reduces the time to market of new platforms and service offerings. Third, as enterprises streamline and standardize their processes, “as-a-service” offerings could emerge as a central driver of global sourcing. Fourth, digitized and hybrid remote-based ways of working may continue to be an integral part of the delivery model.

Five discontinuities are reshaping the global sourcing of technology and business services.

Fifth, the scale and scope of global sourcing deals are rapidly evolving. The share of the deal market claimed by large deals (those with a total contract value of greater than $500 million) has grown by more than 40 percent over the last five years, while the share claimed by small deals (total contract value of less than $50 million) has shrunk by 16 percent. Large deals are increasingly becoming multitower and transformation focused, while small deals are focused on specialized point solutions.

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For enterprise buyers, broader scope and flexibility

As enterprises continue to transform their business and operating models, five considerations can help them carve out a win-win proposition for the sourcing of IT and business-process services.

Rethink and expand the scope of services

Sourcing can now reach beyond the traditional focus on noncore and transactional services—recognizing that yesterday’s “core capability” probably won’t be tomorrow’s. Over the years, service providers have increased the maturity of their offerings to support integrated services, strengthening their industry-domain expertise and developing technology ecosystems that span both core platforms and digital edge solutions. Enterprise buyers can therefore look at sourcing options not only for transactional tasks but also for entire end-to-end service journeys.

See service providers as potential transformation partners

For enterprise buyers, a new concern is to consider the transformational capabilities of service providers, including sector-domain experience and facility with digital and design thinking. Providers that excel in these skills can offer new commercial models allowing for consumption-based pricing, or even self-funded transformation. These arrangements often include a strong upfront commitment to productivity improvement, with payout plans linked to business outcomes.

One global high-tech company worked with a service provider to significantly automate its legacy processes and move to an agile delivery model. The service provider rebadged the client’s staff in North America and Asia hubs, and upskilled and augmented the existing talent pool with next-generation agile delivery practices, backed by enhanced skill sets in automation, digital, and analytics.

Adopt flexible operating models

More creativity could help buyers release value while retaining specialized knowledge. Options include carve-out models that transfer people to the service provider, and may also include the transfer of technology assets and infrastructure. Typically, enterprise buyers commit a minimum volume of business to the service provider over a longer term—for instance, up to 5 or 10 years—and new iterations include the provider managing the client’s transition to new processes and technology platforms.

Access top talent with new workforce structures

The pace and complexity of today’s business requires access to the most advanced capabilities. Enterprises are therefore searching for ways to tap into wider talent pools, such as independent contractors and on-call online-platform workers, especially for niche technology skills.

A leading medical-distribution organization has widened its hiring channels by organizing hackathons with an open-source community of technology professionals. The company then short-lists candidates who create the best solutions. While it still uses the traditional channels of hiring (such as social media and job portals), the organization realized that the open-source community channels were far more productive, particularly to attract talent with expertise in niche technologies.

Strengthen risk management

Digitization and the rise in remote working create new data-security and privacy challenges. Managing those risks may require changes to operating practices, such as enhanced risk and security controls, improved recovery and business-continuity planning, new safeguarding policies, and additional cybersecurity training for employees. Concentration risks require continual reevaluation, particularly for critical business processes with a very low tolerance for delay.

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For service providers, transforming for impact

Even as enterprises look to accelerate capability building through effective service-provider partnerships, the value propositions of incumbent service providers are being challenged by digital-native specialists. These twin pressures yield five implications for service providers to continue to deliver value.

Drive business outcomes

Service providers can achieve significant impact by bridging the gap between technology and business to help their clients achieve ambitious business targets. But doing so requires service providers to augment their functional-domain knowledge and gain a deeper understanding of underlying processes.

In a procurement engagement for a global manufacturing company, one service provider overhauled its client’s buyer journeys. It created an integrated workflow tool that significantly improved the buyer experience and accelerated the average order-cycle time. The tool streamlined the process based on two major interventions. First, it enabled single-click buying, using an integrated electronic purchase catalog. Second, it created a structured supplier-approval process that was customised for each purchase category. In addition, the provider improved transparency by deploying real-time KPI dashboards, which measured performance relative to internal aspirations and the performance of the client’s peers.

Attract top digital talent and forge alliances

A significant share of the services economy is shifting to a technology-led approach, with a broad range of businesses now competing in this space. These include vertical platforms for specific industries and functions, hyperscale cloud-service providers, and cloud-based application platforms. As incumbent service providers expand their offerings, they face the challenge of attracting in-demand digital talent—and navigating the market to find partners with distinctive capabilities to fill crucial gaps.

In our estimate, up to 30 or 40 percent of the opportunity pipeline for incumbent service providers could involve these types of partnerships. To capture that potential, service providers can reorganize and renew their capabilities to serve cloud and software-as-a-service providers. This could involve a strong partnership engine and a joint go-to-market strategy. In the most common model, the technology-platform player owns the core technology, while the service provider offers a complementary, highly skilled workforce.

A leading services provider has created an ecosystem of partners (including a cloud-based hyper-scaler and a workforce-optimization suite) to build a comprehensive portfolio of omnichannel contact-center solutions. By integrating cloud-engineering capabilities, the service provider created a range of as-a-service offerings, such as contact-as-a-service. This approach helps reduce clients’ service-rate costs and accelerates time to market. It also allows the service provider to drive impact for clients across a range of outcomes: improving end-customer experience (through artificial intelligence–based chat bots or built-in analytics modules to generate predictive insights); increasing client revenue, through enhanced up-sell capabilities; and driving true operational excellence (through customized smart visual dashboards, or gamified routing of customer queries to the best available representatives).

Offer transformation as a service

Transformation capability as a value proposition is increasingly becoming a differentiator, creating new openings for service providers to expand their roles in serving their clients. Newer service offerings that emphasize design thinking, agile delivery, centers of excellence, and at-scale business-process automation can help challenge the client’s legacy technology and business-process models.

For example, one global service provider has engaged with a North America–based financial institution, guaranteeing specific productivity improvements while investing to migrate the institution to a new cloud-based technology platform. The switch from owning the technology to a usage-based model reduces the institution’s upfront costs while freeing its people to focus on core business development and product innovation.

Unlock innovation at scale

Service providers back their promises by demonstrating innovative use cases with clear pathways to scale-up and value capture. For many providers, this will mean either building their internal capabilities or effectively partnering to form an innovation ecosystem.

Creativity can help in finding resources to support these. As part of several large engagements, one leading service provider often proposes to invest 1 to 2 percent of the annual contract value as an “innovation fund.” The investment is intended to identify, pilot, and scale up use cases based on the latest disruptive technologies.

Construct flexible commercial propositions

Service providers are well placed to meet their customer’s twin needs for greater efficiency and lower upfront costs. This can be done with variabilized cost models, such as as-a-service or output-linked pricing. In addition, depending on the scope, tenure, and size of the deal—along with time to value—service providers can offer upfront investments or productivity commitments. Flexible operating models are an increasing requirement as well; for instance, providers may consider buying out existing enterprises’ operating units through a carve-out model. This may include rebadging, transfer of client technology assets, as well as build-operate transfer arrangements that hand new capabilities back to the client at a future date.

Driven by rapid digitization and a post-pandemic normal, the next generation of services-sourcing models is at an inflection point. Enterprises will continue to drive tech enablement and consolidation of business-process services, and to integrate internal and external partner capabilities. As lines blur in the service-provider landscape, players have a chance to create new and profitable models that better serve emerging needs.

This article was updated in June 2023; it was originally published in September 2021.

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