Outsourcing 2021: A Year of Projected Growth and Our Top Five Challenges

Originally published in Lexology.com by Morgan, Lewis & Bockius LLP, January 20, 2021

As we noted in our Outsourcing 2021 webinar last week, a lot has happened and changed in the last 12 months since January 2020. There have been significant and unprecedented changes in the way our companies do business, the way we engage and interact with colleagues, and the way we interact with external parties, including how our companies and each of us leverage technology to market, process transactions, and otherwise communicate.

Outsourcing solutions and relationships have evolved – or perhaps adapted – over the past year to scale to increases and decreases in demand, to respond to different work models (include remote working) and to facilitate and implement new technologies at a rapid pace. Outsourcing has shifted from a primarily cost savings mechanism to an important part of many companies’ multifaceted ecosystem, enabling diverse sources of supply and delivery locations, resiliency, scalability, speed to implementation, and innovation.

In our webinar, we looked back at the past year and looked forward to 2021 and the challenges and promises that may be in store for the outsourcing market. Some highlights from the webinar are summarized below.

Forecasts for Outsourcing in 2021

  • Per Deloitte’s Global Outsourcing Survey, cost remains at the top of the list for key considerations for businesses when engaging in outsourcing

  • According to Statista, by 2022, the value of IT services companies that delegate to external suppliers may exceed $413.72 billion.

  • Hot off the presses, ISG noted in its report for Q4 2020 that global combined annual contract value (ACV) reached a quarterly high of $16 billion in Q4, up 13%.

Outsourcing Resiliency in 2021

  • Outsourcing through a COVID-19 lens, including:

    • Ability to increase or decrease the size of teams has been pivotal to many back and middle office functions meeting the crisis head-on.

    • Easy access to technology at speed.

    • Reacting to different restrictions at different times across different jurisdictions, ensuring compliance with regulations, and enabling flexibility as the circumstances change.

  • Regulations in the European Union driving resiliency in outsourcing:

    • European Insurance and Occupational Pension Authority (EIOPA) guidelines on outsourcing to cloud service providers

      • Guidelines came into force on January 1, 2021 and expand on how the Solvency II Directive (2009/138/EC) and the Solvency II Delegated Regulation ((EU) 2015/35) are to be applied.

      • Not applicable to regulated activities in the United Kingdom, but applies to businesses operating within Europe and their new and existing cloud outsourcing contracts.

    • European Banking Association (EBA) Outsourcing Guidelines

      • Will be mandatory for all (including existing) material outsourcing arrangements in Europe and United Kingdom from 31 December 2021.

      • Introduces key contractual requirements to increase resiliency in outsourcing arrangements, including key provisions relating to business continuity, subcontracting, and audit rights.

Outsourcing as Strategy for Scalability Challenges

The challenges of sudden change in demand and business models, and the ability to scale infrastructure, including:

  • Increased network capabilities

  • Increased demand for cloud services & collaboration tools

  • Shift to online transactions

  • Increased call center volumes

  • Increased automation and AI

  • Decreased demand due to business downturn or shift in business strategy

Outsourcing as a way for Strategic Transformation

Considering contract provisions that address the challenges of implementing solutions such as robotics and automation that will enable companies to provide best in class services and remain competitive in their market by leveraging innovative solutions and technology, while balancing cost considerations and compliance requirements. Examples include:

  • Structures to enable implementation of transformation projects

  • Structures to incent on time, on budget delivery

  • Commitments to provide insight into innovation

Outsourcing and Security

Increased focus on:

  • The potential increase in attacks due to remote working

  • The challenge of protecting and securely processing and managing data and information of outsourcing clients, including to:

    • Comply with privacy and security laws and client data safeguard requirements

    • Proactively modernize privacy and security features and technologies to identify and prevent evolving security threats including in new working models

    • Leverage state-of-the art incident response and remediation processes

    • Implement market-based liability structures

Outsourcing and Compliance

Challenges and contract considerations relating to third-party compliance solutions, including:

  • Siloed, specialized solutions

  • Multitude of providers

  • A diversity of provider types (including high proportion of SMEs)

  • Different entry/procurement points into the organization, with different stakeholders

  • Significant divergence in contract terms and risk allocation

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