2016: The Disappointing Year in the Services Industry | Sherpas in Blue Shirts

As many executives are focusing on the changes that may occur in their business in 2017, I think it’s important to take a moment to review what happened in the services industry in 2016.

At the outset of this year, we at Everest Group believed the U.S. economy would continue to grow and that discretionary spend would build. We realized—and I often blogged—that the labor arbitrage model was mature and growth was slowing, but we believed the model still had more to play out.

However, the reality as it played out over the past 11 months is that the labor arbitrage market matured much faster than anticipated and discretionary spend was less robust than we expected. Consequently, earnings and growth disappeared for most of the providers in the services industry. The labor arbitrage business is flat and has effectively stopped growing.

Because of maturing service models, the year also brought a great deal of pricing pressure and providers’ growing by taking each other’s share.

But there is also good news. Almost all service providers’ growth in 2016 was in cloud and automation, and these areas are growing at a rate of almost 22 percent.

The industry is also showing early signs of revenue compression, and I believe it will be 40 percent or more over the next few years. Digital technologies such as automation, analytics, cloud and cognitive computing allow providers to do existing work much more efficiently. In many service categories, there is a 40 percent or more opportunity to eliminate FTEs. This year clearly showed providers integrating automation into their contract recompetes as well as in aggressive productivity performance.

The pace of cloud and automation adoption in services picked up significantly this year. In my next post, I’ll discuss what this means for 2017 as well as other predictions for the coming year in services.

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