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The pandemic is evolving the relationship between businesses and service providers; here’s why

digital transformation
(Image credit: Image source: Shutterstock/Wichy)

From supply chain challenges to reworking business processes for the remote-world, enterprises have navigated significant disruption in the face of Covid-19 to just stay afloat. Businesses have found themselves needing greater support from their service providers than ever before, and the past 12 months have underscored how critical it is for companies to have an effective outsourcing strategy— particularly those that offer digital capabilities and business process services — in order to survive a crisis and, at the same time, transform to lead in the aftermath.

Moreover, the crisis has reinforced companies’ symbiotic relationships with their service providers. That’s evident from a survey that BCG conducted in the autumn of 2020, which found that companies will continue and even accelerate their dependence on service providers and that, despite the disruption, many have plans to continue their digital transformations.

Counting on service providers to navigate the crisis

As the pandemic raged last year and governments around the world were forced to impose, and then reimpose, national lockdowns, the world’s economies were paralyzed.

Many companies realized that they had no option but to become more digital, more quickly. Survival depended on it. The shift had to happen almost overnight, and those that could facilitate remote work on short notice were able to limit the impact of the pandemic on their operations. Those that could not were hit hard. In addition to having to ensure employee wellbeing and ability to work remotely, critical business processes had to continue, and nimble companies shifted to online marketing, selling, and services delivery for the foreseeable future.

But while many companies rely on a global footprint of providers to prevent service breakdowns, that model doesn’t factor in the possibility of a pandemic washing over the world. Service providers, particularly in outsourcing hubs such as India and the Philippines, were hit hard with the rapidity of societal lockdowns, although they did their best to cope.

Despite this, companies did find significant support from service providers during this period: 79 percent said that they asked service providers for help in some form, such as longer payment terms (47 percent), price reductions (45 percent), or free support for more processes or additional services (41 percent).

Pushing ahead, cautiously, with a transformation

However, the drive to maintain business processes and survive didn’t stop enterprises from focusing on maintaining their digital transformation journeys. 61 percent of the companies surveyed said that they accelerated parts of their digital transformation over the course of the year, although 42 percent noted that some project were forced to be slowed. While it’s easy to assume that the pandemic only accelerated digital transformation, it’s clear that this came at the cost of other projects.

Importantly, most enterprises plan to persist with their digital transformation agenda; in fact, the majority expect to accelerate the execution of their transformation-related projects over the next 24 months. These companies anticipate their immediate focus to be reinforcing the IT function, with more investments in cybersecurity (55 percent), given that people will continue to work from home; automation (49 percent); cloud migration to accelerate digital & reduce costs (47 percent); artificial intelligence (AI), machine learning (ML), and analytics (46 percent); and crowdsourced innovation (35 percent).

Interestingly, there’s a correlation between an organization’s plan to slow transformation projects and its inability to leverage service providers effectively. Companies that are planning to accelerate transformation projects anticipate relying on service providers more heavily in the future, even as they build capabilities in other areas.

Reshaping the future of outsourcing

Almost half of all the companies we surveyed have stated that in 2021 they will outsource more work than they will do internally. That leads the question: Although levels are uncertainty for the future are at an extreme high, what are the key implications for businesses’ sourcing strategies? Companies should manage their outsourcing strategies in the future by taking four steps:

  • Focus on resilience: Companies must ensure that staying in business and bouncing back from adversity are two key considerations when refining IT sourcing strategies. Businesses must incorporate new ways of working — particularly hybrid working— to enabling operational resilience in the future.
  • Be selective about partnerships: Businesses must become more strategic about their outsourcing. Companies, on average, work with as many as five service providers but developing deeper relationships with fewer partners can help create ecosystems of digital innovation.
  • Be selective about partnerships: Businesses must become more strategic about their outsourcing. Companies, on average, work with as many as five service providers but developing deeper relationships with fewer partners can help create ecosystems of digital innovation.
  • Bridge talent gaps. Every enterprise must re-evaluate the capabilities that it can develop in-house with existing talent and determine what to procure from service providers. By building capabilities within the workforce, companies can reduce the risk of their transformation projects stalling and turn to service providers in areas where they need to augment their talent. In fact, some companies are trying to develop capabilities in tandem with service providers including identifying strategic career transitions between providers and companies—a trend that is likely to grow in the years to come.

Companies must ensure their relationships with service providers remain strategic, particularly as we move into the recovery phase post pandemic. Businesses should invest in developing critical capabilities in-house whilst using third-party expertise to step up the pace of digital transformations. That, in turn, places the onus on service providers to expand their skills and offerings.

Coming out of the crisis, service providers should be prepared not only to renegotiate costs but also to grab the capabilities-based opportunities that are bound to come their way to be a strategic partner for their clients’ digital transformations. Only then can service providers hope to become trusted partners in a companies’ future agenda.

Sukand Ramachandran, Managing Director and Senior Partner, Boston Consulting Group (opens in new tab)

Sukand Ramachandran is a member of Boston Consulting Group’s Financial Institutions and Technology Advantage practices. He advises clients across industries on digital and technology-enabled transformations. He leads BCG’s corporate banking work in Europe, its trade finance work globally, and the firm’s work in technology and digital in wholesale banking as well.