Forget the Great Resignation, we’re in a Great Big Mess. Time to wake up to our new reality…

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Rewind exactly two years… we were shutting down the civilized world so quickly we could barely process what was happening to our lives, our families, our children, our jobs – even our pets. There was this eerie week where many of us just carried on as normal as the realization sank in that our world was changing dramatically, and nothing would be quite the same again. 

This is the calm before the storm

Just as we’re peering out of our caves and rubbing our bleary eyes at a world recovering from a two-year pandemic… a world with the most vibrant investment climate ever, people gleefully hopping employers for salaries they had never dared even dream about, companies making stacks of money which they barely know what do to with… and all we were worried about was a bit of wage inflation and our pathetic attempts to combat carbon emissions. Suddenly everything has changed again… and changed very differently.

The reality

Firstly, we’re not going to predict how this ends. Noone can. But we can draw up scenarios of what will happen to the world and our industry as the reality of what is happening sets in:

The global economy will hurt, and IT and business services are caught right in the mix. There is no way around this. The question is to what extent, but the prospect of a looming energy crisis, a humanitarian crisis, great uncertainty, rising inflation, and a crashing Russian economy will significantly reverse the rampant growth that emerged from the pandemic recovery. 

Wage inflation + attrition + economic tightening is already putting huge pressure on services firms. Some will struggle to survive this. Demand for immediate support for all types of IT and business support services is higher than ever, with the hurry to the cloud the desperation to modernize systems to remain effective in the virtual economy. As if this wasn’t challenging enough, throw in the uncertainty of military conflict in Ukraine and neighboring states, which fuel the continuity of European enterprises. The cost and capability to execute basic services are being challenged like never before.

Enterprise clients of services will struggle to meet rising prices. The services industry has done a fantastic job keeping services pricing steady over the last couple of decades. Whatever hardships arose – such as the 2008 crash, wage inflation in critical service delivery locations such as India, Philippines, and Central/Eastern Europe – these have always been offset by increases in delivery efficiencies, automation of IT and business services, and advancements in technologies such as conversation AI and smart tools that convert analog activities, processes, documents, etc. into digital formats. However, the rising cost of services is driving service providers to increase prices to stay profitable, and many enterprise clients will struggle to meet these increases. The services industry has reached a dangerous tipping point between cost-effective delivery and simply becoming an unattractive proposition for clients.

Many industries are highly vulnerable to high energy prices. Industry sectors such as industrials, infrastructure, automotive manufacturing, telecommunications, real estate development, and public sector financial services will experience margin pressures like never before due to the looming energy prices. Combine this with the painful impacts from the Chinese slowdown, the fallout from the Ukraine crisis, unpredictable supply chain disruption, and rising stagflation in the US and Europe, their ability to meet the rising prices of IT and business services critical to keep them functioning in the virtual economy will be severely tested. Companies like BP, Shell, Equinor ASA, Nestle, Bunge, Imperial Tobacco, Volvo, Daimler Truck, Renault, and VW are just examples of enterprises strongly impacted by their ties and investments in Russia and Ukraine. Sectors that are less vulnerable are private banks, consumer staples, pharma, healthcare, utilities, upstream oil and gas, and IT.

Many new services engagements will be delayed as many enterprises absorb this new reality.  We are already seeing hesitancy from enterprise leaders in signing new services deals until they have a clearer picture of the landscape, their own financial position, and the selection of locations and partners to deliver the work.  While we came into this year expecting a further 10% increase in IT and business services spending, we think this will shrink to something closer to 5% amidst the uncertainty.

The Bottom-line: This completely unnecessary and bloody mess that Russia has created by invading Ukraine will likely have a crippling effect on Ukraine’s emergence as a technology hub and a rippling effect on global technology and business services.

Debilitating Ukraine’s software engineering talent. Ukraine’s IT services exports accounted for nearly US$5B, higher than its income from wheat exports, Ukraine’s #1 export category before Russia decided to invade. Now the entire country and its thousands of software engineers face an uncertain future, literally not knowing whether they’ll live to see another day. Global software engineering firms like EPAM and Luxoft (now part of DXC) have thousands of talented Ukrainian engineers…but at this time, we can just wish and pray for their safety. We have been talking daily with many Ukrainian tech professionals who have stable satellite internet access and are determined to keep doing their work.

Perception of Eastern Europe as a delivery hub is fragile. Depending on how long and widespread this war gets, western multinationals are likely to get nervous about their Eastern European delivery centers that border Russia and Ukraine, i.e., Romania, Hungary, Slovakia, Poland, and Belarus. The threat of war might stall new decisions to outsource to these countries and/or expand captive centers.  This could be of significant benefit to India and the Philippines, the two global offshore regions with the strongest “talent at scale” reputations.

Be prepared for some tense conversations with your service providers. The concerns in Europe might shift more work towards offshore locations such as India, but that will likely result in exacerbation of the talent supply issues amid increasing wage inflation and never seen before attrition levels. Service providers are already struggling to keep their operating margins in line with shareholder expectations. This will mean price increases that they will need to pass to unwilling customers dealing with an inflationary economy.

Dealing with the situation might force a pause on long-term enterprise innovation. Enterprises saw light at the end of the Covid tunnel, but this war complicates things even more. Rising oil prices from Russian sanctions will further drive inflationary pressures across the western hemisphere. Will this push enterprises to focus on operational cost reduction to save CAPEX? This might mean a slowdown in large-scale innovative initiatives (perceived to be risky), but a pick-up in short-term tried and tested (read commoditized) services. For instance, we were finally seeing a positive movement towards real investments around sustainability, but will this war force us to forget climate change for some time?

Another test for battered supply chains. The covid-impacted supply chains will also be tested once more. Russia is not only an oil country but also exports iron, steel, aluminum, copper – raw materials for many goods-producing industries. Investments in making supply chains resilient will likely continue might even see an even higher uptick given the unrelenting pressure on supply chains.

A major test for the virtual economy as we deal with uncertainty.  The last two years have seen the true birth of the global virtual economy, where location becomes irrelevant for so many situations, including service delivery.  The hurry to the cloud is fuelled by this new virtualization of business, and most companies are barely two-thirds of the way there.  What we didn’t account for was a military conflict in a location such as Europe, and how this could destabilize everything.  Stock markets held up during Covid as we were able to factor in the impact of the pandemic and eventual return to normality.  However, military and geopolitical issues, where the very energy that keeps industries running is in question, which creates nothing but uncertainty

Posted in : Business Process Outsourcing (BPO), Cloud Computing, IT Outsourcing / IT Services


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