Is outsourcing the new restructuring?

Research we carried out in late 2021 suggests that the sudden surge of interest in outsourcing— which began during the peak of the COVID crisis in 2020—continues. Why?

Prior to the pandemic, outsourcing had a poor reputation among many clients. The promise of the 1990s, which saw a significant shift in the way organisations thought about their operating models, drawing a clearer distinction between core/non-core activities and outsourcing the latter, had given way to poor quality work, rigid service-level agreements, and frustrated clients. But for the last decade, a quiet revolution has been going on: Standards have improved, and buyers and suppliers are more experienced and have a better understanding of what they’re looking for/delivering. Ironically, some of the most effective outsourcing contracts have been those where ordinary employees were barely aware their “colleagues” worked for a third party. That being said, it was still a surprise to see, as we did, in September 2020, that 38% of clients expected that more of the work currently done by them in-house would be outsourced in the future. Subsequent research during the course of 2021, and most recently in November, put the proportion slightly higher, at 41%.

In contrast to this, the level of client interest in restructuring was much lower than expected. Restructuring services are typically countercyclical: The jump in demand for restructuring during the 2008 financial crisis, offset the loss of more regular professional services work, so most people—including us—anticipated a similar pattern this time around. But it soon became obvious that that wasn’t happening: In the middle of 2020, just 10% of client organisations we surveyed said that they were more likely to use consulting support in the restructuring space; 14% said they were less likely to do so.

Of course, the high levels of interest in outsourcing and the disappointingly low investment in restructuring work may just be a coincidence. But we don’t think so.

The pandemic was a different type of crisis. From its outset, the financial crisis was always going to bring in permanent change to banking regulation, so making equally permanent changes to banks—restructuring—made sense. But the COVID crisis has been one of where the hope of normality returning has been consistently deferred. Initially, client organisations expected things to go back to what they were. Many still do (travel companies, for instance), while others are struggling to work out how the constant upheaval of the last two years, which may or may not be coming to a close, will have a long-term impact on behaviour (witness the discussions about office/hybrid/home working). In the latter context, it makes sense to keep one’s options open. And this is what outsourcing allows for: While restructuring typically involves selling off parts of organisations and closing others, you can bring processes back in-house and terminate an outsourcing contract should circumstances change. Outsourcing is also scalable: In the summer of 2020 an airline would have needed much smaller back-office functions, so why not shift some of them to a third-party who can then take on responsibility to respond to growing workloads as the number of flights increases? As is widely recognised, furloughing and other government support schemes reinforced a certain amount of waiting-and-seeing, too.

It’s possible, as the permanent changes wrought by the pandemic become clearer and as the winding-down of government support forces organisations to make decisions they’ve been postponing, that 2022 is the year we’ll see restructuring make a comeback. But with 75% of client organisations having more ambitious corporate goals than pre-COVID, the focus looks set to be more on investment and growth.

Having (probably) missed the boat where this crisis is concerned, the big question remains whether restructuring will make a comeback during the next crisis, or whether it’s in the process of going for good.