On-demand outsourcing: the new norm or another flash in the pan?
As companies adapt to a consumer-driven marketplace, on-demand is a trend that is emerging across every sector. This is often driven by the fact that customers want what they want how they want it.
Essentially, companies are using on-demand outsourcing as a way to cost-effectively scale their business in response to changing market conditions. It gives large organisations the flexibility of their smaller, more nimble counterparts, while smaller companies can avoid making large capital investments up-front, and instead, effectively pay as they go. There are three main reasons why a company might look to on-demand outsourcing:
- To correct for natural peaks and troughs in demand. Most breakdown repair companies, for example, rely on third-party contractors to ensure they hit customer service targets 100% of the time. Last Christmas’ Black Friday delivery chaos is a good example of where on-demand arrangements providing an important safety net.
- To cater for specific demand niches. Companies are increasingly outsourcing their customer service centres either for out-of-hours calls or when, in times of emergency, an unusually high volume is expected. This has become the norm for many mid-market financial services companies.
- To support new growth areas of the business. Organisations looking to expand into new markets, for example, may outsource back and middle office functions as they test the water or while they get in-house support off the ground.
Who’s doing it?
Although on-demand outsourcing is being used across a number of sectors – from financial services to hospitality – manufacturing and retail are the two sectors which stand to benefit most from this type of arrangement. It is unsurprising then that these two sectors are at the centre of the buzz around the phenomenon.
Large manufacturing industries – like the auto and oil & gas components sectors – are increasingly outsourcing the quality testing and checking of their goods when hit with a big order. Similarly, if companies are having a very good year that they think may not last, or are operating in a project-based industry like construction, they will look to outsource some of their key processes as a more cost-effective way of addressing short-term spikes in demand. Retailers are also outsourcing in this way. Large retailers, like Boots and John Lewis, usually own about 80% of the distribution from central warehouse to store, but outsource to a third party in response to peaks in demand – for example, during the Christmas trading period. On-demand outsourcing not only helps to cater for these demand spikes, but also allows the company to keep large initial costs at bay.
Companies will typically retain a small proportion of their work with an outsourced provider, even when they don’t have a demand spike. This way, providers have an ongoing relationship with the company, understand its workings and its demands, and can deliver when called upon at a moment’s notice. In many cases – and this is something we expect to see more of as on-demand outsourcing grows – the third-party provider will outperform the company outsourcing to them, until eventually business-as-usual becomes outsourced.
The future is bright
While on-demand outsourcing is on the rise, one segment of the market is set for unparalleled growth the outsourcing of white collar processes like finance functions or even HR.
In 2014, the total market for on-demand white collar outsourcing in the UK was £67 million. By 2017, we expect this figure to have more than trebled. This exponential growth will be driven by increased cost-cutting on functions seen as non-core within organisations, and by increased uptake within the public sector. It will come as no surprise that cost-cutting – the strategic battleground for private companies in hyper-competitive markets – is driving growth in outsourcing. Increased uptake within the public sector, however, is a recent and fascinating development.
Local authorities are leading the public sector charge towards on-demand outsourcing. This is evident in areas where there is uncertainty over future policy and a preference for more fluid arrangements. When big decisions are being delayed – like in revenues and benefits processing, where the potential introduction of Universal Credit is preventing wholescale outsourcing and investment in in-house capabilities – local authorities are outsourcing caseloads to organisations like Northgate Public Services.
Because local authorities perform similar tasks from one region to another and because they are not in direct competition, outsourcing firms like Northgate can cater to their niche requirements while still making a profit. Outsourcing a number of ‘recurring but one-off’ functions is also increasingly popular. This is where third-party suppliers are brought in to investigate benefits or entitlement claimants through cross-referencing different government databases annually.
Low adoption of on-demand white collar outsourcing to date has partially been down to a lack of innovation in many large incumbent suppliers. These organisations are used to lift and shift outsourcing – taking on existing functions wholesale and making incremental improvements over time, rather than plugging volumes into an already existing factory of white collar functions. Many of the major public sector suppliers are yet to establish an offering in this space despite growing demand. For these slower moving companies, it’s a case of the carrot or the stick – innovate to seize a slice of that £200m pie or watch new players come onto the scene to gobble up your share.
Undoubtedly, instances of companies using on-demand outsourcing have grown in recent years. This is down to sheer convenience in many cases; with organisations both large and small using on-demand arrangements to help them respond to erratic market conditions or test new business moves. White collar functions are a fertile area for growth in the on-demand portion of the market –and as incumbents and insurgents rush to capitalise on this growing demand, we expect the buzz around on-demand outsourcing to sound ever louder.
About the Author
Vivek Madan is a Partner and the Global Head of the B2B Services practice at OC&C Strategy Consultants. He works with clients to address fundamental strategy and change questions, leading the firm’s largest global projects in this space.