Gravy trains invariably come to a halt at some stage in their journey, and labor-driven IT and business services, fueled by lower wage regions and robust delivery models are poised to change beyond all recognition in the next few years. However, this doesn't mean today's winners have to become tomorrow's also-rans, if they are smart enough to make discreet investments in the disruptive business models of the future, and gradually introduce these into their traditional models.
The Indian majors have defied their critics to sustain their labor-driven model beyond all expectations - and are in a great position to blend their models to cater for the coming disruptions
You've probably been reading from us that we see several of the Indian majors continuing to carve out a commanding position in the global services market, with their market share doubling in the last four years, in addition to their leading revenue and profit generator, TCS, making the HfS IT Services Top 10 for the first time.
And while there are the usual detractors claiming "India will run out of runway and prices are getting too competitive to sustain this growth", they are still able to maintain their growth numbers consistently in the double-digits. The disruption and havoc the Indian majors have reaped on the incumbent service providers has lasted much longer than many were predicting, and that tail continues to happily wag for them and enterprises continue to gobble up their wares. And with 60% of IT services, and 80% of back office business operations still sitting inhouse, this gravy train has a few more stops left to make on its journey.
When change to the traditional outsourcing model comes (and it is coming), there is no reason why some of the Indian majors cannot challenge whatever new wave of disruptive providers come at them. You only need to look back five years to see how quickly the landscape can shift. There is no "new breed" of service provider on the horizon today, which is an obvious candidate to offer services that are lower-priced than the Indian firms, however, I do see a multitude of significantly disruptive forces already at play that are going to change this market beyond recognition in the medium to long term:
Disruptive forces already on their way to change the services landscape indelibly
In short, there are some very real threats to today's entire services model underpinned by one factor: client needs are becoming less labor-intensive and more focused on higher-value business needs. Let's look at six examples of how the new breed of services will emerge.
1) Cloud vendors: Firms like Rackspace, Google and Amazon are already subbing to the major providers to deliver data center solutions for enterprise clients. There is nothing stopping them from moving up the value chain to the client end, displacing the Indian majors altogether as more IT operations become automated and less reliant on human intervention. These firms already have the SME market saturated and can easily move up into the enterprise space once their standardized solutions become "acceptable" at the enterprise level, and less customization is needed. In addition, IBM is making huge bets on selling more cloud-driven platforms to clients, that can replace traditional outsourcing models, which could bear significant fruit for the firm in the future.
2) Robotics-driven vendors: This is more of a threat to current BPO delivery models, where advances in robotic automation software are enabling clients to reduce their "already offshored" services by a further 20-30% by replicating manually operated processes in robotic software solutions. We are seeing this with certain emerging enterprise clients, and some service providers are already piloting robots with clients. As robotics become more mainstream, because of client requirements, those providers with strong ability to replace labor with robotic process automation are going to be at an advantage. This will carve out the bottom layers of many BPO operations and will also change the help desk and IT support functions in ITO as well as BPO.
3) SaaS solutions: Advances in SaaS products often negate the need to outsource entirely, especially where back office processes are becoming dated and obsolete. This is already having a real impact in areas such as accounts payable, payroll, indirect procurement, employee performance management and benefits administration. Specialized solutions such as Concur, Cornerstone, Ultimate and Coupa are already making great strides in these areas, which are not labor-intensive with their delivery. As these current specialists find more ways to integrate together the opportunities for integration services may decline as well. Clients already require software development and API skills in emerging areas like PaaS to support their solutions, with is creating new opportunities for ambitious service providers willing to invest in these capabilitles - and challenges for those persisting with servicing legacy environments.
4) SaaS + services + crowdsourcing: Solutions like LegalZoom in the US provide a lot of self-help managed services that traditionally went to outsourcers, especially in the SME space. There's no reason why these companies can't move up to the large enterprises as clients get better at "servicing themselves."
5) CMO-driven digital services: We estimate 15% of IT deal flow is already being driven from the CMO's office in digital areas that have strong social media requirements, are analytics-driven with a significant mobility requirement. Most of this technology is already available today and the requirements on the service provider are to "digitize" existing business processes. Hence, the winning providers in digital will be those that can develop relationships and delivery teams that can work for CMOs and other business units, not solely IT departments—not a direction in which many Indian majors have oriented their sales and solution teams.
6) "Born in the cloud" clients: Most of the smaller, growing firms today are doing everything in the cloud, and many new capabilities they add are sourced. We would wager that when we look at the Global 2000 firms in 5 years' time, many of them will operate like this. Their needs are going to be very different from the labor-intensive services of today, where clients will expect most operations to be "pay by the drink" and any people-based support will be highly analytical and value-add.
The Bottom-line: Labor is the diminishing variable in services - and tomorrow's winners are already making investments to provide alternative offerings
The winners in tomorrow's market need to adapt constantly to the developing needs of enterprise clients to stay ahead of the game. The market is going to be hugely different in 3 to 5 years and we are likely to see a new set of providers emerge that can balance the above variables to succeed. But one variable is certain: the use and provision of labor is the one cost on the decline in the services industry, and those providers which fail to recognize this (and some are already guilty) will gradually fade away.