Last year, the global economy lost its post-pandemic luster. Much of Europe entered into a recession or near recession even as the cost of doing business continued to rise. This was, and continues to be, driven largely by a combination of supply chain cost increases due to rising energy prices, record unemployment lows and continued wage inflation. The result: massive margin pressure that leads to a renewed focus on cost optimization.
But we have been here before. So what is new?
Adding more seats into onshore or near-saturated nearshore locations is no longer a viable answer. The same macro combination of inflating wage costs and talent scarcity applies. This is why we expect companies in Central Europe to rely more heavily on business process outsourcing (BPO) in the coming years.
Enabling Enterprise Decision-Making
Enterprises in the DACH region have traditionally been reluctant to broaden their corporate services delivery ecosystems. Germany’s works councils are one of the major factors. Unlike in the U.K. or the U.S., for example, where only certain sectors have a workers’ union presence, many German companies have an elected works council. The primary focus of these councils is to safeguard the interests of employees and collaborate with the employer on work-related matters.
Works councils have rights defined by law and are involved in decisions regarding work conditions, hours, salaries, workplace policies and more. They play a significant role in promoting dialogue between the employer and employees. The somewhat unusual economic times we find ourselves in appear to be producing a meaningful shift in works councils’ perspectives. This signals an opportunity for German companies to tap into the benefits of modern BPO solutions.
Sourcing as a Solution
The combination of a talent shortage, wage inflation and a recessionary economy is forcing some companies to rethink their old ways. Companies in DACH are opening their minds to the possibility that outsourcing partnerships can help them solve the twin challenges of: 1) lack of access to the digital, data and GenAI-related skills, which are in short supply, and 2) lack of workforce capacity to focus on higher-value activity.
Labor arbitrage has long been at the foundation of the outsourced services value proposition, and it continues to play its part, but the material impact on cost, quality and experience in contemporary service partnerships is too great to ignore. Digitization of business processes that automates and rebalances the workload between human and virtual resources is giving companies competitive advantage.
By sourcing some of the work associated with routine and transactional business processing activities, companies can lower their cost base through labor and digital arbitrage. While the DACH market is fairly mature in IT outsourcing (ITO), business process outsourcing (BPO) has seen less traction compared to markets in the U.S. and U.K. But it has become an increasingly relevant option for enterprises in DACH over the last two years to outsource processes that are common to all businesses, e.g., Human Resources, Finance, Procurement and processes that are specific to a sector, e.g., payments processing, loan application handling.
Does Your Strategy Include BPO Partnerships?
Companies are faced with little alternative than to pivot away from their heavy dependence on captive strategies and toward a more balanced equation that augments internal capability with the best of what the outsourced marketplace has to offer. And organizations in DACH need to move now to avoid falling behind.
This doesn’t mean a wholesale strategy shift. But it does mean enterprises need to take a proactive stance to the reality that technological evolution continues to move rapidly and access is scarce to the skills needed to realize its benefits.
All indications are that, moving forward, the hallmark of competitive business services leaders will be the mastery of this balancing act and the ongoing orchestration and maintenance of an ecosystem of healthy technology and service partnerships.
ISG helps decision makers around the world navigate the changing IT and business services landscape. Contact us to find out how we can help you.
About the authors
Jill Stabler
Andreas Fahr
Dedicated to building strong, long-term relationships with each client, Andreas uses his broad perspective on the chemical, life sciences, health, transportation and public sectors to help you find the right IT service providers, to meet your business goals and get the most value out of your operating models and technology partnerships. He is excited to apply his deep knowledge of product digitization, IT management, digital transformation programs and governance best practices and to new sectors and clients in the DACH region.
Past achievements at ISG
In his long career at ISG, Andreas has drawn on his expertise in sourcing strategy and IT optimization to help clients identify and utilize the right vendors and digital tools for their organization. Andreas first joined ISG in the automotive sector, and became a partner focused on manufacturing in the EMEA region, where he:
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Led the transformation of a multi-brand OEM’s IT program from inception—assessing the future services landscape and crafting a financial plan—through execution and transition, resulting in the OEM’s adoption of a new, standardized service portfolio.
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Implemented an innovative technology RFP framework for a large enterprise client, which became a much duplicated and well-known standard within the global client organization and provider space.
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Supported a client in founding and growing a new digital business unit—where the number of ISG employees on the project has quadrupled to keep up with the unit’s success and rapid expansion.
