Having worked my entire working life as part of IT industry I am amazed to see the way IT industry has evolved, from once being viewed as sweat shops/cheap labor to a place where its widely accepted and value recognized; the industry has truly come a long way. Personally, I have seen the industry from various perspectives – software engg to pre-sales to sales to strategy to talent fulfillment to operations and as delivery head and it gladdens me no end to say that IT services has been a torch bearer for Indian IT system and it won’t be entirely wrong to say that it actually laid the foundation of the multi unicorn status tech start-up arena in India.

The IT outsourcing landscape is evolving rapidly, with businesses increasingly turning to outsourcing IT services. The global IT outsourcing market therefore continues to see a surge in revenue, and it is projected to reach a staggering US$430.50 billion in 2023 (Statista).

This upward trajectory is anticipated to continue, with an annual growth rate (CAGR 2023-2028) of 11.07%, ultimately propelling the market volume to a staggering US$777.70 billion by 2028. These statistics highlight the robust and ever-expanding nature of the IT Outsourcing market, driven by the increasing demand for technology-driven solutions and cost-effective IT services.

The advantages of outsourcing are widely known and accepted, namely - cost savings, access to specialized expertise, and better customer satisfaction/engagement.

However, if you are a noob then the questions asked during outsourcing have changed from “Should we outsource” to “Where do we start” or “What to outsource” or “How to do it” to even more nuanced approach like “Keep the part above the neck” or “Total outsourcing”. Also, if your organization is growing fast then definitely it will be adding more applications/tools, which in turn makes your IT more complex, and unwieldy. This leads to the sweet spot of outsourcing so that a scale outsourcing provider does the heavy lifting for you.

However, there are numerous factors which are ensuring that the IT outsourcing business continues to grow more complex for every buyer and below are some of the main reasons:

1. Risk mitigation- Don’t keep all eggs in the same basket – Almost every fortune 100/500 has an active strategy/risk department who advises IT to de-risk, have more suppliers! Theoretically and from risk perspective its right advice however the cost of this decision is immense and would probably add a few basis points to bottom line for many companies. The number of handoffs that happen and the misalignment that can happened due to different development/testing/implementation approaches are all eating away at time to market. So, think carefully on who is doing what and pay special attention to the integration points. Also, lesser the number of vendors, better it will be.
2. Shifting baselines– Every IT service buyer wants clear RoI and most IT service providers are ready to do the same however the bone of contention always will be on veracity of the baselines to improve from. As business grown and adds to the IT real estate the baseline keeps changing and the pace is so big that for some parts of the IT estate a consistent 6–12-month data is a challenge while for other parts as well its noticed that getting a clear view is usually difficult and in the end, we use certain assumptions which will change. So, this adds a layer of uncertainty and fuzziness which the buyer needs to be ready to accept.
3. Contractual barriers– Nowadays we see a lot of churns in large contracts from one vendor to another and in these scenarios the contractual obligations typically make it tough to wrest control and at times expensive too. (Personal anecdote – early in my career I came across an incident where a firm had to pay onsite bill rates for offshore resources for transition, all due to a gap in the contract). There can be many other complexities – like transfer of tools, data, process details to more complex like IP transfer, minimum revenue commitment, volume discounts etc.
4. Accounting for buyer’s time– Be ready to devote some dedicated bandwidth to navigate internal corporate mayhem and working with vendors and ensuring that they get clear right of way. This is a critical step but often underestimated.
5. Working model– Work from office, Hybrid, Remote, Gig worker – although each is more stablished than 2-3 years back, but each has tons of nuances that need to be thought through. Also, in the current world context it has a major impact on timelines to start and deliver the project. Apart from that it has major cyber security implications and needs a lot of wherewithal to be ready with.
6. Real estate– Direct offshoot of the working model but in an ever-growing world we are coming across examples of talent in not so popular areas like Costa Rica, El Salvador, Argentina, Jordan etc. apart from obvious established scale places like India, USA, Canada, UK etc. Each comes with its own advantages and disadvantages from perspective of labor law, work styles, cost, and productivity.
7. AI – emerging dark horse – Create you AI roadmap ASAP

1. Low level/low value-added tasks/manual, repetitive tasks– Like the app on the phone era we are entering an AI solution era where for most repetitive tasks there is a solution built/being built/PoC stage/Can be built. So, the IT buyers need to change their thinking, not worry about what happens to existing workforce and processes and aim to completely automate. They will be doing a favor to the workforce and adding immense value to the business
2. Eliminating human dependencies– AI based tools can assess codes, find bugs, resolve issues, add to knowledge repository. So future transitions will be easier.
3. Better customer experience– An AI agent can provide better answers, doesn’t get tired or irritated 😊and always available. Success of any business lies in customer satisfaction and AI is one of the best paths available currently. It does have some chinks, but they will go away sooner than expected.
4. Cost efficiencies can be dramatic– 20% to 50% depending on what function is being AI outsourced. McKinsey study (The state of AI in 2023) also confirms that it’s the top consideration.   

The fate of legacy IT estate

The fate of legacy IT estates, often referred to as "legacy systems" or "legacy applications," is a topic of significant concern for many organizations. These legacy systems typically consist of older hardware, software, and technology infrastructure that have been in place for an extended period. The future of these legacy estates is influenced by several factors and can take various paths:

1. Modernization: Many organizations recognize the need to modernize their legacy estates to keep up with the rapidly evolving technology landscape. This may involve migrating from on-premises systems to cloud-based solutions, upgrading software to the latest versions, or refactoring and rearchitecting applications for greater efficiency and agility. Modernization efforts aim to extend the life of legacy systems while aligning them with current business needs.
2. Replacement: In some cases, legacy systems are so outdated and inflexible that organizations opt for complete replacement. This typically involves selecting and implementing new off-the-shelf software or custom-built solutions that better meet current requirements. The decision to replace a legacy system is often driven by the system's inability to adapt to changing business needs and the high maintenance costs associated with older technology.
3. Coexistence: Coexistence is a strategy where legacy systems continue to operate alongside newer technologies. This approach allows organizations to gradually transition to modern solutions while maintaining essential functionality provided by legacy systems. APIs and middleware may be used to facilitate communication between legacy and modern systems.
4. Maintenance and Support: Some organizations choose to continue maintaining and supporting their legacy systems, especially when these systems are still critical to their operations. This may involve periodic updates, security patches, and ongoing technical support to ensure that the legacy estate remains functional and secure.
5. Retirement: In cases where legacy systems are no longer essential and the cost of maintenance outweighs the benefits, organizations may choose to retire them. Data and functionality may be migrated to more modern systems or archived for historical purposes.
6. Hybrid Approaches: Many organizations adopt a hybrid approach, combining elements of modernization, replacement, and coexistence. This allows them to balance the need for innovation and agility with the practicalities of maintaining critical legacy functionality.
7. Compliance and Regulatory Considerations: In regulated industries, such as finance and healthcare, compliance and regulatory requirements often influence decisions regarding legacy systems. Organizations may need to invest in legacy system updates or replacements to ensure compliance with evolving regulations.
8. Cost-Benefit Analysis: Ultimately, the decision regarding legacy estates is often driven by a cost-benefit analysis. Organizations weigh the costs of maintaining and upgrading legacy systems against the potential benefits, including improved efficiency, reduced risk, and enhanced competitiveness.

It's essential to note that there is no one-size-fits-all solution for legacy estates. Each organization's situation is unique, and the approach chosen depends on factors such as business objectives, budget constraints, industry regulations, and the criticality of the legacy systems. Regardless of the chosen path, addressing legacy estates is a strategic imperative to ensure that organizations remain competitive and resilient in an increasingly digital world.

Conclusion

By embracing the advantages offered by outsourcing, such as enhanced efficiency, scalability, and access to expert knowledge, organizations can elevate their business processes to the next level. Recognizing these IT outsourcing trends and acting upon them promptly is crucial for businesses to keep pace with the ever-advancing world of technology.

Those who harness the expertise of third-party providers position themselves competitively in the market, maintain their competitive edge, and continually enhance their operations without the need for extensive internal investments in learning and implementing new technologies.

In the ever-evolving landscape of technology, IT outsourcing has become a viable solution for businesses across the globe. By entrusting their information technology needs to external service providers, companies can streamline their operations and focus on core competencies. Outsourcing IT functions can offer cost savings, enhanced scalability, and access to specialized expertise. However, as artificial intelligence (AI) continues to advance, it is reshaping the outsourcing industry. AI is revolutionizing IT outsourcing by automating repetitive tasks, improving efficiency, and reducing human error. From chatbots for customer support to machine learning algorithms for data analysis, AI is transforming the way outsourcing services are delivered. By leveraging AI capabilities, outsourcing providers can deliver faster and more accurate results, leading to increased productivity and customer satisfaction. Nevertheless, the rise of AI in IT outsourcing also raises concerns about job displacement and the need for upskilling the workforce to adapt to these technological advancements. In summary, IT outsourcing coupled with AI is revolutionizing the industry by offering improved efficiency, cost savings, and enhanced capabilities, while also demanding thoughtful consideration of its impact on the workforce.