Outsourcing innovation: Where do managed services fit?

The traditional outsourced IT model is increasingly out of sync with continuous transformation and innovation. Here's how to address it.

Can innovation be outsourced? 

It’s a seemingly simple question, but one with enormous implications as companies of all shapes and sizes embrace the importance of rapid digital transformation as the essential driver for ongoing business evolution, growth, and viability. 

Innovation, of course, fuels digital transformation, which is why company leaders today are urgently focused on fostering a culture of innovation from within while seeking external partners and technologies that give them an entrepreneurial jump-start. 

But amid all of this corporate lean-in to agile thinking and continuous evolution, churning away in the background are the old reliable managed services partners: The Information Technology Outsourcing (ITO) providers that have been keeping a steady hand on core functions like company data centers, servers, networks, and more—and almost certainly not innovating.

So, to reframe the question, these days every company needs to be asking: “Is my outsourcer innovating?” And for most companies, the answer is almost certainly a painful, “Nope—not even close.”

An outdated model

For two decades now, outsourced managed services have been a comfortable security blanket for many companies, solving headaches for just about every “C” in the C-suite by delivering predictable costs, economies of scale, risk management, hardware and software needs, and hard-to-find technology talent.

Yes, the stability and consistency of the managed services model is comforting, but increasingly, it’s also a major contributor to the inertia that is holding back innovation at many companies. ITOs came of age in a business era that was vastly different from today’s reality of rapid change, increased volatility, and disrupters on seemingly all fronts. 

Indeed, about the only thing that hasn’t changed in the business world is the managed services delivery model. That’s largely because ITOs have no incentive to change—and in many ways, they are incentivized not to change. Helping client companies become more agile and efficient threatens their revenue model—it’s a disrupter, alright, but to the ITO’s revenue stream. 


In their current form, managed services are designed to prevent organizations from realizing modernization goals.

Further complicating the picture for the traditional ITO model has been the emergence of innovation-friendly cloud-based solutions, as we outline in a new whitepaper. By some measures, moving to the cloud can eliminate at least half of what traditional managed services provide (which is one reason many ITOs are eager to manage cloud services for their clients). But as many businesses are learning, the cloud by itself is not some magic wand for digital transformation. Instead, companies need to rethink their technology strategies, improve internal skills, and reevaluate what they are getting from their managed services providers.

The CIO imperative

The managed services model was showing its age even before the pandemic reset everyone’s clock and sense of urgency on digital transformation. Post-pandemic, the model is now fully under pressure to innovate and evolve the types of services and value it delivers.

One harbinger: Nearly half of the chief information officers (CIOs) in a recent KPMG survey said the pandemic had permanently accelerated their company’s digital transformation efforts, but just 31 percent said their organizations were highly effective at using digital technologies to advance the business strategy.



Percentage of respondents indicating that the pandemic permanently accelerated digital transformation.


Percentage of respondents who said they experienced a budget increase after the start of the pandemic.

It’s a troubling gap that suggests a serious misalignment between business strategy and technology strategy. And it’s why the CIO role itself is changing rapidly, with CIOs moving beyond back-office management and taking a leading role on innovation and transformation initiatives. 

Today’s CIOs must be more strategic than ever, maintaining continuous alignment between technology and business goals. That means a regular evaluation of the benefits and utility of every technology and feature, how and why they’re used, and whether they threaten that essential continuity between business and technology strategies. Indeed, for many companies today, the technology strategy is the business strategy.

Your competitors all get the same updates at the same time as you; it’s what you do with them that will differentiate you.

The new managed services

Next, the CIO needs to take the lead on a thorough and honest evaluation of the company’s managed services partners. Managed services are not dead, but the traditional model is an impediment to innovation and simply not sustainable. CIOs can and should be asking more. They don’t need a partner to maintain business-as-usual, they need a transformation partner who can deliver enhanced services that streamline the company’s digital journey.

That will include rethinking managed services business terms as well. The cloud’s ascendency has given companies significant leverage to blow up the old model. New rules of engagement will take the form of more agile-driven agreements that include shorter timeframes, more flexible staffing, specific innovation benchmarks, and outcomes-based pricing. 

In essence, this evolving new enhanced managed services model is fundamentally redefining “services.” Successful service delivery partners will ditch the traditional “we only do Windows” approach and take a flexible, holistic view of their clients’ always-changing needs. An effective partner will drive very different outcomes than they have in the past.

In our survey, more than half of the CIOs said they actually plan to increase the use of managed services. Their challenge, then, will be finding a provider who embraces this enhanced new service delivery model, has redefined its services and business terms, and has the vision and capabilities required to truly be a partner for their client’s digital transformation journey.

Contact us

David Brown

David Brown

Global Head, KPMG Managed Services Principal, Advisory, KPMG US

+1 314-803-5369
Marcus Murph

Marcus Murph

Principal, CIO Advisory, KPMG US

+1 214-840-2671