Software Development Outsourcing Trends for 2015

You may have read a CIO Magazine article on the outsourcing trends in 2014 or before. In 2015, KPMG’s annual outsourcing services survey as usual highlights the most pressing issues in the Information and Communication Technology (ICT) sourcing area, but…

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29 Apr, 2015

Software Development Outsourcing Trends for 2015

You may have read a CIO Magazine article on the outsourcing trends in 2014 or before. In 2015, KPMG’s annual outsourcing services survey as usual highlights the most pressing issues in the Information and Communication Technology (ICT) sourcing area, but also provided a more nuanced view of motivation by enterprise decision makers when choosing to source services externally.

The 10 ICT Trends To Watch

Cost savings due to labor arbitrage between lower- and higher-cost labor markets have always been the key driver in software development outsourcing. Cost reduction will remain a factor for years to come, but according to the 2014/2015 Provider Performance and Satisfaction Studies survey, the main focus is shifting. The infographic below details the top 10 trends in outsourcing service provision, giving a glimpse of where the outsourcing industry will be heading in the near future.

Trend #1: From Cost Reduction to Results and Flexibility

For the first time, almost 50% more buyers seek to enable better quality service provision compared to those seeking primarily cost savings. The implications for service providers will manifest through an increased pressure for results-driven service provision, as opposed to hourly billing rate, combined with a push for access to on-demand resources for work done when it’s needed – meaning without and upfront fees, retainers and without any upfront volume commitments.

Trend #2: IT Sourcing as an Enabler

The reasons that are expected to influence outsourced service delivery are diversifying. While cost savings are a must-have, many customers now seek to minimize their capital expenditure commitments, improve the quality of services they are already sourcing, shorten their product delivery cycles and access the hard-to-find talent that can serve as a potential bottleneck for growth. This trend will prompt more customers to shop around for providers offering a better price/value ratio more often, eroding the contract renewal loyalty bonus that incumbent service providers might have enjoyed. The search for specialized talent will broaden the geography from the traditional locations to the global talent market.

Trend #3: Cloud Providers Leading in Service Satisfaction

Service providers who move their delivery infrastructure into the cloud also happen to perform slightly better in service model innovation and agility. Those IT providers who innovate do not necessarily gain a sustainable competitive advantage, but they are more likely to try harder in areas such as client service. Therefore, providers who are embracing the changes in the infrastructure technology landscape are also likely to remain competitive.

Trend #4: IT Operations Decentralize

The trend away from central planning is finally changing the structure of companies’ IT operations. Multinational companies are breaking up siloed internal IT operations and are unifying their entire IT capabilities into a single service center serving all internal departments. The implication for service providers is that they need to adapt and blend into the exceedingly networked global service delivery ecosystem, providing a variety of services to a number of end users: 24/7 and globally.

Trend #5: Cloud Readiness to Remain Low

If service providers aren’t moving to the cloud fast enough, customer adoption of cloud technologies remains even slower, with only a tenth spending more than 10% of their IT budget. This finding has an explanation, found in the next development.

Trend #6: Security Moves Front and Center

The number one reason for slow cloud infrastructure adoption revolves not around technology or business process challenges, but over security and privacy concerns. Because security is so difficult to pin down, most enterprises have adopted a wait-and-see approach to cloud adoption. This is why the focus on security and reliability over traditional hardware-based systems is the most promising route for cloud service providers.

Trend #7: Challenges to Multisourcing Remain

SIAM (Service Integration and Management) challenges for organizations that simultaneously use multiple service providers as part of a single end-to-end IT service center still remain largely unresolved: the majority are not satisfied with their current arrangement. As enterprises grapple with management overhead costs associated with multisourcing, suppliers will be pushed to provide more tailored solutions. Some suppliers will be dropped altogether as enterprises seek to streamline operations.

Trend #8: Government to Remain Off-Limits to Pure Offshore Services

Service providers are still expected to have a sizeable local footprint when providing services to the public sector. Offshore and nearshore providers will grow their global presence to locate delivery centers closer to their customers.

Trend #9: Cloud Readiness to Remain Low

India, Brazil and Poland lead the ranks of the top 3 most popular outsourcing locations, but with a market share of 55% even India (with a 41% share) is far from dominance. Regional service providers specialization and availability are likely to play a greater role as competition continues to influence the global ICT services landscape.

Trend #10: Client Service Offers Room for Improvement

With fewer than 2/3 of enterprise customers satisfied with their service providers in the Americas and the Asia Pacific and slightly over half in Europe and Middle East, client service is ripe for improvement. Service providers delivering faster response times, more tailored service offerings and service-oriented personnel improvements will be more successful compared to their peers who compete solely on lower cost.

KPMG 2015 Outsourcing Trends Infographic

KPMG 2015 Outsourcing Trends Infographic

Infographic by KPMG Institutes. The 2014/15 study covers the entire globe, providing buying behavior insights of more than two thousand customers from 24 countries with an estimated annual contract value of more than $10 billion.

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