The High Five for Outsourcing Growth

Many companies are pressing the reset button on their outsourcing spending these days.

That’s not to say there is less interest in outsourcing. On the contrary, companies are signing outsourcing contracts in record numbers, according to the latest ISG Outsourcing Index™. The sharp rise in demand, however, is not being accompanied by a corresponding rise in spending.

As they work to solidify their digital business strategies, companies are favoring shorter contracts that give them more flexibility to adapt to new technologies and rapidly changing market conditions. Not only that, but the expansion of cloud computing, X-as-a-Service offerings and automation solutions are driving down the cost of outsourcing overall.

Despite these seismic shifts in the marketplace, our research shows there are five industries, in particular, that should have the pedal to the metal when it comes to outsourcing. The five industries – consumer durables, oil and gas, insurance, banking and utilities – are the only ones that fall into this sweet spot: those with the greatest potential to increase their adoption of outsourcing and their willingness to spend more on it.

According to data from the ISG Momentum® Market Trends & Insights® 2015 Vertical Report, each of these industries has a solid record of outsourcing spending and a fairly large number of companies that are not currently outsourcing. They also show a particularly strong demand and readiness for digital innovation and are looking to outsourcing service providers to help them apply the latest advances in automation, cloud computing and analytics as a way to boost their capabilities and reduce time-to-market for new products and services.

The application of innovation is playing out differently in each of the verticals.

Oil and gas companies, for example, have an urgent need to reduce costs in the face of low oil prices and oversupply. And, while this segment has a below-average outsourcing penetration rate of 40 percent, oil and gas companies—along with companies in the consumer durables and utilities industries—are showing a growing enthusiasm for the Internet of Things (IoT) as they work to drive down production and distribution costs.

The utilities industry, meanwhile, has powerful spending potential and a lot of room for outsourcing growth with only a 52 percent penetration level. Companies in this sector are seeking outsourcing service providers to, among other things, help them develop applications that enhance customer loyalty and employee engagement.

Outsourcing in the consumer durables sector—which has a healthy per-company average spending appetite—is picking up notably as enterprises leverage the industrial IoT to change their businesses from selling not only products but outcome-based services.

Companies in the banking industry—which represents the greatest market opportunity for outsourcing with an increasing penetration rate and increasing per-company average spend—are likely to commit more of their budget toward building mobile and online platforms to help them attract and retain customers.

Meanwhile, the insurance vertical has one of the best outsourcing penetration growth rates among all verticals and a positive compound annual spending growth rate. These companies are tapping the data capture and analytics capabilities of service providers to better understand customer preferences for product development.

To find out more about the growth of these five verticals and the outsourcing industry in general, read the executive summary of the ISG Momentum® Market Trends & Insights® 2015 Vertical Report. And contact me to discuss how research and insights from ISG can help enterprises and service providers find their way in a changing market.