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IT outsourcing customers cling to cost-savings mindset

Stephanie Overby | March 16, 2016
IT leaders continue to focus on cost containment with their IT service deals, but in today’s business environment companies will have to spend money to save money, according to KPMG’s David Brown.

If you keep doing what you’ve always done, the old adage goes, you’ll always get what you always got. And today’s outsourcing customers are still chasing cost savings with their IT services deals. However, they’re not necessarily getting them — at least not with traditional outsourcing deals, which are reaching a point of diminishing returns.

“A big issue with diminishing returns is that the other top organizational priority is investments in new and innovative technologies such as data and analytics, cloud, mobile and (to a lesser degree in the near term) cognitive and process automation, while at the same time beefing up security capabilities,” says David J. Brown, global lead in KPMG’s Shared Service & Outsourcing Advisory.

“Most organizations will be challenged to reconcile these conflicting goals and will need to get creative in doing so, for example, by gaining economies of scale via global business services, biting the bullet to make near-term robotic process automation and cognitive investments that will pay off handsomely [long term], and partnering in various forms (alliances, outsourcing, joint ventures) to share the cost of investments with third parties,” Brown says.

IT leaders can no longer rely on squeezing suppliers on margins to keep costs down, says Brown. They have to spend money to save money—and also deliver the new capabilities their enterprises expect from IT, whether that means migrating applications to the cloud, introducing new automation or robotic capabilities, or partnering with IT service providers to deliver business outcomes. CIO.com talked to Brown about how the traditional outsourcing approach will have to change if IT leaders and their service providers are to meet these dueling priorities of cost containment and innovation.

CIO.com: In KPMG’s year-end shared service and outsourcing report, you noted that the top priority for customers remains driving down operating costs even as the approach the point of diminishing returns. Why is that?

David J. Brown, Global Lead, KPMG’s Shared Service & Outsourcing Advisory: Organizations are continuing to feel margin pressures. Traditionally, they’ve looked at operating costs—and specifically outsourcing relationships—as a lever. We believe this approach is reaching the point of diminishing returns for traditional outsourcing deals. The outsourcing community faces new pressures to accelerate solutions that can drive additional savings. We are now seeing a rise in adoption of software- and business-process-as-a-service in many organizations and also a faster adoption of robotic process automation. This also aligns to what we view as increased demand in innovation at the same time as cost reduction; both are available at the same time, which hasn’t always been the case. 

In terms of core IT spend (not accounting for shadow IT spend in business units), spend levels vary significantly depending on industry but spend levels overall have been flat to declining for several years.  Per Gartner, global IT spend was down 3.5 percent in 2015 compared to 2014.   

 

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