Volatile Financial Market Makes the Outsourcing Industry Anguish
If business leaders and outsourcing advocates had been lulled into a false sense of security by the Wall St’s long-term surge, they received the share market equivalent of a cold shower this month.
Volatility returned to a complacent market with vigor seeing as the CBOE Volatility Index spiked effortlessly to record multiyear highs as the Dow Jones Index experienced a sharp and brutal correction. Since then, volatility has ebbed and flowed while remaining well above levels seen in 2017 while stocks have rebounded, with both the S&P 500 and Nasdaq composite enjoying for their best weeks since late 2011.
A shift in market sentiment has clearly taken place, and this may impact the outsourcing industry over the next 18 months, even though the underlying fundamentals remain largely unchanged.
Why Volatility Matters
Outsourcing’s ecosystem is constantly changing. However, its growth is contingent on the establishment of sound legal and economic foundations. In today’s globalized economy, outsourcing as an economic growth driver is highly exposed to the financial market, and any turbulence can quickly lead to the unraveling of outsourcing’s value equation.
According to Goldman Sachs, since 2010 the world economy is outperforming most of the economic predictions for the first time and chances are there that this trend will continue. Goldman Sachs has also stated that the strength of global growth is dependent on lots of factors across most advanced and emerging economies.
5 Key 2018 Outsourcing Trends that Depend on Demand Predictability
As outsourcing contracts are typically multi-year agreements, demand and funding predictability is key determinants of their success. Volatility in financial markets creates uncertainty and destroys value, putting outsourcing initiatives under stress.
Here are the five major outsourcing trends that may be disrupted by financial market volatility:
- Cloud Computing
- Machine Learning and robotic process automation
- Rise of Freelance and Gig Economy
- Digital Transformation
- Companies focus more on value and less on cost
1) Cloud Computing
Many outsourcing firms and client organizations are migrating to the cloud. Cloud computing enables outsourcing companies to offer enhanced functional capabilities and key process areas with better management of client problems and requirements.
Analysts are predicting that by 2018, the cloud-computing sector would be valued at $200-billion, up from $121 billion in 2015 estimates. The cost-effectiveness and ability to offer customized solutions to clients are paving the way for outsourcing firms. Major outsourcing clients such as Amazon, IBM, and Accenture are likely to see increased levels of competition amongst outsourcing service providers.
However, the cloud runs on massive investments in distributed infrastructure and bandwidth. These capital-heavy investments are put at risk by volatility in financial markets, which may cause them to be delayed, deferred or canceled.
2) Machine Learning and Robotic Process Automation
Robotic Process Automation (RPA) is emerging as an economically viable innovation, particularly in areas involving pattern recognition through processing massive volumes of data.
Process automation is delivering enhanced productivity and greater efficiency at increasingly lower costs while retaining maximum quality in the process. Similarly, many firms are ramping up their adoption of robotics to replace humans and speed up repetitive tasks.
One example is the adoption of IVR in call centers to provide self-service access by customers to basic FAQ information while connecting them to a human operator in the call center to solve more complex questions.
Artificial Intelligence (AI) is becoming more affordable and more responsive in a range of implementation environments, making it a viable option in outsourcing services. AI offers the opportunity to increase supplier margins, enhancing revenue generation capacity and reducing staff liabilities, while generating significant savings for clients.
As with cloud computing, however, development costs remain significant for AI-based machine learning and robotic process automation leaving it exposed in times of economic uncertainty.
3) Rise of Freelance and Gig Economy
Growth in the Gig Economy and freelancing are spreading into outsourcing. Many firms are adopting this model and recruiting skilled and experienced workers to handle tasks from remote locations as part of their outsourcing services to clients.
This trend is expected to continue over the upcoming year. However, in times of economic turbulence, fewer people are willing to accept the loss of certainty that accompanies freelance work, and this may jeopardize the rising acceptance of the freelance model amongst outsourcing agencies.
Similarly, blending freelancers into an outsourcing environment adds a layer of complexity in managing and coordinating contracts that fewer outsourcing companies may be willing to accept in volatile times.
4) Digital Transformation
Technology is evolving the way traditional companies communicate. Companies are aggressively embracing online services, social media, and mobile marketing. With some 68 percent of the companies are now outsourcing their SEO services according to Hubspot’s 2017 Small Business Trends Survey, the age of digital transformation is upon us.
This outsourcing model is delivering improved visibility and lead generation capacity for client firms. However, marketing budgets always target cuts in times of economic difficulty and volatility in financial markets often triggers a collapse in business confidence, which potentially could slow down both the pace of digital transformation and the speed with which it is adopted in different areas of the corporation.
5) Companies Focus More on Value and Less on Cost
While most businesses outsource IT and other support services for strategic and cost reasons, the actual focus is the value of the services provided by these IT/ITes firms.
Today’s outsourcing clients are highly educated and aware of the potential problems associated with outsourcing. This, combined with the need to deliver outsourcing solutions is driving the trend to provide better value to clients by outsourcing firms, with increased levels of transparency. Businesses may well pay more for high-quality service providers, but they will see the value in adopting this model.
Volatility in financial markets places pressure on outsourcing client entities to focus on managing costs, reducing long-term strategic flexibility. This volatility may also constrain client access to working capital as bank credit lines, and financing is often linked to share market value. Hence a sliding share market can trigger a decline in access to finance.
For their part, listed outsourcing companies also tend to find themselves driven by share market volatility to focus on managing their costs, constraining their ability to offer flexible value-based outsourcing packages.
The Case for Volatility
While volatility is accepted as being terrible for predictability and business confidence and investor sentiment, it can also stimulate innovation and new technology adoption.
When conventional approaches fail to deliver the outcomes necessitated to survive turbulent times, it often stimulates the adoption of less well-tried innovations.
For outsourcing, the same economic factors that are putting pressure on investments in AI, machine learning and the gig economy may also ultimately stimulate their wider adoption both to save costs and to reduce overhead commitments.
The return of share market volatility has been an unwelcome reminder of uncertain times in the past. Markets, which had become accustomed to a steadily rising share market, were shocked by recent plunges and min-recoveries. For outsourcing companies, this volatility represents a series of white-water rapids, which agile players will navigate successfully, while less adroit firms may find their rosy plans and projects overturned and floundering in the rapids. One point to remember is that every episode of turbulence eventually results in renewed economic vigor, which could power outsourcing forward into the future.