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The impact of the talent scramble on the outsourcing market

As well as severe supply-chain disruptions and energy-related issues, the immediate post-COVID recovery period has seen a noticeable shortage of key talent which is having a considerable and detrimental impact across a wide number of sectors.

The scramble for talent

In the UK, where the end of freedom of movement following Brexit has exasperated the impact of the pandemic including the so-called ‘Great Resignation’, a shortage of lorry drivers, triggering panic buying, has lead to mile long queues for petrol at filling stations. As a result, the UK Government mobilised the British army to assist with the transportation and delivery of fuel to various parts of the country.

But this shortage of talent is not restricted to transportation, nor to the UK.

A recent Future of Work report from management consultant Korn Ferry found that by 2030 more than 85 million jobs could go unfilled due to the lack of skilled people to take them. Even now, talent qualified engineering and IT are particularly scarce, with global research outfit Gartner recently reporting the lack of skilled talent as a leading factor inhibiting the adoption of key technologies across core domains such as compute infrastructure and platform services, network, security, digital workplace, IT automation and storage and database.

Why the talent scramble?

Emerging technologies such as AI, cloud, Big Data and 5G have been particularly affected by the talent scramble just as demand for skills in these domains is at an all-time high.

Reasons for this include the pandemic-induced online ramp-up in response to stay at home orders driving significant direct-to-consumer business online, as well as a rapid increase in the adoption of work from home (WFH) and hybrid models. All underpinned by a massive adoption of cloud technologies. In fact, many enterprises had already started digital transformation programs and the pandemic acted as an accelerant. Other scarcity drivers are the imminent retirement of baby boomer workers as westernised democracies face aging populations, coupled with lower numbers of computer science students coming through education systems across the globe. Furlough schemes have also played a part.

How is this affecting the outsourcing market?

The talent scarcity is affecting all the major markets in which outsourcing providers operate (and locate their delivery centres) including the UK, Europe, India, SE Asia and the Americas.

Competition for talent leads to increasing wages and benefits. This is now filtering into rate card and pricing discussions between outsourcing providers and their customers, with many providers reported to be actively seeking rate increases for existing contracts, and bidding higher on new deals.

This is flipping the outsourcing paradigm from one of cost reduction or, at the very least cost containment, to one where year-on-year cost increases (over and above consumer price inflation (CPI)) look set to be passed through to customers. This impact is being felt across a range of outsourcing domains such as Application Development and Customer Experience Management (CXM) as well as business process outsourcing domains such as Finance & Accounting and Procurement.

How should outsourcing customers respond?

Customers should consider carefully requests for rate card increases from their outsourcing partners, reviewing current contractual pricing mechanisms, as well as benchmark and market data in order to see where current contracted rate cards sit across the spectrum in the market.

Customers should also consider broadening the conversation with key third party providers – often there is appetite for some financial engineering e.g. in order to smooth budgets whilst funding innovation or transformation projects, as well as exploring other options such as spinning out a captive or business services organisation so as to limit capital expenditure whilst locking in preferential prices and performance standards over a longer timeframe.

We are aware of a number of providers actively seeking such deals so do contact us if you are considering this, or more generally if you are looking to renegotiate an existing or enter into a new outsourcing or managed services agreement.

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