What will be the big stories in 2014 in global services? We believe the main themes of 2013 will continue this year but will take on bigger significance. Whether you’re a buyer or a provider, you need the following issues on your radar screen and need to be prepared for change over the next 12 months.
An expanding upswing
From an economic perspective, it appears that both North America and Europe will continue their slow climb out of the depths of the recession. We expect that to continue to beneficially affect the services sector, specifically in discretionary spend.
Quite frankly, we see the strongest growth coming in the traditional arbitrage labor market. As economies expand, the Indian firms with their talent factories are well positioned to capture a significant portion of discretionary spend as more funding becomes available for IT and projects.
We believe the expanding economy will also influence transformation projects. The large organizations that drive the transformation market are extraordinarily well capitalized at this point, and it makes sense that the improving economy would motivate them to spend some of their cash on transformation. We would always expect cost reduction to drive a portion of the transformation market, but we believe that some of the transformation focus in 2014 may well shift to drive growth and differentiation.
A big push
We continue to see the rise in the influence of business stakeholders, a phenomenon that we commented on fairly regularly last year in our blogs. We believe this trend will continue and the result a push for services more focused on outcomes and functionality and less focus on price per unit. We don’t see the entire market shifting to this, but we believe this shift will be an important part of the market.
The as-a-service models are best positioned to service the shift to outcomes and functionality. Hence, we believe the ongoing rush to cloud and as-a-service will continue and will increasingly reach into the CIO/CTO funding budget to garner more of their share of spend. It’s clear that business stakeholders will continue to drive the cloud surge.
A looming threat
We believe the immigration and H-1B visa reform issue will continue to hang over the industry, swaying ponderously like the mythological Sword of Damocles. Unlike Damocles, who managed to depart the peril and anxiety of the sword above his head in Greek mythology, we think the immigration/visa issue will have an ongoing effect.
Specifically, we believe that there will be no let-up in the difficulty in getting B-1 and H-1B visas, and particularly firms that are viewed with caution will struggle along those lines. We think that the bureaucrats will continue to monitor visa issues and create friction in the visa approval process. This has happened in the United States, and we also see this happening in Canada and across Europe. The increasing friction in the approval process won’t stop the industry’s use of the visas, but it will create irritation.
The unanswered question is whether or not immigration reform will happen. We don’t believe there is strong support for the India-based model or the model of using H-1B or temporary workers on shore.
As we’ve blogged before, we believe that if reform does happen, on balance it will have negative consequences for the industry, particularly for the Indian heritage firms, which aggressively use H-1B and L-1 visas in their onshore mix. It will raise their cost of doing business and bring them closer to the cost base of their MNC and Global In-house Center (GIC) competitors.
A dose of rebalancing
We believe 2014 will bring a move in the banking sector to more aggressively shift work from third parties into GICs or captives. A number of issues are driving this strategy change. The banks want to increase productivity in services and also desire to gain control over key aspects. In addition, there is a regulatory tailwind from the Fed’s recent pronouncements around its concern that the banks have used third parties too aggressively for some delivery functions.
We believe these factors will drive a shift from third parties in the banking sector to GICs. We don’t believe that this will materially drive work from offshore to onshore but more into the type of vehicle from delivering services. The overall proportion probably will not change, but we do see some rebalancing going on with a realization that there are segments of the workload that are better delivered for productivity closer to the customer. However, we believe the ongoing desire to lower costs will somewhat offset the shift.
What will be interesting to watch is whether other industries follow the banking lead. Historically, the banking sector leads market shifts and other industries following after a 9-18-month gap.
Any of this movement in a significant way will have a material effect on the services industry.
A move up
Partly driven by the previous issue of banking leading the shift, our opinion is that the GICs and captives will continue to increase their influence over spend. Those firms with captives or GICs will continue to grow in influence and potentially in size. In addition to their potential to increase the amount of work they do, we also believe they increasingly will be asked to manage some vendor or provider relationships from a low-cost location such as India. We think this, in turn, will drive more focus on price.
The upside
Typically an increased volume of work increases provider’s pricing power. But we think this will be largely offset going forward. In some select areas where there is more and more inclination to view offshored work as less sticky and therefore bid it out on return, we think that mindset will drive down overall prices. But we don’t see that there will be a precipitous drop in pricing in 2014; pricing will be stable to slightly down.
