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2016 IT Outsourcing Trends

Author: Gretel Digo

Posted: January 18, 2016

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Information technology or IT outsourcing or the transfer of responsibility for technology solutions to a third-party provider remains an attractive method for businesses to extend their technical capabilities and lower IT spending.  According to Computer Economics, IT outsourcing spending as a percentage of the overall IT budget has remained flat and ended on a downward trend over the past three years.  However, IT outsourcing spending is rising at a rate similar to overall IT budgets.

Looking ahead to 2016, analysts predict with certainty that technology will continue to disrupt outsourcing delivery models.  Companies that are slow to adapt and innovate risk being left behind in a constantly changing and ever-competitive market.  Big IT outsourcing trends for the next few years include analytics, automation, cloud services, better cyber security and increased IT outsourcing activity in the healthcare sector.

Cloud services.

Most companies are still in the early adoption stage when it comes to cloud services.  This year, more corporations and small businesses will move some aspect of their IT operations to the cloud.  In the United States, Computer Economics reported that more companies are outsourcing IT security, e-commerce and application hosting than help desk, desktop support and application maintenance.  The study revealed that application hosting (cloud-based) is the number one outsourced function, with 65 percent of companies planning to increase the work they outsource.  Meanwhile, outsourced e-commerce, IT security, data centers and app hosting have the highest success rates for improving IT service levels compared to performing the same services in-house.

Robotic process automation.

RPA is going to be big in 2016, particularly in the retail sector.  Many companies are already using RPA to manage IT operations and IT infrastructure, and this trend is only expected to grow this year.  Automation alters supply chain processes, forecasting, security and customer engagement.  RPA can potentially boost speed to market and simplify cost management.

Data analytics.

Data analytics will continue to be disruptive in 2016 as machines become smarter and data management capabilities improve.  Data analytics combined with automation is a powerful mix that companies can use to understand customer behavior and consumption trends.  For example, Target uses sophisticated data analytics to create more effective promotional catalogs, loyalty programs, and direct marketing and merchandising campaigns.  Data analytics allows the retailer to determine which of its customers are expecting or pregnant.  The company then sends these customers coupons for maternity and baby products.  Rio Tinto, a large mining company, also outsources its data analytics.  The outsourced team analyzes volumes of data from equipment sensors to predict downtime events. 

TechNavio’s study reported that the global data analytics outsourcing market will grow at a CAGR of 31.68 percent from 2012 up to 2016 due to the industry’s massive accumulation of data.  As companies collect information online and from sensors, automated machines and other sources, they require systems to convert data into intelligence and integrate platforms into enterprise resource planning (ERP) software.  The goal is to create a single, centralized platform to enable better decision making and real-time information sharing across the organization.  This year, more companies and SMBs will leverage analytics tools (their own tools as well as third party tools) to drive competitive advantage.

Mobility.

More people accessed the internet from mobile devices in 2015 than from personal computers.  In 2016, mobile is expected to continue its domination.  For businesses, this means refining their mobile presence, brand, marketing campaigns and customer-centricity.  Using the massive data trail left behind by customers, companies can customize their buying experience.  Major retailers are already doing this, profiling each customer and creating a custom basket of items for them to consider.

Heightened cyber security.

With rapidly changing technology comes increased security risk.  As companies invest in digital transformation, e-commerce, analytics, information sharing and IT outsourcing, there are more channels available for opportunists to access data illegally.  Security breaches and cyber attacks can happen to anyone.  Both startups and corporate giants like Sony and Target have experienced serious security breaches.  In an age where data is both a risk and an asset, more effective cyber security measures are required.  Governments are aware of these challenges, and they are creating legal frameworks to protect customers.  Some governments provide advisory programs that detail steps to mitigate common threats.

However, businesses and services providers are mainly responsible for mitigating risk.  Companies are bound by legal requirements in their country or state, which can complicate the process.  Experts recommend that companies comply with general and most restrictive requirements to ensure compliance.  Cyber security issues will only increase in 2016 and the coming years.  This year, businesses that are struggling with compliance are expected to work with external IT security providers.  More companies will hire data security consultants and specialists that can bring in the required tools and processes to prevent and address cybercrime in a responsive way.

Smaller Outsourced IT Contracts.

This year, the global industry will continue to move from mega deals to smaller IT outsourcing contracts.  According to a recent study, global IT outsourcing spending remained flat in the third quarter of 2015 at $5.6 billion, while awarded outsourcing contracts increased 20 percent.  Compared to 2013 figures, the IT outsourcing market is down 30 percent.  The study further said that winners and losers in 2016 and beyond will be determined by how companies adapt to coming changes.  The industry should expect major changes in IT infrastructure, data centers, and to a lesser extent business applications.

As deals get smaller, those that offer innovative products and services will come out on top.  This is in favor of smaller providers who are quicker on their feet than larger companies.  Large service providers that rely on established relationships with chief information officers will no longer find this model sustainable in the future. 

Outsourced disaster recovery.

According to a study by Computer Economics, outsourced disaster recovery has the biggest potential to reduce costs successfully in 2016, compared to other commonly outsourced IT functions like desktop support, help desk, e-commerce, network operations, database administration, application hosting and maintenance, data center operations, IT security and app development.  The study reported that companies outsource disaster recovery to reduce risk rather than cut costs.  As disaster-recovery-as-a-service matures, on-demand cloud services will become a cost-effective alternative for companies that do not require extra capacity.

Increased IT offshoring & outsourcing activity in the healthcare sector.

The slew of regulatory changes and ICD-10 rollout in the United States are boosting the demand for healthcare IT outsourcing in other areas, particularly emerging locations.  On top of new regulations, hospitals, private practices and healthcare providers face increasingly demanding technology requirements.  A recent Black Book survey found that healthcare organizations will increase IT outsourcing spending in 2016 not only for traditional functions like revenue cycle management and medical billing/coding, but also for more complicated work like software development and IT infrastructure services.  The main drivers of increased outsourcing are immediate access to skilled personnel and good return on investment.  Employment forecasts for health IT professionals are very promising in the coming years in the U.S.  and emerging markets with low labor costs.

The Black Book survey showed that client satisfaction with their outsourcing partners hit an all-time high in 2015.  The last time this occurred in the healthcare industry was in the late 1990s with IT outsourcing.  IT outsourcing is clearly making a comeback for companies with limited budgets and those under pressure to increase profitability.  In the next few years, IT outsourcing in this sector will be seen as a cost control strategy as well as a way to access required software and expertise.

IT outsourcing allows healthcare leaders to remain solvent and innovative by extending their technical capabilities and leveraging specialized expertise.  By outsourcing IT services, companies can find the right talent quickly and build a workforce suited to rapidly evolving market demands.  The pressure to increase revenues and collections while providing outstanding patient care will also drive IT outsourcing activity in the coming years.  Another way IT outsourcing helps organizations is to address understaffing, process inefficiencies and issues associated with outdated platforms cost-effectively. 

For service providers, this means focusing on data quality, security and cost savings.  For healthcare organizations, this means prioritizing both technology and processes.  In-house IT departments will need to expand their role in 2016 to become true innovation partners, and outsourced IT teams will help them.  Analysts predict that successful healthcare organizations of the future will combine effective strategy with governance, well-designed outsourcing partnerships and change management. 

IT Outsourcing Strategy

In 2016, IT outsourcing is expected to shift focus aggressively from volume to value and from output to outcome.  It is time for organizations to change their hour-based mindset into a more effective, value-centric model.  Rather than focusing on the resources needed to deliver software or a technology solution, companies will weigh IT outsourcing decisions in light of potential value added to the business.  Analytics will play a big role in the evaluation phase; analytics tools can baseline current performance and monitor performance of IT contracts over the course of the outsourcing projects.

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