Article written by Allen Bernard and published by CIO Dive on April 19, 2021.

As COVID-19 brought the worldwide economy to a sudden and screeching halt, businesses of all shapes and sizes found themselves adrift in uncharted waters. To stay afloat, most businesses dramatically accelerated their digital transformation efforts. 

In typical times, this also would have led to an increased reliance on IT outsourcers, according to a survey by the Boston Consulting Group of 200 selected companies across industries. 

"Many companies were forced to take unprecedented steps to survive: 79% said that they asked service providers for help in some form, such as longer payment terms (47%), price reductions (45%), or free support for more processes or additional services (41%)," the survey authors said in a blog post about the survey.

But, like most everything else in 2020, what one would expect to happen, did not. Because of the fear, uncertainty and doubt sowed by the pandemic, businesses began hoarding cash, while cutting expenses to the bare minimum. These efforts were not uniform, however. 

To manage the transition to remote work and online customer engagement and order fulfillment, many businesses increased spending on cloud, particularly software as a service (SaaS). (The now-familiar headlines of video conferencing provider Zoom growing by 300% almost overnight were hard to miss.) 

This continued through the first three quarters of 2020 but began to turnaround late last year, as the global economy became more predictable, said Kevin Parikh, CEO of Avasant, an outsourcing advisory and management consulting firm.

"Shock and awe and fear happened in [first three] quarters of 2020. And then there was a recognition that big investments were needed in the fourth quarter to transform, to survive. I have one client who told me they went from zero to 50,000 global video calls a day — 50,000 a day — by flipping a switch," he said.

Cuts in IT outsourcing spend due to the pandemic eased from $83 billion in the spring to $31 billion at the end of 2020, said Gunjan Gupta, a principal research analyst at Gartner.

"Some of the service providers, they are reporting even double-digit growth," she said. "I think the acceleration is going to continue for the rest of 2021 and 2022."

Global IT spending on end-user services is forecast to grow 4.4% to $1.19 billion in 2021, according to Gupta. This is compared to a spending reduction of 2.6% in 2020. That is just the tip of a very big iceberg. 

After contracting 4.6% in 2020 to $490 million, worldwide IT spending on consulting and implementation services are predicted to experience a 4.5% CAGR through 2024. While worldwide spending on IT-centric managed services, infrastructure, and application support, which decreased 1.1% in 2020 to $475 million, will see a CAGR of 5.3% through 2024. 

Higher value-add

The pandemic also changed what companies want from their outsourcing providers, said Brett Sparks, senior director analyst, Sourcing, Procurement & Vendor Management at Gartner. Pre-pandemic, companies were often narrowly focused on outsourcing specific services (such as helpdesk), infrastructure and storage, or tasks such as network monitoring and management.

Now, with digital transformation efforts still very much top-of-mind and existential, organizations are looking for more than just five-nines of uptime or to save money on labor costs.

"It's outcomes from two different perspectives," he said. "It's a cost avoidance … and it's also getting a business to truly sit down [and answer the question], 'What does digital transformation mean to you?'"

Because digital transformation means different things to different people and morphs industry to industry and company to company, most CEOs and even CIOs struggle to summarize it for their organizations, he said. 

"Larger firms that have full-time staff devoted to … IT operations are more keen to bring in technology consultants and advisors for strategic guidance, and large project execution," said Fred Chagnon, a principal research director with Info-Tech Research Group. 

Near-shoring in high demand

Leaning on outsourcers for more than just a fixed set of pre-defined deliverables is necessitating the need for real-time collaboration, said Gupta. Organizations are now looking for providers in similar time zones so they can engage in co-creation.

In co-creation, instead of sending out an RFP, a company works with a group of outsourcers from the outset to brainstorm ideas and develop solutions. 

As a result, outsourcers are opening offices in lower-cost countries south of the U.S., including Mexico, Costa Rica and Colombia. For outsourcers focused on the European market, Poland, Ukraine and the Czech Republic serve similar roles. 

Here to stay

The move to near-shore delivery based on time-zones is likely a long-term trend as newer paradigm shifting technologies like 5G, mixed reality, AI/ML, robotic process automation (RPA) and host of others become commonplace.

And, since waiting to catch the digital transformation bus has proven, for many companies, to be a costly mistake exposed by the pandemic, businesses will need all the help they can get integrating these technologies into their day-to-day operations. 

"What are [companies] doing now?", said Avasant's Parikh. "Well, the change is really happening in 2021. We're still outsourcing all that traditional stuff that we've been outsourcing since 2000-2002. It's still happening the old way, but now we're putting a layer of transformation on top of it that's getting us access to new technology, new platforms and ways of connecting with our clients and customers in a different way."