Experts in the global services terrain

Three factors are reshaping the demand profile for application services, changing the services in fundamental ways. The first factor is best exemplified by digital technologies. Basically these are new technologies that create new business opportunities in enterprises. Inside of this would be cloud, mobility, social, big data and the IoT. They are made possible because of the innovations and disruptive technologies that are coming into the marketplace. There is an important aspect to these opportunities, which significantly impacts the services industry.

We can refer to this first factor of demand for application services as “greenfield” opportunities. In this space, is there is no provider incumbency and there no ecosystem is in place. Because these demand areas (cloud, mobility, big data, social and IoT) are new and never been done before, they are closely linked to a client’s business agenda driving growth. These greenfield app services are often funded and driven by the business and new money, and the sponsors are very senior-level executives within the organization.

Business units are highly involved in these app initiatives because they hold potential for market share gains or competitiveness shifts. And they’re new and exciting. It’s always more fun to work on initiatives for growth, and it’s much easier to spend greenfield money than it is to take money away from the brownfield existing ecosystem.

This source of app demand services is really exciting for CIOs and service providers because it’s using technology for what they want technology to do. In my next blog posts, I’ll discuss the other two factors in the profile demand for application services.

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The uncertainty of Brexit is not good for any industry. This is particularly true for the global services industry, since it is based on aligning labour forces, regulatory and legal concepts, and economics across multiple countries. When one country faces such a fundamental discontinuity, it and others intertwined with it are certain to need time to determine how to realign against the new normal.

Our initial reaction to the impact of Brexit on the global services industry follows. We will publish new advisory notes as the UK government releases more details about its exit strategy.

Overall picture:

  • It is possible, but unlikely that Article 50 (A50) of the Lisbon Treaty is invoked very soon. This would mean that for two years there will be no significant change. When A50 is invoked, exit negotiations can potentially run until the next UK General Election. That is a period of three to four years of no real regulatory change. In both of these scenarios we will see the status quo largely unaffected for up to four years but investment decisions on-hold or shelved.
  • Slightly longer term, another Scottish independence referendum would be likely to succeed. Also possible is an independent Scotland being fast-tracked into the EU. For Scotland the appetite for investment north of the border looks good. Who would have thought a week ago that nearshoring would have meant Scotland?
  • Initially, demand for outsourcing services through new contracts is likely to stagnate, as UK companies digest and await government strategy on Brexit. Renewals of existing agreements are also now facing uncertainty – in particular, crafting legal frameworks that adapt to the changing conditions will be challenging.
  • The drop in the value of the Pound will increase sales of British manufactured goods and, thereby, boost the sector. We may see increasing demand for outsourcing contracts to power manufacturing growth within the UK. Service providers will need to show agility and innovation to take on this demand to make the most of an uncertain market.
  • Currency fluctuations will cause volatility in service providers’ contracts and business from the region. This could lead to different ways of hedging and potentially contract renegotiations (those that were pan EU).
  • Outsourcing by the large and mature UK government sector will initially slow down pending Brexit strategy decisions. The sector, however, also has to deal with severe budget cuts. The combination of Brexit uncertainty and budget cuts will enhance demand for services by outsourcing to companies such as Atos, Capita, and HPE/CSC that are already well established in the market in the UK.
  • The picture in the financial services market is a complex one and for the purposes of this discussion, we consider the UK-headquartered financial institutions. On the one hand, financial institutions might see some easing of EU-originated regulatory requirements. This could lead to changes in scope of existing outsourcing contracts. On the other hand, there will be a lot of uncertainty in the sector about its relationship and business with the EU. This could boost demand for cost-cutting outsourcing as banks batten down the hatches and brace themselves for a bumpy ride over the next few years. BFSI will also look to monitor risks better in very uncertain times. We may see increasing investment in big data for managing and monitoring risks.
  • International outsourcing companies will be assessing the number of staff that they have working in the UK and EU countries and will track Brexit to ensure that they have optimized the spread of people who serve EU countries and the UK, which accounts for the largest share of the market in Europe. They will watch for clues relating to how work visas are likely to be sorted out and how this impacts the onshore-offshore model – particularly for staff that might need to travel between the UK and European countries.
  • Uncertainty is often a trigger for economic slowdown and ultimately a recession. The usual outcomes of cuts in expenditure and job losses cannot be disregarded with consequences such as lowering of demand in HR-related services such as RPO. However, it may help increase use of contingent labour and we might see an acceleration in MSP.
  • As the approach to Brexit becomes clearer, we would also expect to see an increase in projects required to alter operating models and data storage/access to comply with the new regulatory constructs. In the interim, many current transformation projects which involve activities that might be impacts by Brexit will be delayed or managed to allow flexibility to adapt to changing conditions.
  • Once the dust has settled (and hopefully quickly), EU and UK leaders are likely go past campaign style rhetoric such as “out is out” and negotiate in order to moderate uncertainty through interim trade deals to allow business and commerce to flow. If the UK economy slows, it will tend to have negative impacts on others as well, so hopefully there should be some natural momentum to get key issues sorted in an expedited manner. However, given we are discussing a political process, that hope is likely misplaced.

Staff travel and working visas

Historically, the UK has had a long and successful sourcing relationship with countries that are outside the EU, for example, India and the Philippines. This is unlikely to change. A relatively simple visa system for outsourcing company staff who come to work in the UK has served the industry well and is likely to be duplicated for people from the EU. However, whether these staff can easily work across the UK and the EU is not yet clear.

Overall, visa and immigration-related costs will increase for service providers operating in Europe and with centers in the UK. This may lead to a preference for placing more work in Europe (such as, CEE) as service providers will be able to more easily tap into the European labor market, especially when requiring European-language support.

Delivery centres

The UK-based delivery centres mainly serve demand from the UK but some also offer services in different language to other EU countries. This is particularly true for Scotland and Northern Ireland. Staff coming from other countries with language skills are likely to come under any new working visa system that is set up.

The UK has been a popular destination for data centres to serve clients in different EU countries. The IT industry will no doubt campaign to have data protection laws that are approved by the EU. However, over time we may see some relocation of data centres to EU countries.

Nearshoring to EU countries will slowdown initially until the details of Britain’s exit from the EU are worked out.

The drop in the value of the Pound will make the cost of “importing” services from nearshore and offshore GICs higher for UK-based parent companies. This will push the need for increased efficiency and we will see increased demand for cost cutting through technologies such as automation.

Although the question of whether there will be a Brexit is now answered, the number of remaining questions just got more complicated and uncertain.

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Growth in the contact center outsourcing (CCO) market has slowed to ~4 percent – as compared to 5-6 percent a few years ago – primarily due to service providers’ focus away from the traditional cost-driven business model toward value-added services, omnichannel solutions, and high-value work that will shape the contact center market of the future. As it’s expected to take a few years for the new age solutions to reach maturity, providers across the board will have ample time to rejig their broader strategies with market realities, and come out on top of their game when the growth rate shifts again into higher gear.

The size of contract renewals has outgrown that of new contracts by almost three times over the past few years, implying that larger buyers are shifting their vendor management strategy, moving away from smaller contracts with multiple providers to a smaller group of providers handling larger parts of their operations. There has also been an increase in multi-geography contracts in the last several years, which indicates buyers are consolidating their global engagements across multiple countries to simplify their operations and offer a consistent customer experience.

Service providers are responding to this challenge by making sure they have adequate resources to meet the new buyer requirements. Many are doing so via acquisitions for scale and to fill capability gaps they may have, e.g., those related to value-added services, multi-channel capabilities, emerging geographies such as those in Asia Pacific and the Middle East, and rapidly growing verticals including travel & hospitality and healthcare.

Service provider acquisitions 2012 to 2016

Large service providers are also actively focusing on the United States as a buyer geography. In the last few years, we have seen multiple acquisitions primarily focused around the U.S. market. These include Alorica-EGS, Alorica-West Corporation, Convergys-Stream, and Teleperformance-Aegis. While at first glance the U.S. appears to be among the slowest growing geographies, one needs to remember that it accounts for almost half of the CCO market. As such, despite its low growth rate compared to other geographies, in absolute dollar terms the U.S. added more than US$1 billion in new business in 2015, one of the largest spending gains globally, and more than half the size of the entire Middle East CCO market.

Acquisitions aren’t just specific to the large service providers. Even the small and mid-sized players in the market are ramping up their capabilities and scale by absorbing smaller firms. For example, Capita and Webhelp have acquired several smaller firms within Europe, and Knoah Solutions, a comparatively smaller CCO player in the United States, acquired LL Contact Center in Tegucigalpa, Honduras, to expand its nearshore capabilities.

With the move to a more digital contact center experience, the market dynamics have changed significantly in recent years. As customers move away from traditional offerings, service providers can no longer rely on their key strengths within a set of domains, and need to make sure they have capabilities across the board.

While the focus will remain on organic growth, acquiring it through inorganic means seems inevitable. We expect to see more consolidation in the market in the coming years, not only to reduce competition but also to improve margins and stabilize prices that are already under pressure due to the increasing role of automation and RPA. As such, we can expect several more M&As in the coming years, as service providers try to secure their place in the new world order of the digital customer experience and the changing CCO value proposition.

For an in-depth review of the CCO service provider landscape, please see our newly released 2016 CCO PEAK Matrix.

 

Proven actions that enable more effective communication across lines of business, departments and other silo boundaries.

In today’s fast-moving digital world, creating relationships that enable and sustain collaboration to solve problems or create new value is a key to success. And as I’ve blogged before, CIOs need to create relationships between their IT teams and the business stakeholders to achieve more effective communication. Not an easy objective, considering how siloed most organizations are these days. I want to share with you some of the successful strategies deployed at Jacobs Engineering to build such relationships.

I learned of these strategies in one of my conversations with Cora Carmody, who served as CIO of global technology companies including Jacobs Engineering Group and SAIC for the past 19 years. Jacobs Engineering provides technical, professional and construction services to industrial, commercial and government clients.

Read more at CIO online.

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The technology vendor landscape of IoT edge analytics is heating up, with providers such as Cisco and IBM collaborating in an edge partnership, GE Digital’s Predix augmenting its edge capabilities, HPE boosting the capabilities of its Vertica portfolio, and PTC adding muscle to ThingWorx.

They and all the leading IoT analytics vendors, including AWS IoT, Microsoft IoT Suite for Azure, and SAP HANA Cloud IoT Service, are adding or enhancing their edge analytics capabilities, as there is a growing realization that cloud-centered analytics may not be able to deliver the necessary run time “action” expected of the IoT.

At the same time, the market realizes that edge analytics does not add meaningful value in terms of detailed insights into a system, and is generally suitable for small-sized projects. Moreover, many enterprises believe that though edge analytics reduces the entry barrier to the IoT, it does not provide meaningful value if not enhanced with a cloud-based data crunching system.

Enterprises that deal with a very large set of IoT data will normally have requirements for both real-time analytics and detailed insights. Thus, they may consider splitting their analytics lifecycle into two parts, running analytics models on the edge and performing detailed IoT analytics and model development in a cloud. However, this is easier said than done, and will require creative thinking from the architects, application developers, and device makers. It will also require enterprises to have different efficacy models for edge analytics and cloud-based analytics. For edge analytics, it’s about driving real time decisions or device-specific analysis, while cloud-based analytics is most suitable for fundamentally enhancing the IoT value chain.

IoT architects understand the underlying limitations they will face to run analytics on edge devices (e.g., memory, capacity, and power consumption), yet they are being pushed by the business to be as close to the data as possible. Smart architects will quickly realize that crunching data at the edge can be counterproductive, expensive, and many times just impossible. They can smartly address business requirements by delivering a “centralized + edge” analytics scenario. They should also segregate analytics operations and execution, and creatively deploy these at the edge or in the cloud as needed.

However, with all this confusion running amok, enterprises are finding the IoT landscape technologically overwhelming. Everest Group’s digital research suggests that though ~50 percent of global enterprises have piloted some type of IoT projects, less than 20 percent consider IoT to be in their top three investment priorities. The key reason is that enterprises are unable to accept that they are ready for the IoT, and thus continue to be fence sitters. While there are headline-grabbing case studies, especially in the industrial IoT space, most enterprises are still figuring out the IoT jigsaw puzzle.

Technology vendors, system integrators, and other market participants need to play a constructive role in shaping the IoT, a once-in-a-generation opportunity, into reality. It will be a great pity if they continue to focus on a short-term agenda of selling new technologies to enterprises, rather than meaningfully helping them deploy IoT solutions in their business.

Enterprises will have to be cautious in creating the most suitable IoT architecture for each project. Beyond the technical feasibility, they will be well-served by understanding the vast landscape of IoT technology, and getting a good grasp on the leading IoT technology vendors’ offerings.

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