The Current State of Outsourcing: Key Statistics and Facts from a Data Analyst‘s Lens
Outsourcing – the practice of engaging external vendors to handle business functions traditionally done in-house – has rapidly evolved into a multi-billion dollar industry today. As a data analytics practitioner tracking global markets closely, I have witnessed outsourcing mature considerably – from basic factory floor offshoring to sophisticated technology partnerships and integrated Business Process-as-a-Service solutions.
In this comprehensive expert guide, I dig deeper into latest outsourcing market data, trends and models shaping its future trajectory.
Quantifying the Global Outsourcing Industry Boom
Recent statistics clearly showcase the massive growth and value generation achieved by the outsourcing sector:
As per data from Grand View Research, the total global outsourcing market was valued at $92.5 billion in 2019. Amidst cost pressures and digital transformation pursuits, it is projected to grow at a brisk compound annual growth rate (CAGR) of 8.8% from 2020 to 2027.
More specifically, KPMG projects the global information technology outsourcing segment to expand at a CAGR of 5.4% till 2025 (KPMG). IT outsourcing alone could be over $442 billion by 2027 as per Precedence Research analysis (Precedence Research).
Business process outsourcing contributes substantially to the GDP of major offshoring hubs like India and The Philippines:
I have captured some insightful outsourcing statistics in the data table below to quantify its phenomenal growth:
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|Global Outsourcing Industry Projections|2020|2027|
|Total market value|$92.5 billion |$207.2 billion|
|IT Outsourcing Market Value|$314 billion|$442.3 billion|
|Customer experience outsourcing market value|$35 billion|$96 billion|
Clearly, outsourcing represents a thriving multi-billion dollar sphere of commerce worldwide today – one that cuts across sectors and geographic boundaries.
Which Business Areas Are Most Suited To Outsourcing?
Outsourcing encompasses a diverse range of back-office work, customer-facing processes and even mission-critical technology projects. Extensive research into buying patterns reveals these as being among the most widely outsourced services globally:
Information Technology
IT outsourcing offers fertile ground for cost savings and operational flexibility. As per Everest Group, 65% of all infrastructure management services are outsourced today (Everest Group).
Applications management has lower penetration – indicating room for accelerated adoption. The chart below shows the percentage of enterprises outsourcing specific IT workloads:
Business Process Services
Business processes like finance, HR, customer care, procurement and supply chain management are prime candidates for outsourcing leverage business process-as-a-service (BPaaS) and software-as-a-service (SaaS) solutions.
As per NelsonHall, the global BPaaS market could swell to ~$180 billion by 2027 – expanding at over 11% annually (NelsonHall). Companies seek bundled deals encompassing process consulting, benchmarking and transformation – not just tactical outsourcing.
Business Impact Services
Specialist research & analytics capabilities also lend themselves well to outsourcing models. Domain experts worldwide now offer niche services – from personalized medicine insights using genomic analysis to credit risk modeling leveraging alternate data.
The KPO segment alone is expected to grow 12% yearly touching almost $70 billion by 2027 as per projections from Mordor Intelligence shown below:
Choices Abound Among Top Outsourcing Destinations
Certain countries have strategically positioned themselves as centers of excellence to deliver outsourcing services globally across the above domains. Abundant skills, advanced infrastructure, cost advantages and favorable policies drive their ascent.
India continues its leadership in global technology outsourcing with a 65% market share of offshore business process outsourcing (BPO) (Outsource2India). The country holds a 33% share of the $200 billion global sourcing market as per industry association Nasscom.
The Philippines now captures a quarter of BPO market share. As per UK Trade and Investment‘s estimates, the industry employs over 1.3 million Filipinos across IT services, healthcare information management, software development, animation, game development and more (UK Trade & Investment).
Central European Hotspots like Poland and Czech Republic offer abundant STEM talent leading European ITO market with expected CAGRs over 15% (Tholons). Krakow Poland houses centers for Google, IBM, State Street, JPMorgan delivering multilingual IT and advanced R&D services.
China has also emerged as an AI, engineering and biopharma outsourcing hub with 5G connectivity and IP security advances expediting its rise. China‘s technical outsourcing market could swell to ~$150 billion by 2025 creating over 5 million domestic jobs according to consultancy Kearney analysis (Kearney).
Clearly companies now enjoy much latitude across locations to access targeted skills, data sets and localized market connectivity critical for global success.
Outsourcing Decision Drivers – Beyond Cost Savings
Outsourcing conversations often center around wage arbitrage and tactical labor cost savings. However I have observed maturing motivations among clients – choosing outsourcing partners aligned to long-term innovation and growth strategies.
The chart below classifies primary outsourcing decision drivers as per a Deloitte 2016 survey into three major buckets (Deloitte):
While cost factors remain prominent, quality and flexibility considerations also grow in importance to leverage outsourcing strategically.
Companies now seek best-fit partners that align with their business priorities and culture – not just the cheapest service provider. They demand flexible, on-demand capacity from outsourcing vendors to address fluctuating market needs.
And they value specialized skills like data analytics, AI/ML capabilities that enhance decision making and spur innovation across the business. With C-suite digital transformation mandates, outsourcing has evolved far beyond a mere cost control lever.
Outsourcing Risks – Going Beyond Stereotypes
Despite its many documented benefits, outsourcing continues to carry perceived risk baggage among the uninitiated. However simplistic fears around job losses or communication gaps only reveal partial truths.
In my advisory experience, overlooked nuances around ownership, priorities and data control pose bigger challenges. Outsourcing deals can flounder without clearly defined customer-vendor role clarity upfront aligned to desired outcomes.
For instance, a rushed transition of ERP support staff could erode system stability without adequate knowledge transfer planning and documentation rigor. Vendor staff juggle multiple client priorities that may divert attention from ad hoc special requests unless adequately incentivized.
Offshored medical claims processing could also expose sensitive patient health information (PHI) if information security controls fall short of HIPAA mandates. Location-agnostic cloud solutions necessitate robust cybersecurity governance given intensified data breach risks.
However prudent outsourcing decisions factor in these considerations upfront while targeting appropriate processes. They limit over-dependence on specific vendors and geographies to mitigate concentration risk.
And continuous coordination rhythms align both parties to desired quality, risk and innovation expectations as the outsource engagement evolves. Outsourcing thus necessitates a watchful partnership mindset rather than an abdication of operational responsibility.
Outsourcing Pricing Trends – outcome-based models proliferate
Traditionally outsourcing pricing relied predominantly on efforts and resources deployed on a project. However the industry is shifting towards outcome-based pricing models to better calibrate value delivery.
As an example, business analytics outsourcing fees now include performance incentives on accuracy of demand forecasts or success of targeted marketing campaigns. Health insurance claims processing incorporates penalties for erroneous reimbursements falling outside agreed error tolerance levels.
Such pricing mechanisms allow clients to pay basis business impact aligned to context. They incentivize solution providers to collaborate more holistically ensuring their commercial interests directly hinge on customer biomics improvements and growth.
Everest pegs outcome-based pricing penetration at 5-10% of total contract value today. But increased adoption of such models seems imminent as the post-pandemic economic climate demands tighter ROI justification for every enterprise expenditure (Everest Group).
Cloud infrastructures, data connectivity, automation and blockchain now equip outsourcers to offer innovative risk-reward based pricing aligned to client solution requirements. The future outsourcing landscape looks primed for value-based collaborative commerce enabling organizations to dynamically calibrate desired outcomes.
Best-in-class Outsourcing Results Demand Multi-pronged Governance
Passing the operational buck to vendors while chasing unrealistic cost savings makes outsourcing outcomes suboptimal if not outright harmful. Best practices necessitate proactive governance across four critical pillars:
1. Aligned vision: Both parties must continually revalidate problem statements, objectives, success metrics and challenges to prevent divergence
2. Touchpoint rigor: Daily standups, sprint reviews and escalation rhythms that surface dependency roadblocks early
3. Technology infrastructure: Secure information exchange, access control and communications platforms
4. Incentive structures: Reward creativity, change embracement and outcome-based pricing
For example, Diageo, the global drinks giant saved over £150 million over 7 years by outsourcing IT infrastructure and application services to TCS leveraging such structured governance practices (BusinessInsider). The outsourcing program delivered productivity enhancements of 40%+ through optimized hardware utilization and self-healing automation.
Proactive coordination rhythms enabled both parties to dynamically recalibrate improvement roadmaps ensuring continued value unlocking. Robust governance helped translate ambitious outsourcing vision into tangibly consistent execution excellence.
Outsourcing Horizons – What Does The Future Behold?
As outsourcing market maturity accelerates, creative hybrid models harnessing open talent pools, automation and smarter risk-sharing seem poised to dominate:
Crowdsourcing gains: Online freelancer platforms like Toptal and Andela are redefining outsourcing access leveraging on-demand global talent clouds
Intelligent automation inevitability: Software robots handle ~40% of outsourced F&A processes today – expected to exceed 60% by 2024 (Blue Prism)
Cybersecurity prioritization: Data connectivity across outsourcing ecosystems warrants investments in next-gen protection like UEBA (user behavior analytics)
Co-creation mindsets: Partnerships spanning design agencies, legal firms and startups drive product innovation fillingcapability gaps
Location dependencies thus dissipate giving way to capability-focused cost-effective solutions optimized outcomes. This allows internal staff to redirect energies towards activities delivering maximum competitive differentiation aligned to company mission and culture.
The data signals an outsourcing tipping point that makes offshoring a cornerstone strategy for global enterprises rather than just a siloed cost play.
FAQs
What are some typical business functions suited to outsourcing? Why?
Typical outsourced business functions span:
Information technology – Software development, testing, system administration, helpdesk/tech support and infrastructure management offer fertile grounds for skills arbitrage and efficiencies
Business process services – Finance, HR, supply chain and contact center processes lend themselves well to process standardization, automation and workload consolidation using offshore captives
Advanced analytics – Access to distributed data corpuses allow offshore statisticians, economists and data scientists to develop sharper insights around risk, fraud, demand patterns etc.
Common outsourcing motivations revolve around cost savings, specialized expertise access, flexibility and focus on core business priorities.
What risks should companies watch out for with outsourcing?
Outsourcing risks that warrant proactive mitigation include:
Transition failures causing business disruption without systematic knowledge transfer
Communication gaps stemming from geographic/time zone barriers needing escalation mechanisms
Data security around customer, employee or patient privacy requiring robust cybersecurity protocols
Quality failures from pretending cultural context does not matter
Loss of visibility and control on outsourced operations making course corrections difficult
Managed well, outsourcing fuels enterprise growth and competitiveness. But overlooking people, process and technology integration aspects breeds chronic partnership dissatisfaction that starts small but cascades exponentially.
How is outsourcing expected to evolve in the coming decade?
As per industry projections, outsourcing models in the 2020s decade will see dominances of:
As-a-service consumption: Burst capacity, specialized skills leveraged on-demand from global talent platforms
Intelligent automation: Analytics and software bots handling 40% to 60% of repetitive, rules-based processes
Value-based pricing: Fees aligned to business outcomes via creativity incentives and risk/reward sharing
Crowd-enabled innovation: Tapping open innovation marketplaces and freelancer talent clouds
Thus outsourcing looks primed for location-agnostic, on-demand capability consumption from decentralized specialty providers – from fintech algos to video production freelancers!
Conclusion
The global outsourcing wave shows no signs of abating as technology dismantles traditional location-dependent operating models. By 2027, total outsourcing market size could exceed $200 billion worldwide.
As outsourcing expands from IT to complex business processes, risks around quality, data security and continuity warrant careful governance practices. Pricing mechanisms move towards outcome-based models to incentivize sustainable value creation for clients.
And creative hybrid models emerge blending automation, specialty platforms and niche freelancers to drive innovation outsourcing.
The data signals outsourcing acceleration across domains – not just a cost play but a lever that unlocks structural flexibility, performance edge and mission focus for competitive futures.
