Why Are Businesses Outsourcing Digital Transformation?

From software development to payment processing, experience enhancing data analytics to AI-driven customer service bots, the expertise needed to run a modern business is increasingly specialised.

No business that hopes to survive and thrive in the modern economy can afford a low-tech approach, yet the requisite skills are in high demand and expensive to acquire.

As a result, our latest IT and business services M&A market report shows that the technology outsourcing sector is booming.

So, what is driving this uptick in deals? Are businesses simply looking to cut costs, or is digital transformation driving a consolidation of innovation?

Hiring partner organisations to provide a specific service, whether that’s hospital catering or company recruitment, is nothing new.

It leaves managers free to focus their resources on their core business and has been gaining a foothold both in the private and public sectors for decades.

But as organisations big and small continue on their roads to digital transformation, the approach is picking up considerable speed in the tech sector.

Futurum’s 2018 Digital Transformation Index found that just 40 per cent of companies had established a dedicated digital transformation team. The remaining 60 per cent, it said, were turning to outsourcing.

Part of the reason is that the specialist skills needed to develop and deploy the technologies needed to drive change are expensive and in short supply.

Demand for data scientists and data engineers in the UK, for example, has more than tripled over the last five years, yet, according to the Royal Society, but training and education have not kept pace.

Calling for a UK-wide strategy to address the impending skills gap, Professor Andrew Blake, chairman of the society’s working group on data science, said: “Capturing, interpreting and being informed by data can radically transform a business, so it is only natural that employers are catching on to the potential of hiring data experts.

“The… British economy has high demand for people with data skills, particularly at the advanced end of the spectrum, where businesses are crying out for professionals to unlock the potential of new technologies.”

As is true across disciplines including AI, machine learning, and blockchain, demand for skills is only set to increase – in fact, the World Economic Forum estimates that, globally, 133 million new specialist IT roles could emerge in the next two years.

The outsourcing route, then, is an obvious solution.

As our IT and Business Services report shows, the IT outsourced services field is currently the most thriving segment of the tech market, accounting for 33 per cent of the whole IT and business services sector in the second half of last year.

Of the 125 transactions made between June and December, a significant number were large deals that involved software outsourcing and payment processing firms, and provided global reach.

PayPal, for example, became the first foreign company to be granted a Chinese payments licence when it acquired a majority stake in the country’s online payments business, Gopay.

During the same period, Arizona product engineering firm, Indecomm Digital, bought Avantica, a Silicon Valley software outsourcing firm with development centres in Costa Rica, Peru, Bolivia, and Colombia.

Taking operations further offshore, California-based cloud company MINDBODY acquired India-based software firm Simplicity First in a bid to build a bigger global workforce.

These deals are indicative of a ground change. Businesses big and small are turning to outsourcing firms that can provide the specialist expertise they need to future-proof their operations.

A survey from MIT Sloan Management and The Boston Consulting Group in 2017 found that 85 per cent of businesses believed AI would play an important role in their ability to stay competitive. Access to specialist expertise, then, is essential.

Technology is changing every aspect of how we do business, from interacting with customers to taking their payments. But the skills needed to facilitate this change are lacking.

Companies cannot afford to be left behind by the digital revolution, and this is driving the growing outsourcing trend.

But as with all things tech, things do not stand still for long, and it will be interesting to see what happens as the next, “digital native”, generation takes its place in the workforce.

Hampleton Partners is at the forefront of international mergers and acquisitions and corporate finance advisory for companies with technology at their core. Hampleton’s experienced deal makers have built, bought and sold over 100 fast-growing tech businesses and provide hands-on expertise and unrivalled advice to tech entrepreneurs and companies which are looking to accelerate growth and maximise value.

With offices in London, Frankfurt, Stockholm and San Francisco, Hampleton offers a global perspective with sector expertise in: Artificial Intelligence, Autotech, Cybersecurity, Digital Commerce, Enterprise Software, Fintech, Healthtech, HR Tech, Insurtech and IT & Business Services. 

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