February 16, 2017
A sea change is starting because of digital technologies. The impact as companies apply these technologies to their business will be massive – much bigger than the Industrial Revolution with the invention of the loom for manufacturing clothing and Ford inventing the production for manufacturing automobiles. Everyone has been talking for some time about how big an impact these technologies will have on the services industry. But there is a new factor now that makes the potential impact even more significant: the protectionist activities driving companies to step back or pause in globalization and offshoring. I think the services industry would be foolish to ignore the potential of this greater impact. Let’s look at where businesses are headed.
There can be no denying that the stakes have been raised and barriers are being put in place to make globalization and offshoring less acceptable and expensive. In Europe, it is evident with the Brexit bill and the UK opting to leave the EU. In the US, protectionist barriers are starting to be executed through proposed changes to immigration law and H-1B visas, tax reform and potential border tax implications, and reputational risks arising to companies from government entities or disgruntled employees and vocal press entities. The result: companies are paying more attention to how to do work onshore without suffering negative cost impacts.
By investing in digital technologies such as Robotic Process Automation (RPA), cognitive computing, automation and cloud, companies can drive cost improvement by dramatically improving the productivity of their workforce. In many cases, they can achieve cost improvement even greater through improved productivity than through labor arbitrage and thus offset impact of not sending their work offshore.
Of course, service providers also can use these technologies to improve their own workforce productivity to offset the potential of rising costs from immigration and H-1B visa reform in the US.
Our market data shows leading providers in the services industry have been looking at digital technologies and associated digital models well before this step back in globalization. Our tracking of service providers clearly shows the traditional services (labor arbitrage, offshore factory model, remote infrastructure management and asset-intensive infrastructure) grew by only .1 percent last year. Almost all the growth in the IT and business process services market came from new digital offerings – which are currently growing at over 18 percent a year.
Although the trend in digital services has already been growing, we believe the current climate discouraging globalization and offshoring will further accelerate the adoption of digital models. This will force the current shared-services structure. It also will force the provider community to fundamentally change their business models and the way they currently structure their business to deliver services.
