Phil Fersht, CEO and Chief Analyst, and Elena Christopher, Chief Research Officer from HFS, recently hosted a webinar with David. J Brown, Global Head of KPMG Managed Services, and Ron Walker, US Leader, Managed Services, to explore paths to evolve managed services from “transactional” to “transformational.”
HFS has long called on enterprises to look beyond the legacy labor arbitrage mindset because this is a dying game and lacks the value creation needed for a business to grow in the digital dichotomy.
The world of outsourcing is going through a big shift, where the legacy arbitrage model of the last quarter of a century is on life support and will be replaced by technology arbitrage.
– Phil Fersht, CEO and Chief Analyst, HFS Research
It is imperative that enterprise business and technology leaders take the lead in driving this mindset change and invest time and resources into adopting emerging technologies. However, they shouldn’t do this alone. Beyond their peers in business and technology, they must leverage their managed services partners to continually evolve new operating models, generate data insights, and drive outcomes like revenue growth, debt reduction, and margin improvement. For their transformative efforts to take hold, a joint team of business, technology, and partners can form what KPMG calls a dream team of experts to unleash value from new ideas, innovation, and technologies.
Our latest HFS Pulse data based on ongoing input from 604 Global 2000 enterprises reveals that less than 20% of surveyed enterprises are building new sources of value by leveraging data, insights, and technology in their everyday operations. However, trends indicate this number will likely increase to more than 30% in the next two years (see Exhibit 1). From a managed services firm’s perspective, organizations are waking up to the importance of value creation.
According to David, “Costs are still number one; however, we’re finally starting to see organizations look at the value they’re going to get out of their service providers or ecosystems that go beyond cost. This is the sentiment we see from our clients. They say it’s awesome you can take out costs, but this transformation journey is continuous, and we need to understand how you can help us on an ongoing basis to bring additional value.”
Sample: 604 executives across Global 2000 enterprises
Source: HFS Research, 2024
Enterprises are looking for new ideas to drive business growth and support enterprise innovation beyond cost efficiency.
Managed services must be part of an enterprise’s playbook for sustaining transformation and driving strategic priorities by accessing new technologies; therefore, it’s about going beyond cost efficiencies and finding new sources of value.
Enterprises are keen to transition from legacy full-time equivalent (FTE) models to more fungible outcome-based models. Nevertheless, resistance across the value chain has led to the slow adoption of these innovative approaches. David explains, “Reasons for this slow transition include comfort with status quo due to familiarity with FTE-based pricing, trust issues with new pricing structures, ambiguity in contract structures, and bureaucratic hurdles.”
Our research from 600 Global 2000 enterprises echoed this sentiment, wherein 80% of respondents plan to renegotiate their existing third-party business process management (BPM) services contracts. Further, the data shows that 53% preferred payment based on business outcomes, and 47% preferred to stick with the FTE model for payment.
We deal with sophisticated organizations, and they have sourcing teams that follow specific pricing models that can be measured, so it’s hard for them to move to a new model. We’re working on ways to translate these outcome-based models into progressive contract structures.
– Ron Walker, Managed Services US leader at KPMG US
Overall, there is a reluctance to challenge the status quo, and organizations are not highly incentivized to change things. There is a pressing need for transparency with outcome-based models, pricing methodologies, and corresponding gainshare mechanisms. HFS data reveals a trend to renegotiate existing contracts, and this may lead to an opportunity to reorchestrate business partnership models.
Elena Christopher, Chief Research Officer at HFS, remarks, “The best way forward is to build on current transaction-based models while moving toward more innovative models that provide the flexibility and agility to navigate the digital dichotomy. As trust within the ecosystem deepens, enterprises can extract more value from these new dynamic partnerships.”
Furthermore, managed services providers can offer the necessary incentives through strategic collaborations, defining clear performance metrics, and focusing on outcomes such as revenue growth and debt reduction.
Phil highlights a pivotal moment in the evolution of managed services, driven by groundbreaking technologies like generative artificial intelligence (GenAI). He observes, “Cutting-edge technologies like GenAI have a seismic impact on how we operate, do business, and bridge the gap between consumer technologies and enterprise applications. We believe GenAI creates a new S-curve of value creation, driving as much as 70% of productivity.” This is an inflection point for managed services between people-driven and technology-driven value. We call this the emergence of the Generative Enterprise™ (see Exhibit 2).
GenAI brings a buzz, similar to previous technology trends like robotic process automation (RPA). However, what sets it apart is the remarkable rate of adoption owing to its ease of use. This has led to a heightened visibility among C-suite executives and customers, all seeking to navigate the pros and cons of this inflection point.
Source: HFS Research, 2024
KPMG concurred with findings in the S-curve, as Ron notes, “The S-curve holds, with GenAI surpassing RPA in adoption. GenAI offers a more cost-effective and straightforward implementation.” Both customers and the C-suite can leverage it to their benefit, resulting in a more immediate impact on the organization. Nevertheless, constraints exist, including regulatory challenges, responsible AI considerations, and technological limitations related to chip production speed and processing capabilities.
Surprisingly, our research from 104 executives across the Global 2000 revealed that the top three skills crucial for success in GenAI are problem solving, adaptability, and critical thinking skills. Meanwhile, development skills, or prompt engineering, ranked far below. In this context, managed service providers can supplement these missing skills. Furthermore, the respondents identified customer operations, sales, and business development and strategy as top business functions where GenAI is expected to generate substantial value in the next 12–18 months. In a notable example from KPMG, AI is employed to help clients with advanced forecasting. KPMG employs a combination of data scientists, sophisticated tools, algorithms, and learning capabilities to enhance its team’s expertise. This approach doesn’t merely constitute outsourcing or managed services but rather represents an augmentation of the client’s capabilities in that specific domain. GenAI elevates this to the next level. Highlighting the efficiency of GenAI, Ron points out, “It utilizes this data to generate board reports or financial statements within seconds or minutes, a task that would otherwise consume one to two weeks to complete.”
GenAI is revolutionizing the managed services model by venturing into areas traditionally outside the scope of tech support and efficiency enhancement. It shifts the focus toward augmentation, significantly reducing manual, transaction-intensive tasks and enabling more strategic, high-level work. This evolution marks a significant change in how technology is applied to business processes.
HFS Pulse data findings of 104 enterprises actively exploring and deploying GenAI across the Global 2000 highlight that enterprises increasingly seek providers that deliver more than technology capabilities. They now actively seek partners with process expertise, industry expertise, and advisory capabilities (see Exhibit 3).
Sample: 104 Global 2000 executives
Source: KPMG and HFS Research Managed Services Outlook 2023-2024
Ron agreed with the observation that having process expertise is of significant importance, emphasizing the need for specialization in processes specific to an industry to deliver true value. He elaborated, “For instance, the energy sector differs significantly from the consumer-packaged goods industry.”
Managed services is more than just people or technology; it combines both, complemented by process expertise within specialized industries. Elena highlights, “For instance, having process expertise in finance and accounting is valuable, but being able to do this in the context of financial services or manufacturing is unique. So, this is where you marry process and industry to create high impact.”
In the old model, people were very much the commodity, and technology provided value in the mindset of partnerships of managed services. Now, we’re moving to a partnership model where technology is the commodity and people add significant value.
Managed services of the future is no longer about cost arbitrage but about unleashing value for the enterprise with new ideas, technology, and innovation. Enterprise leaders need to foster a mindset change within their organizations and leverage managed service providers to drive this transformation.
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