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global services

Gazing into the Global Services Crystal Ball: Sometimes you get it Right, and Sometimes, Not so Much | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

When I visited India for the first time in the early 2000s, the country was largely unknown in terms of business. The airports were small and dingy. The upscale hotels were really nice but also scarce. That meant they could charge insanely expensive rates…I remember paying US$700 per night at the Leela Palace!

My U.S. colleagues and I were on a mission to visit largely unknown service providers like Infosys, TCS, and Wipro, all of which had around 10K employees. At the end of the trip, we concluded that this was going to be real, and big…very big.

So we, and the other industry analysts in the space, pulled out our crystal ball to see what specifics we could predict. How clear, or cloudy, were our sixth senses back then?

What we got right

We did well in this category. India, along with many, many other low-cost locations, is absolutely capable of doing the global services job with scale. It’s also capable of doing many sophisticated processes (full disclosure: we might have underestimated this one a bit.) And those “unknown” companies I mentioned above? They’ve become truly global players, by some measures even surpassing the original powerhouses like Accenture, ACS, CSC, EDS, IBM, and HP (many of which have already consolidated).

What we got wrong

While inflation slowed in the U.S., it did even more dramatically in recent years in India. This, in turn, slowed the arbitrage difference, creating relatively smaller impacts on our models. And currency moves – such as a change from around 45 to 64 rupees – created a large positive impact, offsetting inflation by roughly 50 percent.

What we got really wrong

Labor supply was the biggie. All of us in the analyst community completely underestimated the impact of the available supply, which created an ongoing downward pressure on entry-level salaries. Using the best available data, the number of college students in India has risen from 13.6 million in 2008 to more than double that (28.5 million) in 2016.

While we didn’t predict it in the earliest years of the global services industry, by the end of the 2000s we were forecasting the end of labor arbitrage. India salaries were rising at double digit rates, and it seemed that it was only a matter of time before we reached parity (for offshoring purposes, 70 percent of U.S.-based salaries was considered parity.) As you see, we were miles off on that one.

What we got really wrong | Supply of labor

Increased labor in India as well as other locations have ensured limited salary increase, especially for junior roles

Future of Global Services

Looking forward (through our much more mature crystal ball) on the cost question

  • Temporary shortages of key skills, particularly digital, will create upwards pressures on salaries. But as the education and corporate systems retool their training curriculums, I expect the resulting surge in available talent will allow a cap and perhaps drive down salaries. Still and all, India is still a viable place to get low cost labor, albeit not quite as good as it was 15 years ago. (Review our Executive Briefing, India Global Services Industry: A Look Back at the Last Decade and Our Future Outlook, to drill down into the supporting analytics for this analysis.)
  • Many functions and processes have reached an offshoring saturation point. This doesn’t mean a complete stoppage of work moving offshore, just that many of the big, concentrated moves have already happened.
  • New automated solutions like RPA are going to create significant process labor efficiencies, in turn increasing headcount pressures.
  • The tipping point in this equation will go back to the supply side, where the ongoing wave of college students will keep pressure on wage advances far into the future, especially for the entry level positions.

Gazing forward to at least a 2040 – 2050 timeframe, other low-cost locations such as eastern Europe may get tapped out, since they don’t have as large a stream of graduates as does India. So, I say: advantage to India in keeping the wages compelling with its tidal wave of ongoing supply. But the looming question will be, what to do with all of those freshly minted grads?

My next blog will tackle the interesting another aspect of my looking back and looking forward retrospectives: “Are the India Heritage Services the new Global Leaders? The answer isn’t obvious. Stay tuned…

Signs of Structure in a Disordered Global Services World? | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

The global services market is in upheaval, and disorder seems to be the new world order. Geopolitical developments, macroeconomic pressures, and unprecedented pace of changes in technology have resulted in huge disruptions to the usual ways of doing business. However, despite the turmoil, the global services market continues to grow, albeit at a much slower pace compared to previous years.

eg5

When developing our Global Locations Annual Report 2017, Everest Group spent considerable time and effort analyzing the underlying data to determine if there are some signs of structure amidst the disorder. Here are some patterns and trends visible from our analysis:

Pervasive rotation of delivery capability toward digital

There has been significant increase in both number and share of new centers focusing on delivery of digital services. Between 2013 and 2016, the number of such centers grew by ~177 percent.

  • Regions: Most of this growth was concentrated in Asia Pacific and nearshore Europe
  • Segments: Cloud, Internet of Things, and Big Data witnessed the highest adoption rates
  • Sourcing model: While the lion’s share of the growth was with the in-house model, service providers also reoriented their delivery portfolios

Greater leverage of nearshore locations

Both service providers and global in-house centers are growing faster in nearshore locations, such as central and eastern Europe, Latin America, and the Caribbean, compared to traditionally offshore locations (such as Asia Pacific.) This is driven by multiple factors, most prominently the drive towards digitalization and the different talent demands this imposes. The chart below shows the increasing share of nearshore regions in new delivery center setups:

eg4

Complementary growth in onshore locations

There has been a rapid surge in large enterprises’ and service providers’ service delivery footprint in locations traditionally considered onshore. While firms either retained or reduced the pace of growth in offshore/nearshore locations, they ramped up presence significantly in the United States and continental Europe (see the following chart for new onshore delivery center setups of top-20 IT-BPO service providers.)

eg31  20 leading service providers across IT and BPS that Everest Group uses as “Index” providers to gauge market trends

This is largely driven by enterprises’ desire to deliver complex services coupled with the advantages of customer intimacy. However, for many providers, this is in anticipation of strict work visa issuance guidelines which may make it imperative for them to have a foothold in the onshore market for hiring talent

While there’s some “method to the madness” in these pervasive trends, there are many operational risks that are likely to add to the disorder. These include:

  • Increased safety and security risks (terrorism and border issues) in Indonesia, Malaysia, and Thailand, and high crime rates in Guatemala and Jamaica
  • Continuing conflict between Russia and Ukraine
  • Frequent changes in political leadership in Egypt
  • Macroeconomic instability in Brazil and Argentina.

For more such trends and analyses on the value propositions of different locations through Everest Group’s MAP MatrixTM, which will help you frame your global services location strategy, please refer to our report, “Global Locations Annual Report 2017: Signs of Structure in a Disordered World.”

Demand for Digital Technologies Will Fuel Continued Growth of IT Services in 2017 | Press Release

By | Press Releases

Global services market growth rate expected to decline in 2017 for the fourth straight year, hampered by political uncertainties, macroeconomic slowdown.

The growing demand for innovative and digital technologies will spur continued growth of the IT services segment of the global service market in 2017, according to Everest Group. The number of new delivery centers focusing on development of digital services increased 177 percent between 2013-14 and 2015-16. The largest digital services growth segments during this period included cloud, Internet of Things (IoT) and big data.

The global services market has witnessed a significant increase in the share of IT service delivery since 2012 (up by 7 percentage points, from 32 percent to 39 percent), while the share of business process services has declined consistently in the same period (down by 4 percentage points, from 46 percent to 42 percent). Currently, of the US$173-178 billion global services market, IT services have a 39 percent share, with business process services and engineering/R&D services commanding 42 percent and 19 percent, respectively.

Overall, the global services locations landscape continued to experience stable growth in 2016 in terms of revenue; however, the growth rate was slower in 2016 (7 to 9 percent) than the previous year (8 to 10 percent). Similarly, the growth rate of center setups dropped in 2016 in comparison to 2015.

“Going forward, we expect that the global services market growth rate will decline in 2017 for the fourth straight year, measuring 6 to 8 percent,” said Anurag Srivastava, vice president and director of the Global Sourcing practice at Everest Group. “Some of this is due to the direct impact of the macroeconomic slowdown. Other dampening factors will include the political instability associated with Brexit in the United Kingdom and the review of the H1-B visa program in United States. Volatility in equity and investment markets and currency fluctuations will hamper the growth rate as well.”

These findings and more are discussed in Everest Group’s recently published report “Global Locations Annual Report 2017: Signs of Structure in a Disordered World.”

This research offers insights into the size and growth of the global services market, global services exports by regions and country, an update of locations activity by region and country, and trends and risks affecting global locations. It also provides industry-leading comparison and analysis of key changes in maturity, arbitrage and potential of global delivery locations through Everest Group’s unique MAP Matrix™ analysis.

***Download complimentary report abstract here***

Other key findings:

  • In terms of revenue, Asia Pacific continued to hold the largest share (more than 60 percent) of the global services market, followed by Nearshore Europe, Latin American and the Caribbean, and Canada.
  • In terms of headcount, India and the Philippines continue to be the leading delivery locations, accounting for 66 percent of the share, followed by Canada, China, Poland and Ireland.
  • India and the Philippines held more than one-third of the share of the new delivery center setups in 2015-16.
  • Most onshore locations are expected to see an increase in the near future in terms of delivery setups by the top 20 service providers.
    • The United States’ share in terms of onshore delivery center setup activity is expected to increase due to likely changes in U.S. visa regulations, which could make hiring of offshore resources difficult; increasing emphasis to hire locally; and greater focus on delivery of non-traditional functions, such as digital.
    • England’s share has witnessed a significant decline in the past few years; however, its share is expected to increase once investor apprehensions about Brexit decline.
    • Continental Europe is also expected to witness an increase in its share, due in part to the direct impact of Brexit and players moving out from England. Additionally, many cities in the region are being leveraged to develop new digital technologies for global delivery.

Global Services Market Sees 3x Rise in Digital-Focused Deals at Expense of Traditional Business Process Services | Press Release

By | Press Releases

Digital services now represent up to 20% of business portfolios of leading firms.

In 2017, global services providers witnessed sluggish revenue growth in their legacy businesses, while their digital businesses grew remarkably. Digital-focused deals increased nearly threefold in 2017, with cloud application and analytics forming a major portion of digital deals. However, while there is increased focus on next-generation technologies and cloud services, deal volumes in traditional business processes and legacy infrastructure services remained stagnant for many of the leading service providers.

This trend was evident in Q1 2017 as well. Activity in the global services market witnessed a notable increase in Q1 2017 compared to Q4 2016 (383 deals to 367 deals, respectively), owing to a significant rise in ITO deals, while BPO transactions declined.

“There is increasing demand from enterprises for next-generation services given need to improve customer satisfaction and increase efficiency and effectiveness of service delivery. Service providers are accordingly making digital investments to adapt to changing market dynamics,” said Salil Dani, vice president at Everest Group. “In 2017, we witnessed 40 acquisitions to expand digital capabilities, 140 alliances between providers and technology providers or startups, and the setup of 35 new centers and digital pods to help clients rethink their digital strategies. Unfortunately, this robust activity cannibalized traditional business services investments and resulted in a deceleration of service providers’ overall revenue growth to a compound annual growth rate of between 0 and 5 percent.”

These results and other findings are explored in “Market Vista™: Q1 2017.”

Market Vista: Q1 2017 includes data, analysis and insights on transaction trends, major outsourcing deals, global in-house center market dynamics, trends in offshoring, emerging destinations and service provider development (including latest development on next-generation technologies such as digital services). The report also includes Standard Locations Database, which tracks 23 leading offshore locations.

***Download complimentary report abstract here***

Other Key Takeaways

  • While the overall outsourcing demand remained steady, there was a significant decrease in demand from the United Kingdom given the uncertainty with Brexit.
  • GIC setup activity continues to remain high, led by engineering/R&D services.
  • Delivery center setups increased in Asia Pacific relative to Nearshore Europe, reversing the previous year’s trend.
  • Service providers have acknowledged the uncertainty due to U.S. visa reforms and have increased local hiring and overall onshore leverage to safeguard their businesses, especially in IT services.
  • As the market shifts from arbitrage-first to digital-first in contract demands, leading providers are making fundamental changes to their talent and service delivery models.

Reimagining Global Services: How to get MORE out of Technology | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

Much has been written and said about the Bimodal IT model Gartner introduced in 2014 – with forceful arguments for and against. Not at all intending to bash that model, it’s safe to say that the digital explosion over the last three years demands that enterprises’ technology strategies be much more nuanced and dynamic.

The MORE model for global services

Let me explain with the help of the following chart. I call it the Maintain-Optimize-Reimagine-Explore – the MORE – model.

Global Services and Technology in the MORE model

I’ve tried to plot (intuitively) a bunch of technology and service themes on their current and future innovation potential.

  • Maintain: On the bottom right are themes like mainframes and traditional hosting services that are unlikely to go through dramatic changes in the near term. These are exceptionally stable and commoditized, and will not attract exciting investments. Enterprises still need them, and CIOs should Maintain status quo because it’s too risky and/or expensive to modernize them.
  • Optimize: Seven years back, that cool AWS deployment was the craziest, riskiest, hippest tech thing we could do. But, I guess we’ve all aged (just a little bit) since then. The needle of cloud investment for most enterprises has moved from AWS migration (USD$200 per application, anyone?) to effective orchestration and management – a clear case of the enterprise seeking to Optimize its investments in the bottom right corner of my diagram.
  • Explore: On the top right, we have the new wild, wild, west of the tech world. Blockchain can completely transform how the world fundamentally conducts commerce, IoT is working up steam, and artificial intelligence can shape a different version of human existence, much less business models. Enterprises need to Explore these to stay relevant in the future.
  • Reimagine: What we cannot afford to miss out on is the exciting opportunity to Reimagine “traditional” global services into leaner and more effective models using a combination of enabling themes like automation, DevOps, and analytics. These are immediate opportunities that many enterprises consider essential to running effective operations in a traditional AND a digital world. For example:
    • In a world where “the app is the business,” QA is being reimagined as an ecosystem-driven, as-a-service play built on extensive automation and process platforms. The reimagined QA assures a digital business process and a digital experience – not just an app.
    • We are getting into the third generation of workplace services (first hardware-centric, then operations-centric, and now software and experience-centric.) The reimagined workplace service model delivers a highly contextual, user-aware experience, without sacrificing the long-range efficiency benefits.
    • Application management services (AMS) are being reimagined through extensive outcome modeling, automation instrumentation, and continuous monitoring.

Three principles for reimagining global services

It’s interesting to note that many of these reimagination exercises are based on three common foundational principles:

  1. Automation first: Automation and intelligence lie at the heart of our ability to reimagine technology services, because automation helps us deliver breakthrough outcomes without blowing the cost model out of the water.
  2. Speed first: The need to run ALL of IT at speed is driving reimagination and the corresponding investments. If you’re at the reimagination table, throw away your tools to build the perfect (and the biggest) mousetrap. A big part of the drive for reimagination is to move from scale-driven arbitrage first models to speed-driven digital first models.
  3. Alignment always: This is important and good news. For decades, we’ve all complained about the absence of Business IT alignment. Reimagination hits out at this issue by focusing on technology architecture that is open and scalable, and by delivering as-a-service consumption models that are closely linked to things that the business really cares about.

Over the next several months, Everest Group is going to publish viewpoints on each of these topics and more. But we’d love to hear any comments and questions you have right now. Please share with us and our readers!

Which Way are the Winds of Change Blowing in the Global Services Industry? | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

2016 will unquestionably be recorded in the history books as one of the most turbulent years in modern times. Geopolitical, socio-economic, and technological volatility hit global service providers and enterprises alike particularly hard, leaving them in a state of uncertainty never seen before in the services industry.

Everest Group’s recently-published Market Vista™ – 2016 Year in Review report took a deep-dive look at these and other key trends and drivers impacting GICs, offshore/nearshore locations, service providers, and outsourcing transactions.

Here’s a snapshot view into some of the most interesting developments of 2016:

Digital takes center stage in outsourcing deals

While the volume of BPO deals had surpassed that of traditional IT services (e.g., application development and infrastructure services) in the previous decade, the pendulum has swung back to IT – now in a digital form. Several factors are driving this change, including increasing maturity of traditional services, the need for a personalized customer strategy, the need for increasing operational efficiency, and the protectionism wave. Indeed, the number of inked digital deals increased by 175 percent between 2014 and 2016.

Outsourcing deal sizes are decreasing – but not for everyone!

Higher maturity and increasing customer expectations continue to drive comparatively smaller or unbundled deals, particularly in the U.K. and North America, where a significant portion of deals are incremental or outcome-based. However, many enterprises, are signing larger deals as they invest in infrastructure and supporting platforms in order to build digital capabilities in the near future.

New technology, but different implementation strategy

Although large buyers have the capabilities to insource digital services delivery, dearth of talent and investment size and complexity forced smaller buyers to outsource delivery of their digital services.

Concentration in leading geographies

With digital services talent availability increasing in some global services destinations, the share of activity is being redistributed. Share of top-10 locations increased from 60 percent in 2015 to 70 percent in 2016. Locations recording a >50 percent increase in activity in 2016 were Ireland, Malaysia, Poland, Romania, and Singapore.

Surging wave of protectionism

A growing set of countries, including the U.S., U.K., Australia, and Singapore are adopting an “our country first” stance. This has manifested into a series of inward looking protectionist steps and safeguarding regulations, such as Brexit, the recent change in visa regulations in Singapore and Australia, and proposed immigration changes in the U.S. While these had limited impact in 2016, as most of them came into effect in early 2017, it will be interesting to see how players’ location activity evolves going forward.

Following are the five key trends we believe will define the global services industry in 2017:

Global Services Outsourcing Deals in Market Vista

To learn more about Everest Group’s take on 2016’s key trends, developments, and associated drivers – and how these will impact what happens in the global services industry in 2017 – please refer to Everest Group’s report titled Market Vista™: 2016 Year in Review: Global Services Industry Facing “Winds of Change.”

Trump-type Protectionism Threatening Global Services in APAC | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

On April 18, President Trump signed an executive order for interdepartmental review of the H1-B visa program, a move largely aimed at curbing the allotment of H1-B visas to entry level IT professionals from other countries. While it took months for him to officially make a move, his protectionism agenda seems to be spreading far and wide, with several countries in the Asia Pacific region embracing similar protectionist stances to address unemployment.

Australia pulled the plug on its most popular temporary work visa, the 457 visa program. This program allowed companies based in Australia to employ foreign workers, for a period of up to four years, wherever they faced a shortage of skilled workers in the domestic market. It was largely used by global IT companies to source workforce from other countries, mainly India. The Australian government has stated that it will replace the 457 visa program with two temporary visas for skilled professionals. Certain IT skills (e.g., web developer) have been already removed from the list of ~200 occupations that qualify for these visa programs.

In a similar event, the Singapore government restricted the number of visas that can be issued to foreign IT professionals. This has impacted both new visa applicants and those seeking a renewal.

And two weeks ago, the New Zealand government announced plans to tighten access to skilled work visas in a “Kiwi-first” approach to immigration.

Crackdown on visas to skilled foreign workers a threat to global service delivery models

Policy changes that restrict movement of skilled professionals across borders can cause several operational challenges for the prevailing global delivery models of almost all major service providers. The regional delivery centers of leading global and Indian IT service providers based in these APAC countries are likely to face the biggest challenge, as the restrictions against importing talent will make them reliant on local, expensive talent. This, in turn, might negatively impact their margins.

In the short term, enterprises’ and services providers’ cost of operations might witness a spike due to limited availability of landed resources in the onshore workforce. Typically, the difference in cost between a landed and a local resource in most geographies is 10-15 percent. And, based on recently completed research, we estimate that service providers’ margins from onshore operations could drop by up to 16 percent due to the proposed changes to the H1-B visa program. This will likely require service providers to recalibrate their pricing strategy and/or revisit their onshore-offshore delivery mix.

In the long term, service providers are likely to push towards offshoring as a lever to protect their overall margin. And there might be increased instances of even complex work being delivered from offshore locations to reduce dependence on work-visas for onshore locations, in turn requiring increased training and upskilling of employees in offshore locations.

Do you have or run global services operations in APAC? Have you and your teammates formulated an immigration issue mitigation plan? Our readers would love to know how you’re addressing this challenge!

Learn more about Everest Group’s Locations Optimization practice.

Six Common Mistakes Enterprises Make when Developing Service Delivery Location Business Cases | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

Everest Group regularly supports clients in developing fact-based business case models to assess all relevant costs and benefits associated with their service delivery portfolio and delivery location decisions.

Not surprisingly, we’ve seen an increase in this type of activity in the last several years due to technology disruptions, potential immigration reform laws, intensifying competition for talent, and macroeconomic and geopolitical uncertainties. We’ve also seen an increase in the number of faulty/incomplete business cases that, if unresolved, can result in unnecessarily high costs and less than expected benefits.

Six common mistakes enterprises make when creating their global service delivery location business cases.

#1 Clarity on the primary objective of the business case:

Establishing clarity on the key objectives of the business case for service delivery location selection is of utmost importance. Companies often include benefits of other initiatives (e.g., transformation) which may impact their overall locations footprint, but fail to include costs associated with these initiatives, resulting in a faulty business case. As business case assessment is typically done for long-term strategic decisions, it is critical to ensure clarity on the locations strategy and implementation roadmap under consideration.

#2 Underestimating the costs of “what it takes to get there”:

Companies often underestimate the costs associated with exiting their current location (e.g., lease termination and severance costs); disruption in their existing locations (e.g., loss of knowledge due to higher than expected attrition); migrations (e.g., employee relocation, technology migration, parallel/shadow run); and set-up of new centers (e.g., capex, cost of hiring and ramp-up, training costs, etc.)

Example: A global Financial Services company had a 12-month long shadow/parallel run to effectively complete knowledge transfer for high complexity processes. This negated most of the arbitrage-related benefits for the initial 12-18 months. In fact, the company incurred relatively higher total cost of operations (TCO) until steady state operations was achieved.

Example: In a recent engagement, the location selection for a Latin American client’s shared services center was greatly influenced by applicable withholding taxes (i.e., the Argentinean government levies a ~31.5% withholding tax on import of global services from certain locations such as Mexico). These factors significantly impacted the relative cost attractiveness of locations under consideration.

#3 Overestimating benefits:

Companies often plan multiple transformation and optimization initiatives in parallel with changes to their services delivery portfolio. In such cases, things seldom pan out as planned, and the savings achieved are significantly lower than expected in areas including:

  1. Headcount reduction from process improvements
  2. Delivery pyramid optimization
  3. Implementation of automation/technology solutions
  4. Economies of scale (in cases of location consolidation)
  5. Optimization of management and administrative overheads

Example: A BFSI firm changed its planned strategy midstream, as its initial plans to fund the business case for large scale service delivery location consolidation by reducing FTE headcount by ~ 6,000 could not be realistically achieved.

#4 Stakeholder misalignment:

A service delivery location decision must involve multiple stakeholders including onshore business leaders, offshore delivery leads, functional and GIC leaders, migrations and/or transformation teams, corporate real estate, and technology teams. Any lack of coordination among these stakeholders can pose challenges in alignment on data used, key assumptions, the roadmap for service delivery portfolio changes, and the plan for other transformation/optimization initiatives. All stakeholders must be kept in the loop from the beginning of the location evaluation, and they must periodically periodic sign-off on the approach.

#5 Industry benchmarks:

While it is important to leverage industry benchmarks, companies must contextualize information to their own unique situation. The specificity of operations or the role a location plays for the company can be different from the typical value proposition of that location/geography.

Example: A recent engagement for a global Financial Services client demonstrated that, despite industry benchmarks that indicated Location A offered ~20 percent cost savings over Location B for typical BPO processes, the client’s specific processes and talent needs reversed the cost attractiveness of the two locations.

#6 Talent competition in the local market:

Companies often underestimate the true extent of competition in the local talent market, and the impact of attrition on sustainability of their operations. This impacts a company’s ability to scale initially, retain talent, and back-fill lost staff.

Example: A global manufacturing company faced significant challenges in hiring language skills for its newly setup shared services center in the APAC region, resulting in significantly lower arbitrage savings than expected.

While developing business cases models can be a significant challenge, we believe that addressing the above-mentioned points can reduce chances of error significantly. Learn more about Everest Group’s Service Delivery Locations practice.

Trump Dump | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

In our Everest Group forecast for the services industry earlier this year, we predicted deceleration from 3.2 to 2.8 percent in the broader services market and deceleration from 7.1 to 6.8 in in the Indian market. We see no reason to change that prediction of deceleration now. But something notable has happened since we made the prediction: a deceleration in Accenture’s earnings in the consulting and systems integration areas. This is puzzling at first glance but highly significant of a major trend.

We would have expected that we would increase our earlier industry forecast, given two factors:

  • Powerful new digital technologies now coming of age that are ready for adoption and should drive a wave of adoption and new spending
  • A buoyant US and global economy that has increased consumer spending, further driving discretionary services spend

However, we see negative trends due to the insecurity caused by what I refer to as the “Trump Dump” in America and by Brexit in the UK. The Trump Dump is the politically difficult environment causing companies’ reticence or unwillingness to commit to large projects with offshore labor. We’re consistently seeing projects delayed, postponed or cancelled. This puts companies in a bind because there simply isn’t sufficient domestic talent to drive large initiatives.

The US represents almost 50 percent of the global services market. We believe the Trump Dump will have a negative effect on the broader services industry, creating impacts beyond just the Indian segment of the market. Therefore, we believe there are significant reasons for caution in forecasting market growth.

The Battle over Healthcare: Round One Ends with a Whimper and Uncertainty | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

Healthcare reform has become a political slugfest, casting a spell of ambiguity as the world’s largest healthcare economy attempts to fundamentally transform itself.

Consequently, the global services industry is waiting with baited breath to see how this upheaval pans out. For context, healthcare has been a saving grace, growing at three times the rate of the overall IT-BPO market, which is facing challenging times of its own.

On March 6, Republicans unveiled their plan to repeal the Affordable Care Act, or ACA, popularly known as Obamacare. The ACA, which was signed in March 2010 and came into effect during latter half of 2013, was the most significant regulatory overhaul to expand coverage since the passage of Medicare and Medicaid (Social Security Amendments) in 1965. One of the key highlights of President Trump’s campaign was to repeal and replace the ACA, which he dubbed “broken.” Soon after he took over the Oval Office, he realized that complete overhaul of the law would be a lengthy and complex process, contrary to his promise of quickly instituting a completely new health law. Despite the significant advantage of Republicans controlling both House and Senate, President Trump’s bid to replace the ACA with the American Health Care Act, or AHCA, (essentially a variant of Speaker of the House Paul Ryan’s health plan), failed to see the light of day, with Ryan conceding defeat on March 24.

What went wrong with the American Health Care Act

The principal problem with the AHCA was that it was nowhere close to the promised repeal and replacement of the ACA, but essentially a stop gap plan. It was a contentious bill, which lacked widespread appeal. Key stakeholders and their objections included:

  • Almost all the large payers (except Anthem) were opposed to this law, as it would significantly reduce their enrollment base and, in turn, impact their top-line
  • Healthcare provider associations (such as the AHA, AMA, and American Nurses Association) also opposed AHCA, as it would put extra pressure on providers who are already reeling with bottom-line and revenue problems
  • Various consumer groups, including the American Association of Retired Persons (AARP), expressed concerns as the bill was not in favor of the sick and older populations that require healthcare services the most
  • Conservative Republican lawmakers (i.e., The Freedom Caucus) dubbed it Obamacare-lite.

The uncertain future for healthcare payers, providers, consumers, and IT-BPO service providers

The currently regulatory limbo has a cascading impact on each stakeholder group.

Healthcare payers

Health insurance companies are left with little clarity on their participation in the healthcare exchanges, which have become value-dilutive, and appear even shakier given the current administration’s disdain of the ACA. Large payers, including such as Aetna, Anthem, Cigna, Humana, and UnitedHealth have threatened to pull out of the exchange markets if the uncertainty is not resolved soon. There are theories that the executive branch could act independently of Congress to improve functionality of the individual insurance exchanges.

Healthcare providers

Failure of passage of the AHCA resulted in an increase in some of the leading hospital networks’ stock prices. This was primarily driven by the fact that the decline in enrollment, especially around Medicaid patients, has been delayed. Most of these hospitals improved their bad debt when their respective states expanded Medicaid, as hospitals became eligible for payments for patients who could not afford healthcare. While providers are relieved right now, uncertainty remains. They have struggled with high operating costs, thin margins, and talent issues, and these are only going to intensify.

Healthcare consumers

With the June deadline for submittal of initial rates for exchange plan fast approaching, some consumers may be left with limited health plan options, as some of large payers are hedging on exchange participation. At the same time, ACA plans have witnessed a resurgence in popularity.

Healthcare IT-BPO service providers

Service providers will have to deal with spending decision delays from both payers and providers as they look towards the new healthcare bill. We have already seen leading vendors face revenue headwinds. For example, Cognizant’s healthcare revenue grew by just a mid-single digit in CY2016 after a stellar performance in CY2015. Any new decisions around outsourcing will most certainly be deferred for now, whereas existing keeping-the-lights-on spend is expected to continue. Deal renewals are expected to be for shorter duration as buyers (both payers and providers) wait for veil of uncertainty to be lifted.

The road ahead for healthcare and global services

After this initial bruising, the Republicans are unlikely to give up without a fight. Speaker Paul Ryan recently mentioned that House Republicans will resume work on healthcare reform, but offered no timeline. This will be easier said than done, as GOP leaders need to overcome the deep divisions that ultimately led to the failure of the bill.

Healthcare policy requires hard work, and rushing through a half-baked plan such as the AHCA just won’t cut it. Obama spent over a year on garnering support for the ACA, and the new administration’s heavy handed attempt reiterates that there are no real shortcuts to the process. The GOP should regroup and take a fresh look at the problem statement.

The outcomes might have even greater implications on the global services market. Until then, buyers are likely to twiddle their thumbs and delay key decisions amidst the tremendous uncertainty.