ISG’s Andreas Fahr outlines three IT sourcing trends to look out for in the coming year.
By
- Andreas Fahr
Published: 31 Jan 2023
The IT services market is robust. The sector continues to grow, despite multi-faceted crises, including the hike in energy prices, which have contributed to a seven per cent year-over-increase in the fees of service provider contracts in Q3 2022 (compared to Q3 2021).
However, major changes are taking place in sourcing practices. We’re seeing traditional infrastructure projects, which have long been the core business of providers, taking a back seat. Instead, aspects of the sourcing process that directly contribute to value creation for the enterprise client now have priority. As a result, we’re seeing framework conditions, objectives and rules in the relationship between enterprises and IT service providers change at an astounding pace.
As organisations digitise more of their legacy systems and processes, we’re seeing new requirements for process design that interact closely with the innovations that the IT industry is producing. The need for adjustment in sourcing is increasing all the time. In 2023, organisations will need to realign existing partners’ performance requirements continually and include new service providers in the existing partner ecosystem where necessary. We’ll also see an increase in the number of internal stakeholders who will have a say in the design of IT. Therefore, promoting cooperation between the client’s IT function, the business itself and service providers will be a key success factor for effective sourcing.
Trend 1: Business process outsourcing (BPO) providers will focus on customer value
Traditionally, back-office processes (like accounts and HR) have been the domain of BPO providers, but as more of these processes are digitised, BPO providers are looking beyond their core areas to find new ways to deliver value to clients. Banks and insurance companies have been among the quickest players in the market to react to this development. The range of outsourced value-creation processes is growing and is, in some cases, extending to core business processes such as lending. Authentication of end customers is seen as an especially attractive feature when selecting providers.
Sourcing teams in client companies are having to broaden their perspectives as providers diversify their offerings and expertise. The priority is now determining how service providers can add value to the company. As we move into 2023, we’ll see more sourcing teams develop an outcome-oriented mindset – this will help them define what service and process support they need to support their business goals.
Trend 2: Digital engineering is becoming an IT services topic
Research and development (R&D) has traditionally been considered a value-added service by service providers, only offered in connection with infrastructure and development services. The real R&D value was the responsibility of the client’s engineering organisation, which entrusted specialist engineering firms with selected project tasks based on the type of development required. The responsibility for the outcome of engineering projects rested with the enterprise, not the provider.
The Industrial Internet of Things (IIoT) is changing that. Clients now want service providers who know how to meet the diverse demands of IT-OT convergence, as IT solutions become more networked with Operational Technology (OT). Many large IT service providers recognised this need early on and expanded their OT expertise through acquisitions and people development. Those that did this have put themselves in a good position to offer engineering-as-a-service, which goes far beyond the services of specialist engineering firms. These digital engineering providers can work with industrial clients to develop business models that let them apply IIoT innovations in a marketable way.
We also expect to see service providers concentrating on expanding their operational capabilities. They’ll need to acquire sufficient industry-specific knowledge of the relevant valid regulations or industry standards. The more successful these providers are building this expertise in-house, the more they will be able to manage the whole life cycle of IIoT services and assume part of the responsibility for results.
Trend 3: Outsourcing cybersecurity
Cybersecurity shows us how quickly the importance of sourcing can change.Just a few years ago, it was common practice in tenders to attach the company’s security guidelines to contracts and to oblige service providers to comply with these standards by way of a signature. Today, almost all major sourcing procedures include security as an integral part of the performance specification. Whatever the subject of the tender, the sourcing scope must therefore be designed with a suitable understanding of security.
Critical infrastructures are at the forefront of this development. The advancement of the above-mentioned IT-OT convergence has resulted in a sharp increase in points of attack. Attackers are also developing more sophisticated methods and have increasingly powerful technologies at their disposal. Cybersecurity is, therefore, no longer an in-house matter. Nowhere else are user companies so dependent on cooperation with service providers. As a result, we’re seeing the number of security providers increase – but this means businesses face an increasingly crowded market of suppliers that differ considerably in their portfolios and their respective know-how. Maintaining an overview in this highly dynamic market is no trivial task, even for professional market analysts. As we head towards 2023, we’ll see more companies call on external consulting expertise to guide their selection processes and reach a suitable selection.
Andreas Fahr is partner at global technology research and advisory firm ISG
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