Executive Summary: ISG Provider Lens™ U.S. Public Sector - Procurement BPO, Transformation, and Software Platforms
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Improving procurement in steps, from platforms to BPO to transformation.
ISG sees the U.S. public sector, especially state and municipal government agencies, making a strong and unexpected push toward change and improvement in software, systems, organizations and operations. This stems from unexpected change in their markets, constituencies, organizations and operations. It includes functional areas like procurement that had long been considered off-limits to almost any significant change.
Procurement software vendors and services providers report to ISG that they see substantial, unexpected interest, activity and growth in the number and size of deals with U.S. public sector entities. Several Leaders recognized in this study tell ISG that they experienced, on an average, more than 30 percent year-over-year growth in the number of U.S., state, and municipal government contracts signed in 2021, over 2020.
These providers report agencies seeking immediate operational improvements and cost reductions, and help in developing and implementing substantial, sustainable, organizational, and operational change and improvement.
Public Sector Change Drivers
ISG analysis indicates that this widespread Public Sector interest and activity in immediate change and improvement is driven by the following economic, social, and technological factors:
- Overwhelming pressure from cost and constituencies: Revenues are down, while expectations regarding digital business capabilities from users and suppliers have exploded
- End of useful life of key systems: It is no longer financially prudent to continue investing in upgrades and maintenance of some key systems
- Stabilizing remote/digital operational environments: An exodus of knowledge workers to remote locations with minimal training, varying connectivity and unpredictable work environments has strained existing systems and skills
- Rapid decrease in skilled labor: In 2021, the fastest-declining U.S. labor population was that of state and local government workers
- Data efficiency and compliance: Legacy organizations, systems and other factors limit data use across functions and organizations, while fostering environments that are insecure and noncompliant with local, state, and federal regulations
For decades, U.S. public sector entities were able to continue as they were, with minimal pressure for change. The digital revolution fast-tracked by COVID-19 has pushed these entities to a point, where doing nothing is no longer an option.
Developing Procurement Market Trends
What ISG sees suggests – strongly – is that through 2022, U.S. public sector entities will increasingly spend on procurement, digital transformation and procurement BPO, and create a boom in procurement platforms and solution spending. We see this developing as follows:
- Procurement software platforms enable, immediate significant improvement, mostly through standardization of data, system/program interfaces, user experience, and policy application and enforcement. Platforms that include consistently- and effectively-applied automation, enhanced with machine learning and natural language processing, can substantially improve existing operations while identifying areas for further optimization. Case studies suggest that first-year operational savings average between 15 and 30 percent. Properly implemented and used, platforms provide a solid foundation for strategic, sustainable, measurable and continuous improvement.
- BPO services can provide similar advancement for procurement organizations. But the concept of outsourcing remains a sensitive topic for most U.S. government agencies, and for many other public sector organizations as well. Constituencies equate outsourcing with privatization, and have had too many negative experiences to approve of outsourcing. Politically, outsourcing is also a dangerous topic to introduce, as for many it implies some loss of employment or control over sensitive data. That being said, a well-managed BPO brings too many improvement to ignore, including immediate cost improvement and predictability, long-term process and cost control, and a path toward strategic improvement that preserves and advances cost-effective business operations regardless of future change.
- Transformation services will continue to enjoy interest, but less investment, by U.S. public sector entities through 2022. This, in large part, is because few are ready to transform. They need to learn what can be done and can then be guided toward that transformation through a series of tactical improvements. For most, that will begin with new procurement software platforms; for some, it will begin with limited procurement BPO engagements. After 2022 – likely toward 2025 – U.S. public sector entities will more fully embrace full-fledged digital transformation of procurement organizations and operations.
Services and Software Paths to Market
ISG sees continued and accelerating growth in revenue for procurement service providers and software vendors through 2022. Areas where we see the most opportunity include the following services for public sector clients:
- Systems, data, and integration and management services
- Change management (including business process reengineering)
- Function and process automation
- Training for digital advancement
- Security integrated throughout solutions as multiple services
The scope of opportunities should drive significant advancement in provider and vendor go-to-market approaches, including technology partner and channel partner expansion, in order to support rapidly, a widely growing demand.
The partner aspect is particularly important when dealing with U.S. government agencies. Most acquire software and services through value-added resellers, and systems integrators (SI), as well as through traditional consulting firms. It is becoming more normal to deal directly with software vendors and outsourcing service providers, but that often requires the establishment and growth of new relationships. The faster path to the public sector market for most providers is still through established, contracted reseller and SI relationships.
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