Enterprise service delivery preferences are moving towards managed services

The transition from traditional outsourcing models to managed services

Operating models within companies of all sizes are shifting from traditional outsourcing arrangements to managed services delivery approaches. This shift is encouraged by legacy services providers, niche companies, and the Big 4 audit and advisory firms.

There’s a growing trend among enterprises to transition from traditional outsourcing methods to managed services delivery models. In contrast to traditional outsourcing, managed services refers to a strategic, outcome-focused collaboration that delivers tailored, industry-specific expertise and proactive technology and services management. Managed services are also offered as a subscription-based, as-a-service model.

This model supports enterprises in achieving their desired outcomes, emphasizing long-term value through deep insights and specialized capabilities. It fosters innovation, enhances efficiency, and secures a competitive advantage, marking a significant evolution from traditional IT and operational services support to an indispensable strategic partnership. At HFS, we see the rise of transformational managed services that represent a fundamental shift in how an organization does business, delivering significant strategic, financial, or operational value.

Enterprises want delivery at scale with a new set of services

For the most part, enterprises look to service providers to deliver at-scale back- and front-office services along with an increasingly complex set of risk, compliance, ESG, and cyber services. Managed services differ from traditional outsourcing primarily because their effectiveness is measured in terms of outcomes delivered, not costs deferred. In addition, a substantial amount of hard-to-find subject matter expertise is baked into delivering managed services.

With this background as a starting point, we explore how service delivery preferences differ using managed services versus transactional outsourcing or enterprise-delivered captive arrangements, both of which have been the go-to methods for enterprises for the last few decades. We based our analysis on our multiple in-depth discussions with enterprise functional and business services leaders (enterprise leaders) at Global 2000 companies in late 2023 and early 2024.

The current market state indicates cost arbitrage is still relevant, but emphasis on business outcomes is growing

Enterprise executives generally understand the challenge of balancing cost, expertise, and regulatory compliance. With this balancing act has come the need for onshore/nearshore, captive, and outsourced resources, particularly in managing day-to-day operations and fostering collaboration. This departs from legacy environments where one service delivery and operating model dominates. What this means is that companies are more open to a range of managed services options for a broad range of commodity and specialized services.

In our interviews, enterprise leaders stressed that while focusing on business outcomes and transformation is essential, there is still a need for managed services to reduce operational expenses. The consensus is that managed services should be at least 25% less expensive than in-house solutions. In some cases, with the application of technology, enterprises expect a 50% overall cost reduction over the long term. However, at odds with the cost reduction expectation is that onshore resources are highly valued in service delivery and differentiation, with these capabilities coming at a higher price.

The competing models in demand and supply

In our interviews, there was general agreement that the managed services industry has evolved and can address new, complex areas where technology platform delivery can be applied and where there is a mandate to scale services quickly.

New vs. legacy applications and services

Managed services can address these newer niche areas, but because of the lack of scale, driving significant cost reductions may not be feasible in the short term for some service providers. Reframing traditional outsourcing services in a new managed services model for legacy applications like F&A may drive desired cost reductions; however, only savvy managed services providers will know how to also deliver business outcome transformation.

Mid-sized companies may have opportunities to leverage managed services, but customization and size limitations may hinder scalability and repeatability. Large enterprises can achieve scale, but there is a tendency to keep services delivery captive, provided by in-house resources (or through traditional legacy outsourcing). Industries such as health care and mid-market retail and financial services, which don’t have a long history of legacy outsourcing and where highly customized solutions are common, may be strong targets for managed services in the short term.

Big 4 vs. legacy providers

The potential of the Big 4 as strategic partners for managed services is on the table for many enterprises, given the requirements for addressing new and complex service applications like risk management with a tech-forward delivery model. There is also the need to acquire as many services as possible from one provider instead of a fragmented approach across multiple vendors. Multidisciplinary Big 4 firms like KPMG can meet this increasingly complex requirement. They combine advanced technology and insights with deep domain expertise, industry knowledge, strategy, change management, and advisory capabilities.

“To create a sustained advantage through managed services, companies need a strategic collaborator, not a transactional processor,” says Dave Brown, Global Head of Managed Services at KPG. “That’s especially critical in knowledge-intensive areas like financial crime compliance and cybersecurity, where companies are trying to address constantly changing requirements while advancing their growth strategy. These areas are prime candidates for managed services.”

AI is a big game-changer in adding value and reducing costs for managed services

The surge in artificial intelligence (AI) and generative artificial intelligence (GenAI) has been considerable, with most enterprises eager to harness its potential. In this context, managed services can provide expertise and infrastructure for implementing AI centers of excellence and, more generally, managing AI implementation across various functions and applications, which may be costly and complex for companies to do independently. The impact of AI on managed services was repeatedly highlighted in our discussions with enterprise leaders as a top services area. Some of the specific areas where AI can be applied to managed services to significantly reduce costs and add value by providing better results in a compressed time frame include:

• Reconciliations in F&A with the use of Gen AI to facilitate records matching on an industrial scale.
• Collections and payables where a platform tech and AI-focused approach can be applied in early warning for delinquency, refined methods of categorizing borrowers, and optimized strategies for customer engagement to reduce defaults.
• Verification processes for commercial due diligence for partners, customers, and M&A targets that can be standardized and embedded in the platform.
• AI to preempt attacks based on behavioral pattern analysis, protect businesses’ sensitive data, and enhance security risk assessment for cybersecurity.

The Bottom Line: Managed services is not a rehash of the legacy delivery paradigm.

Enterprises now prefer managed services as the preferred approach to achieve business outcomes and drive transformation. Enterprises recognize the need for operating models that can reduce costs, quickly pivot, and continually evolve, combining AI and automation with expertise and application customization. These evolving operating models present an opportunity for enterprises to consider a new class of managed service providers.