Since outsourcing emerged during the mid-20th century, there have been a number of shifts in the ways in which it has been approached and how it has benefitted organisations. With significant shifts in customer demands, technological advancements and evolutions in business needs, outsourcing has provided a means for organisations to drive efficiencies and cut costs. In this article, we’ll delve into how outsourcing has developed over time.
First generation deals tend to be more characteristic of the early stages of the outsourcing industry, namely more transactional. First generation deals are focused on obtaining lower costs or better service from the in-house operation or engaging a third-party service provider to outsource discrete business functions or processes. Given the higher risks with an initial outsource, the contract is often focused on control, limiting the supplier’s ability to innovate, and the KPIs (key performance indicators) are often focused on mirroring what was done internally. These deals often lack a significant focus on strategic alignment and advanced technology integration seen in later generations of outsourcing.
First generation outsourcing deals are therefore mainly characterised by:
Second generation outsourcing deals represent an evolution from the early, first generation outsourcing arrangements, and are characterised by a shift towards more strategic and collaborative partnerships between organisations and their service providers. By the time the initial contract from the first stage of outsourcing is expiring, the customer is likely to be a more mature buyer. Having learnt the lessons from their initial decision to outsource, they are ready to have a richer discussion on the potential for a more transformational approach. The fear and uncertainty when initially outsourcing will have passed and setting out the strategy for the second generation deal is likely to include:
Third generation outsourcing deals are characterised by a greater focus on digital transformation and business value creation. This generation is known for a rise in the integration of advanced technologies and a more profound transformation of business processes. This involves comprehensive, end-to-end solutions and partnerships that go beyond cost reduction to drive innovation, competitive advantage, and customer-centricity. Some of the key characteristics of this evolution are:
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