Reimagining outsourcing after Covid-19

The importance of outsourcing

The pandemic forced companies to rely more heavily on outsourcing, and we know that suppliers are essential to digital transformation. But we found that, despite the trend towards companies developing their in-house teams, they will continue to invest in relationships with outsourced service providers. 

The challenges businesses have faced as a result of Covid-19 are well-documented. Throughout the series of global lockdowns, in which many workforces moved to remote working models, suppliers, particularly in outsourcing hubs such as India and the Philippines, experienced hiccups such as internet teething problems and other hurdles.

But almost all companies we surveyed reported that suppliers remained supportive. For example, suppliers supported companies by providing short-term financial relief to their clients, particularly in those industries hit hardest, such as retail and financial services, where requests for short term contract reviews were common.

We have also seen and heard that Covid-19 is accelerating digital transformation. We agree, but it is more nuanced than that. Our survey found that companies are more selective with the transformation they choose to pursue – some elements have been put on hold, largely because businesses couldn’t afford to focus on them.

Non-critical activities were taken off the agenda entirely. Post-Covid-19, 96% of the surveyed companies want to accelerate transformations that are business-critical. But at the same time, 75% will continue to cancel or delay those projects that no longer stack up as priorities. Suppliers must prepare for that shifting dynamic. 

Five steps to better partnerships

Most of the surveyed companies were happy with supplier performance, but Covid-19 has forced a change in how businesses and suppliers interact. For example, more than 60% of respondents said they would renegotiate their contracts to adjust elements such as pricing, scope and mode of delivery – no easy process for suppliers.

Moving forward, there are five steps companies can take to manage their outsourcing ecosystem and five steps suppliers must also work with clients to achieve:

1. Focus on resilience: All survey respondents said they have a business continuity plan in place. That’s great if only a country or region is off the grid. But if a company’s global network falters – as we saw throughout 2020 – businesses feel far less prepared. What Covid-19 has shown is that resilience must stay high on company agendas, and suppliers are often best placed to bridge any gaps. 
2. Selective partnerships: The vast majority of our survey respondents were satisfied with the performance of their suppliers. Yet we are seeing a trend in which companies are forming fewer yet deeper supplier partnerships. This is the right approach; it’s taxing, expensive and complicated to orchestrate a large supplier ecosystem, and selective – and deep – partnerships are far more productive. 
3. Future-proof contracts: Companies must try to change their supplier relationships to focus on outcomes, rather than inputs. Our survey shows that 47% of executives expect a rise in the use of outcome-based contracts. Similarly, joint ventures are back on the agenda, with 47% of executives expecting a rise in these.
4. Persist with transformation agendas: There is still undoubtedly – and rightly – a focus on digital transformation. But over the next two years, leaders must decide which transformation projects they invest resources and capital into and which they cancel or delay. In doing so, they will be able to plug capability gaps and determine the kinds of suppliers they will need to partner with to achieve their transformation goals.
5. Bridge talent gaps: Our survey showed some shifts towards bringing IT capabilities in-house, but we would describe the trend as ‘selective insourcing’: it has been feasible to bring some capabilities in-house, but others were outsourced and offshored. Moves to bring talent in-house are driven by a desire to reduce the risk of transformation projects stalling, leaving businesses to rely on service providers in areas where they suffer from talent gaps. This tandem approach, in which internal capabilities are boosted alongside the engagement of service providers, is a trend that is likely to grow in the years to come.

Our survey and ongoing client work demonstrate how important it is to actively manage supplier relationships and ecosystems. That doesn’t mean more suppliers – it means making a conscious decision about what your business needs, and Covid-19 has only made those needs more critical.

Business leaders who pay attention to and invest in their supplier relationships have fared better throughout the Covid-19 crisis, and those that change their thinking will do so in the months and years ahead.

Heiner Himmelreich is a partner and director in BCG’s Melbourne office, and is BCG’s global leader for tech sourcing. Hrishi Hrishikesh is a partner and director in BCG’s New Jersey office, and is the lead for tech sourcing in North America. Evelien Scherp is a project leader in BCG’s Melbourne office, and she is a topic expert in tech and sourcing strategy. Ilan Oshri is a professor of technology and globalisation at the University of Auckland Business School.