Companies that engaged in digital outsourcing or subcontracting did so solely to save money. No more than 20 years ago, technology was merely used to optimize processes through task automation. But today, things are different.

Companies can now, and the smartest ones are already doing so, outsource to capitalize on more sophisticated benefits. These include customized industrial solutions, artificial intelligence, advanced analytics, and increasingly advanced machine learning.

Given the landscape of recent years, it is clear that outsourcing is on the rise due to all its advantages and its evolution into fully digitized operations through business process management (BPM).

The rapid growth of digital outsourcing

Approximately, companies around the world spend $230 billion on business process management. This includes everything from customer service to administrative processing in claims, payments, procurement, and more. And while outsourcing still represents only a small part of the budget, it is expected to grow rapidly.

According to McKinsey, a detailed analysis of 53 business process outsourcing agreements (more than 200 transactions) closed between 2016 and 2020 shows that the number of agreements nearly doubled in the five-year period.

Companies have several reasons to explain the rapid growth of digital BPM agreements:

• The growing demand for digital products and services.
• The global adoption of cloud technologies across all industries.
• Cloud platforms and services enable the adoption of more digital and data technologies.
• Digital outsourcing produces high-quality results. Incorporating digital into an outsourcing contract can generate two to three times the impact compared to traditional models, and improve the experience of buyers and their customers.

Challenges presented

However, despite its growth, digital outsourcing also faces various challenges. These include:

Achieving executive support

Digital sourcing programs require a high level of aspiration from the chief procurement officer and other senior leaders. They are key to being in sync, overseeing, and focusing on digitalization.

Organizational inertia, carefully built relationships, and an understandable desire for stability can lead procurement teams to stick with current providers. Additionally, digital sourcing not only represents a new provider but a new way of working with all providers.

Weak sourcing capability

Some organizations may not have the internal capabilities to seek next-generation digital service providers. Doing so requires a different type of business case, based on outcomes and innovation rather than direct cost savings. Furthermore, this digital evolution also means shared responsibility.

Moreover, the sourcing processes themselves need to increasingly incorporate digitalization and automation, a notable improvement over the current, largely manual processes still prevalent in too many organizations today.

In other words, to access external digital providers more effectively, companies need stronger skills in the internal use of digital.

And while it may take time, the reward for implementing these processes is clear.

Four success factors for digital outsourcing

According to a McKinsey analysis of the outsourcing agreement landscape, there are four critical elements for its success:

A focus on transforming operations through digital

The traditional outsourcing approach had a well-defined set of tasks from the company and providers were paid based on a fixed rate for time and materials. However, digital outsourcing seeks to radically transform operations with providers taking on more complex processes and being paid based on the outcome delivered and the solutions implemented.

Shared incentives aligned to innovation

Companies can structure agreements to incentivize innovation throughout the contract term, through arrangements like profit-sharing. Ideally, the innovation agenda aligns with the organization’s overall priorities and covers all dimensions: efficiency, effectiveness, and experience.

Redesigning digital journeys from end to end

Companies can no longer outsource a single fragmented portion of a process and expect significant improvement. For true and substantial impact, the provider typically needs to own and transform the entire process end-to-end, through optimization, digitalization, automation, and elimination of manual processes and tasks. Over time, this expanded perspective helps build a broader mindset of continuous improvement, allowing the provider and buyer to collaborate to generate more value as business and technology landscapes evolve.

Joint responsibility for digital transformation and adoption

Instead of the non-intervention agreements of the past, where a company and a provider often worked in full competition, digital sourcing demands a joint governance structure. Dedicated teams with representatives from both organizations develop and monitor a comprehensive set of KPIs, including customer experience. Providers must be empowered to make some decisions on their own and must coordinate more closely as partners, in areas such as access to the technology stack or dispelling data loss concerns from the chief information security officer.

Thus, companies have this great option of digital outsourcing to take the initiative and step into this new digital normal. At icorp, we can help you, just click here. It is the best option instead of risking giving an advantage to the competition.

This article has been translated using AI and may include errors.