A digital future of the world for business process outsourcing in 2022
Firms predominantly used business process outsourcing to save costs a decade ago. Although the technology was employed to improve operations, it was mostly used for simple job digital automation.
Currently, that strategy is making way for a wiser one where businesses may outsource to take advantage of supplier offers from more advanced providers. Advances in digital technology, such as AI, analytics, and machine learning, are among them. These include tailored industrial solutions.
Experiences of trailblazing firms demonstrate that the moment has come for the outsourcing industry’s focus to shift from traditional right-shoring and basic automation to completely digitalized operations through business-process management (BPM). Since these kinds of outsourcing agreements are still uncommon, there is a chance for both service buyers and providers to advance by developing distinct operational benefits and substantial bottom-line value.
The window of opportunity to take advantage of such benefits is, however, rapidly closing. These transactions will most likely be taken for granted in a few years. Companies may take the lead starting right now.
Digital outsourcing: Growing fast
An estimated $230 billion is spent globally by businesses on process management. These encompass anything from back-office processing applications like claims, payments, finance, and procurement to customer-service activities like contact centres. Only a tiny portion of the overall expenditure is now attributable to outsourcing contracts that demand next-generation technology. The share is, however, increasing significantly.
About one-quarter of the 53 business process outsourcing deals that concluded between 2016 and 2020—a sample was drawn from a pool of more than 200 such transactions—including at least one digital component, according to a comprehensive examination of the deals (social media, mobile applications, analytics, automation, cloud, or Internet of Things). However, during five years, the volume of such transactions nearly doubled. This potential opportunity contrasts sharply with the single-digit growth rates of the outsourcing sector as a whole.
A similar pattern may be seen when the total contract value (TCV) is analyzed. Digital services surged from 30 to 70 per cent of TCV over the five years from 2016 to 2020, and the proportion of new transactions with a digital component progressively rose to about 50 per cent.
Companies cite several factors as the cause of the rapid expansion of digital in BPM deals. One is the exponential increase in consumer demand for digital goods and services. Another is the widespread industry usage of cloud technology. Based on our data, cloud-enabled agreements reached their high in the private sector in 2020 at 67 per cent of TCV and in the public sector at 63 per cent.
Cloud platforms and services, in turn, make it possible to incorporate new data and digital technologies. To speed up cycle times for data-intensive operations, several BPM providers, for instance, are utilizing cloud-based solutions in niche applications like accounting and credit and cash management. Finally—and most importantly—outsourcing based on digital technology produces high-quality results. Digital may have a two to three times greater influence on an outsourced contract than under traditional methods, according to BPM buyers and providers, while also enhancing the experience for buyers and their clients.
Overcoming the challenges
However, there are some obvious problems with digital. Getting executive support is the first. The chief procurement officer and other senior executives must have a higher degree of desire for digital sourcing initiatives, as well as clear support for the shift, supervision during the transition, and emphasis.
These actions are crucial for overcoming the cultural obstacles of any change program. Organizational inertia, meticulously cultivated relationships, and an understandable need for stability can cause procurement teams to continue with established suppliers even when conditions appear to be reasonably quiet. Digital sourcing is a new method of working with all suppliers, not simply a new source. Some working teams may claim that they lack the resources to implement a digital procurement program in addition to the drastic changes that most firms face on several fronts.
Weak sourcing ability may be the main issue. Some businesses might not be able to find providers of next-generation digital services internally. To achieve this, a different business case—one focused on results and innovation rather than simple cost savings—is required. For instance, some clients now demand huge gains in end-user experience metrics from providers, such as quicker call and service times or favourable reviews of AI-based digital products.
Following the proportion of automation initiatives that are completed on schedule or the success rate of digitization projects, other clients demand providers to deliver on transformation initiatives. This progression entails taking into consideration a different group of providers, structuring contracts to encourage collaboration and shared accountability, and forming a much more direct, integrated partnership with the provider. The type of outsourcing that businesses could use in the past was not turnkey.
Additionally, sourcing procedures themselves must progressively embrace digital and automation—a significant improvement over the outdated, primarily manual procedures still in use at far too many firms today. In other words, businesses need better internal digital capabilities if they want to access digital from external sources more successfully.
Up to a year might be needed to develop these skills. However, putting into place better procurement practices has a very apparent benefit. According to our findings, combining digital and automation to renew outsourced contracts may generate three times the financial effect of conventional outsourcing agreements while also enhancing the internal customers’ experience.
Four elements for digital outsourcing success
Four key components of next-gen outsourcing transactions are highlighted by our research of the deal environment, which is supported by the experiences of significant outsourced providers and purchasers.
- A focus on transforming operations through digital.
The conventional method of outsourcing was a simple transaction designed to provide marginal efficiency. Companies delegated a list of specific duties, and service providers were paid according to a flat charge for their time and supplies. That is giving way to a new type of outsourcing, which uses digitalization to drastically change operations. Providers take on increasingly sophisticated procedures and are compensated depending on the results they provide and the variety of technology solutions they use (such as natural language processing, robotic process automation, or AI).
- Shared incentives aligned to innovation.
The value that can be unlocked by these technologies and applications is still in flux since they are continually developing. As a consequence, businesses may design contracts using clauses like gain sharing to encourage innovation across the whole contract duration. For instance, if a provider advises a process improvement that lowers the amount of working capital needed or lowers the number of days that sales are still unpaid, the supplier may negotiate to keep a portion of the value. The organization’s overarching goals should be supported by the innovation agenda, which should encompass all three: efficiency, effectiveness, and experience.
- Redesigning digital journeys end to end.
Companies can no longer outsource a single, fragmented slice of a process and hope to see significant improvement in results since processes are increasingly being reinvented to capitalize on digital. Instead, the provider often has to take control of and alter the entire end-to-end process through optimization, digitalization, automation, and the abolition of manual procedures and tasks in order to have the most impact.
For instance, a provider charged with automated invoice processing may encounter early problems as a result of nonstandard forms and recommend upstream format modifications to the supplier invoice submission process as a result. As the business and technology environments change, this broadened viewpoint contributes to the development of a larger continuous-improvement attitude, enabling the supplier and the consumer to work together to create more value.
Companies can no longer outsource a single, fragmented slice of a process and expect to see significant improvement in results since processes are increasingly being reinvented to capitalize on digital.
- Adoption and transformation of digital technology are jointly responsible.
Digital sourcing necessitates a collaborative governance framework as opposed to the hands-off agreements of the past, where a corporation and provider frequently functioned apart. Dedicated teams comprised of members from both businesses create and track a broad range of KPIs, including customer experience. In areas like gaining access to the technology stack or allaying fears about data loss to the chief information security officer, providers need to be given the freedom to make some decisions on their own and work more closely with customers as partners.
Three success stories
Consider the following three case studies to see how outsourcing works in practice.
- Telecom.
A major telecom company launched an 18-month digital sourcing program to find a single external provider who could increase automation and digitization throughout the company’s operations. The program was designed to help the company modernize its business operations and move away from highly manual, inefficient processes.
The provider provided a range of cutting-edge AI and analytics-related technologies, including robotic process automation, machine learning, and natural language processing, along with platforms that could support process redesigns across the organization, from business units to call centres, service assurance, and other functions. The manner in which the business and technology supplier decided to implement the technologies, however, was possibly even more crucial.
Instead of concentrating just on cost reduction, the two parties negotiated annual price reductions and performance enhancements, together with incentives that would allow the supplier to profit from any innovative new ideas it adopted. That generated strong backing for ongoing improvement. A joint governance structure, along with a comprehensive set of KPIs, service-level agreements, and related metrics—including ones focusing on customer experience—were used to further reinforce the collaborative approach.
All of these were negotiated throughout the process of creating the contract between the two parties, which served to foster trust and align long-term interests. Significant scale economies have been produced by reducing the number of outsourcing providers the firm utilizes to just one strategic partnership across business divisions, including, for example, providing machine learning algorithms with more data to train from. Additionally, there was still a significant cost benefit because the new outsourcing partnership reduced operating expenses by 60%.
- Industrial
Using next-generation platforms and solutions, a major industrial company sought to collaborate with a BPM supplier to modernize its antiquated processes and business-support activities. It hired a major global BPM provider to assist in redesigning its shared-services operations using a mix of business-process reengineering, robotic and point automation, and lean concepts. One of the most successful phases was fully automating billing and payment processes for invoices.
Additionally, optical character recognition technology minimized the need for human labour, and dashboards were given insights and executive-level reports by a business intelligence engine. In all, the program decreased transport inventory backlogs by more than 80%, boosted productivity by nearly 40%, and enhanced end-customer satisfaction by more than 35%. More than $10 million in duplicate payments were found after automating practically all billing operations.
- Consumer packaged goods.
A sizable food and beverage firm with unified finance and HR to support its international operations had a well-established shared-services department. Costs were still quite expensive, though, and it was getting difficult to integrate new businesses into the current system. The company requested that a leading worldwide BPM expert redesign its current system to make it more flexible and affordable.
A proprietary human-machine operating engine that optimizes people, technology, data, and intelligence was introduced by the supplier. Through the use of that technology, the provider automated and applied analytics to hundreds of HR and financial operations, redesigning and standardizing them in the process. Over the course of the next year, the additional features were first introduced in Europe before being made available in North America, Australia, and New Zealand.
The company’s financial department streamlined 50% of its journal entry procedures, increasing real-time postings from 90% to 100%. In HR, onboarding letter turnaround times decreased by two-thirds, mistake rates in employee correspondence plummeted to under 1%, and compliance issues were reduced by 85%. The change increased productivity by more than 30% and generated savings of more than $5 million in both finance and HR.
Conclusion
The COVID-19 epidemic has greatly quickened the pace of digital disruption in the BPM sector, which might lead to considerable financial and operational gains for prepared businesses. Although it will be difficult to overcome internal and external obstacles and completely reimagine the sourcing process, digital represents the future standard for significant outsourcing projects. We think businesses have a decision to make: either they take the initiative and benefit from this transition, or they run the danger of giving the competitors a sizable edge.
Edited by Prakriti Arora
