Category: Outsourcing

Marketing Services: You Can’t Outsource Creativity…Can You? | Sherpas in Blue Shirts

At the Procurecon Indirect conference in Copenhagen a couple of weeks ago, three senior procurement people from different corporations approached me with their woes about the lack of control and the high levels of procurement indiscipline their marketing departments exhibit. They wanted to know how and if Everest Group could solve the problem of rogue spend with external agencies for marketing services. It’s an interesting and very valid question.

Marketing services is one area in which many enterprises’ Chief Procurement Officers (CPOs) have had neither the evidence nor the mandate to challenge established thinking. Furthermore, unlike IT and non-core business process outsourcing alternatives that have been around for 20 years, outsourcing options for marketing didn’t exist until recently. Now that they do, CPOs are sensing the opportunity, in partnership with Chief Marketing Officers, to transform the way marketing services are delivered.

Benchmarking Can Help, but…

Benchmarking can certainly provide rate-card analysis, SLA review, a breakdown of the cost-stack, and any number of other elements from the contract, to give a view of pricing and equitable contracting. But there are problems:

  1. Marketing services engagements are often part of the long-tail of spend, ad hoc in nature, sometimes not subject to a formal contract, and often worth not much individually. Benchmarking these could cost a CPO several-fold more than would likely be saved
  2. If a contract did exist, benchmarking would drive the discussion between a procurement team wanting to understand whether marketing services suppliers are delivering value and a marketing department wanting to defend the status quo. Typically, however, benchmarking informs the commercial negotiation between client and supplier
  3. The nature of marketing services engagements are sometimes niche and specialist, based on knowledge of a vertical or channel acquired over time. Providing meaningful points of comparison is likely to be difficult
  4. Buyers will doubtless maintain that it is impossible to benchmark creativity.

But, as one of my Procurecon conversations suggested, the issues for CPOs aren’t high levels of spend or a desire to be in control of every spending decision. Rather, they’re concerned about fragmented spend and lack of overall visibility.

5 Steps CPOs Can Take

They can begin by promoting the procurement function as an exemplar of best practice by pointing to examples in other spend categories of how procurement has driven cost savings, improved quality, or stimulated innovation. Doing so establishes CPOs’ leadership credentials.

Next, they can introduce some level of technology that will deliver at least visibility into spend. Several speakers at the conference cited the need for the procurement process to generate data to increase efficiency. Many CPOs without a mandate for category management seem reluctant to push for integrated procure-to-pay or source-to-contract systems. But less invasive approaches, such as customized applications in Salesforce, could still generate useful information about spend categories, transaction volumes, and whether suppliers are being contracted by separate groups within an enterprise.

Third, they can consider portfolio rationalisation, against these rationales:

  1. unravelling large numbers of small, often informal arrangements is hard, but the disconnected procurement of “specialized” or creative skills by separate parts of the business can produce a rate-card premium of up to 25 percent
  2. buyers may have contracted long-term rates for specialized skills; in this age of rapid obsolescence, the skills may have become commonplace, but the long-term contracts continue to charge contracted premiums
  3. a specific resource requirement may indeed be specialised for a provider with low capability in a particular area, but may fall into another provider’s delivery sweet spot; in our experience, transitioning such skills to a best-fit provider can save between 1 percent and 3 percent of contracting costs.

Next, they can investigate alternatives. Arguably, marketing services and creative agency spend are still immature enough to offer the opportunity to arbitrage. And providers with capability are rapidly emerging. Accenture has acquired over 20 agencies since 2010. Onsite digital design agencies such as NuFu, Oliver, and Spark44 have a growing impact. Every major service provider – Atos, Cognizant, Sutherland Global, Wipro, etc. – is investing in or acquiring digital agencies, and these investments will allow enterprises to consider accessing marketing services alongside a suite of outsourced IT or business process services.

Finally, they can benchmark the status quo with an alternative. Can a sourced solution give the enterprise not only a cost advantage but also faster delivery, access to global talent, measurable outcomes, and real transparency?

So, CPOs, there’s little reason to ask yourself “how do I do it?” Instead, the real question is, “why wait?”

You can find out how Everest Group helps enterprises optimise global procurement operations here. We also help enterprises rationalise complex portfolios of external suppliers.

Everest Group’s 3rd Annual Service Provider of the Year™ Awards: Did Your IT Services Provider Win? | Sherpas in Blue Shirts

2017 was a seminal year for IT services. Digital adoption finally broke free from the shackles of marketing’s lip service and moved from “pilot” to “program.” The of role CIOs resurged as business stakeholders relied on them to deal with an ever-growing supply landscape and procurement conundrum to deal with new-age technology. And growth challenges appeared to have bottomed out for the two key industry verticals: BFSI (the largest) and Healthcare & Life Sciences (the fastest).

Hence, our 2018 Service Provider of the Year™ awards for IT services providers – our third edition – recognize companies that not only weathered a challenging year but reinvented themselves to chart out a new phase of growth for 2018 and beyond.

Our methodology

We select the IT Service Provider of the Year award winners based on the consolidated scores they achieve in the Star Performer, Leader, Major Contender, and Aspirant positions on our PEAK Matrix™ evaluations. In 2017, 67 service providers participated in 24 PEAK Matrix evaluations.

Awards categories

This year’s awards categories:

  • Leader boards
    • ITS Top 20: A list that recognizes the top 20 service providers
    • Top 10 Challengers: New this year, this list recognizes the top 10 service providers with annual revenue less than US$2 billion that increasingly position in the PEAK Matrix evaluation segments as challengers to the established leaders.
  • Individual awards
    • Leader of the year: Recognizes the service provider(s) with the maximum number of Leader positions
    • Star Performer of the year (overall): Recognizes service provider(s) with the maximum number of Star Performer positions.

We awarded these recognitions in the following areas:

  • Overall IT Services
  • Application Services
  • Digital Services
  • Cloud and Infrastructure Services
  • Banking, Financial Services, and Insurance
  • Healthcare and Life Sciences

Highlights of 2018 Service Provider of Year Awards

Here’s a look at the top five on the ITS Top 20 leader board:

PEAK SP of the Year

  • Accenture and TCS took the top two positions in the ITS Top 20
    • Accenture retained its top slot from 2017
    • TCS moved into second place, leapfrogging Cognizant and IBM
  • Accenture won Leader of the Year (overall)
  • TCS won Star Performer of the Year (overall)
  • And in the new Top 10 Challengers category, LTI and Virtusa snagged the top two positions.

Wondering if your IT services provider – or the firm you work for – received one of these coveted awards? See the complete list of winners.

Dark Clouds Gathering for Indian Service Providers | Sherpas in Blue Shirts

The effort around reforming H1B work visas in the global services industry has been dangling for years, entrenched in a political battle in Congress. But there’s movement again, and dark clouds are gathering on the horizon, signaling a coming storm. Five days ago, the US House Judiciary Committee passed HR 170 (Protect and Grow American Jobs Act) with solid, bipartisan support, and it carries onerous policies aimed at India’s outsourcing service providers – as well as problems for their clients. It hasn’t passed into law yet; but it could happen in 2018. Here’s my assessment of the situation.

Proposed Requirements

As I’ve blogged several times since May 2013, reform focuses on service providers whose business model depends heavily on a large percentage of H1B workers placed at US clients. HR 170 raises the classification of H1-dependent firms to 20 percent, rather than 15 percent of workers. Providers would be required to pay higher wages to their H1B workers – with the minimum salary tied to the average occupational wage in the US. That’s a raise from the current $60k up to, and potentially surpassing, $135k.

The bill adds authorization for the US Department of Labor to conduct investigations of H1B-dependent firms – without first having to establish reasonable cause – and provides for a $495 fine to be levied on the firms for the investigations.

HR 170 also would require US clients to provide attestations and “recruitment reports” attesting that no US workers were displaced by H1B workers. This would add the burden of new management and compliance processes.

Impact

Obviously, the onerous requirements are targeted at Indian service providers that heavily use H1B workers (especially Cognizant, Infosys, TCS, Wipro). The provisions would raise their costs. They would not be able to pass those costs through to clients, so it would reduce their margins. Making it more onerous to use H1B workers would also negatively impact the Indian providers’ business models, which rely on the high-margin “factory” structure for talent provision.

Is it a Long Shot?

Although HR 170 was passed with bipartisan support by the House Judiciary Committee and has yet to pass the full House. If that were to happen, the bill would still face bipartisan battle in the Senate. We’ve seen that play out this year in efforts to repeal healthcare laws and now in tax reform efforts.

However, it may not be a long shot. The bill’s main sponsor, Darrell Issa, the Republican representative from California, will face re-election battles next year and is likely to push harder for a win in visa reform. And don’t overlook the fact that California’s Silicon Valley firms would benefit from onerous visa regulations targeting India’s firms.

My Takeaway Warning

India’s service providers are already struggling in an uphill battle aside from visa reform. They struggle to gain competence and market share in evolving to the digital world. Investments in rotating to digital raise providers’ costs, take time and often lead to battles with investors and other stakeholders who want to maintain the current margin levels. In addition, margins in the digital models are low, for at least the short term.

H1B visa reform’s dark clouds gathering on the horizon for the Indian service providers will only heap new burdens on providers already struggling with margins and new business models in trying to become leaders on the digital space. I believe the bill, if passed into law, would inhibit their growth.

US clients, which want more valuable digital services from third-party firms – but want to pay the low cost they have enjoyed with offshore providers for many years – must recognize that strategy is no longer in the playbook. They also need to be mindful of providers changing their business model and delivery practices to accommodate the requirements of H1B worker provisions when the reform passes into law and how the provider’s decisions will impact the client’s work.

Sourcing Professionals Have a Tough Job | Sherpas in Blue Shirts

If you are a sourcing professional, you have our deepest respect, because now, more than ever, your job is a tough one. The sourcing industry is changing fast, disrupted by emerging technologies, shifting talent requirements and evolving service provider capabilities. Moreover, fluctuating geopolitical and legislative issues are causing enterprises to rethink substantial, long-held sourcing strategies and provider relationships. Sourcing professionals face formidable challenges in the global economy as the new year approaches and they look for better strategies in an industry experiencing unparalleled turbulence.

Technology is Changing the Game

It used to be that a sourcing professional’s No. 1 responsibility was finding a way to get the work done as cheaply as possible. Not any more. Technology has changed the game. In nearly every industry, digital technologies are driving the development of innovative products and services and improved customer experiences. To keep pace in this digital world, enterprises are now pursuing a digital-first rather than arbitrage-first strategy. In fact, the global services market has seen a threefold increase in digital-focused deals.

Automation, once merely a service delivery tool, is now “front end,” with enterprises demanding strategy, vision and strong Proof-of-Concepts (POCs) for advanced automation in 33 percent of all application services contracts in 2016. Similarly, artificial intelligence, cognitive computing and robotics will soon begin to pervade the enterprise portfolio and will eventually become mainstream in sourcing landscape.

Talent Requirements Are Shifting

The increasing adoption of digital strategies is changing the workforce skills that enterprises seek, and, in turn, forcing sourcing professionals to revamp their location portfolios in the midst of a dynamic landscape. Location options for traditional global sourcing continue to expand, and new locations are emerging for unique talent demands, such as digital capabilities.

Geopolitical Disruption Adds Complexity

Sourcing professionals also must anticipate and react to numerous geopolitical disruptions that keep the sourcing landscape shifting like windblown sand. In the past year, for example, we have seen a significant decrease in demand from the United Kingdom given the uncertainty with Brexit; uncertainty about healthcare legislation in the US has dampened the healthcare sourcing market; and the uncertainty due to visa reforms has led to increased local hiring and onshoring in the U.S.

The Provider Landscape is Constantly Changing

Sourcing professionals also are challenged to stay abreast of changes in the provider landscape. Mergers and acquisitions are on the rise, and leading providers are making fundamental changes to their talent and service delivery models. Between April of 2016 and March of this year, Everest Group 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.

Data for Sound Decision-Making

In the midst of this complexity, buyers of global services are tasked with making critical decisions. Recompeting an outsourcing contract, selecting a location for a global in-house center, or contracting for new tech services—these are the types of decisions that can significantly impact an organization’s performance and an executive’s career.

That’s why Everest Group has announced that it is doubling down on its commitment to provide fact-based comparative assessments. We’re consolidating our comparative analysis offerings – previously offered under a variety of product names – under our flagship PEAK Matrix brand, which will now evaluate services, solutions, products and locations. Additionally, we’ll be expanding the market segments addressed to include new functions, processes and industry verticals. Read more about it here.

In the midst of all the complexity and change that sourcing professionals face, one thing remains the same: Everest Group is your source for the fact-based analyses you need to make informed decisions that deliver high-impact results.

The Tyranny of Service Providers’ Global Rate Cards | Sherpas in Blue Shirts

As their enterprise clients move to digital business models, which are clearly superior in productivity, business alignment and speed, legacy service providers seek to shift their offerings to the new digital world too. Seems like a great match, right? So, what’s the problem? The problem is the service providers are accustomed to a very profitable offshore factory delivery model. Inconveniently, the new digital business models don’t align well with this old tried-and-true mainstay. Even more disturbing for the service providers is that the new delivery models look to be less profitable than the mature offshore talent factories. I foresee increasing pressures on margins and some potentially unrecognized consequences that will impact clients.

Two reasons for the margin paradox

 
As the services industry rotates from the old labor arbitrage model to digital business models, service providers expect to achieve higher margins than their typical 40 percent gross margins. Why? Because the digital models deliver a higher level of value. They are better aligned against clients’ business results and are delivered at a faster rate. So, why are providers shifting to digital not getting even close to maintaining the margins they enjoyed in the labor arbitrage space? 

One reason is the price of digital talent. The skillsets for the disruptive technologies are rare and command a higher price. Plus, there is a scarcity of talent with skills and experience in implementing the new models.
  
A second factor is the difference in teams doing the work. The digital world requires persistent teams that remain over time and are located onshore; the arbitrage world depends on low-cost labor in offshore teams that churn over time.  

Read more at my CIO Online blog

The Equifax Data Theft: What if GDPR were in Force? | Sherpas in Blue Shirts

The high entropy data protection space has once again gained headlines after Equifax, the U.S- based consumer credit reporting agency, revealed that a July 2017 theft compromised more than 143 million American, British, and Canadian consumers’ personal data. The data breach incident, one of the worst cyber-attacks in history, was conducted by hackers who exploited a vulnerability in the company’s U.S. website and stole information such as social security numbers, birth dates, addresses, and driver’s license numbers. (Equifax maintains and develops its database by purchasing data records from banks, credit unions, credit card companies, retailers, mortgage lenders, and public record providers.)

Much about the situation would have been considerably different had this breach happened after May 2018, at which time the General Data Protection Regulation (GDPR) – a regulation by which the European Parliament, the Council of the European Union, and the European Commission intend to strengthen and unify data protection for all individuals within the European Union (EU) – goes into effect. Even though it is not headquartered in the EU region, Equifax would have come under the purview of GDPR, because it maintains and reports the data of British citizens. And the stringency of requirements and degree of implications would have been significantly higher for the credit rating agency.

GDPR and Equifax

Although not directly related to GDPR, another significant business impact is the sudden “retirement” of Equifax’s CEO less than three weeks after the breach was announced.

This massive cyber-attack is a wake-up call for the services industry. Starting today, operations and businesses must regard data protection regulations with the utmost importance. Non-compliance will not only harm firms financially, but also expose them to brand dilution and business continuity risks.

Some of the key imperatives for enterprises operating in the ever-so-stringent data protection space include:

  • Know and understand the data security laws under which your enterprise falls, especially those such as GDPR that have far reaching impacts
  • Redesign your business processes to incorporate privacy impact assessments to identify high risk processes
  • Implement necessary changes in the contracts with third parties to incorporate the stricter requirements of consent
  • Achieve process transformation to inculcate privacy by design; this includes risk exposure reduction by technological changes such as data minimization
  • Appoint a Data Protection Officer to align the business goals with data protection requirements
  • Make suitable changes in contracting and governance practices to ensure adequate emphasis on data protection

To learn more about the strategic impact of the EU GDPR on the global services industry, please read our recently released viewpoint on GDPR: “EU GDPR: Is There a Silver Lining to the Disruption.”

Contingent Labor Service Providers: The Winning Capabilities in 2017 | Sherpas in Blue Shirts

There’s no denying that the contingent workforce market is being disrupted by multiple forces – the emergence of statements of work (SoW) and independent contractors (IC) as significant new spend categories, the rapid evolution of analytics and supporting technologies, and rising buyer demand for total talent acquisition, to name just a few. Navigating through the maze of disruptions to rise to the top of the market is no easy feat for service providers in the space, but several have done so in 2017.

Following are the differentiating qualities and capabilities that earned a handful of providers their rightful spot as  Leaders in Everest Group’s Managed Service Provider (MSP) PEAK Matrix™ in 2017.

  • Fast, proactive responses to market trends: With SoW and IC emerging as new spend categories, the Leaders have differentiated themselves by taking early action in acquiring the capabilities needed to manage them. After starting out with the low hanging fruits such as payments, compliance, etc., these Leaders are now moving on to strategic areas of the value chain such as sourcing, category expertise, and negotiation. The Leaders are also making considerable headway in the emerging area of Total Talent Acquisition (TTA) by developing the requisite capabilities and leveraging their existing expertise in RPO and/or as an Managed Service Provider.
  • Technology ecosystem versus discrete technologies: The Leaders understand the need for and benefits of a talent ecosystem, which means offering an integrated set of tools that can help provide visibility and control over the entire talent acquisition function. These service providers have either developed or are in the final stages of developing a holistic technology architecture to serve the entire talent acquisition landscape. A prime example of this is the addition of SoW and IC management capabilities to the existing Vendor Management System (VMS) itself.
  • Next-gen analytics capabilities: While reporting and descriptive analytics have been around for a while, the true business potential of analytics technology can only be unleashed through predictive and prescriptive analytics. When you couple these with natural language programming (NLP) and artificial intelligence (AI)/machine learning (ML), you create an easy-to-use, intuitive system that can greatly reduce the costs and spend associated with contingent labor. While the technology is still in nascent stages, the Leaders have started taking a few tentative steps down the road to acquiring these capabilities.
  • Capability to serve the entire market: the Managed Service Provider market is no longer restricted to certain geographies or large enterprises. Buyers from developing markets and mid-sized firms are starting to embrace and realize the benefits of an outsourced contingent workforce management program. The Leaders have introduced specialized offerings, such as evaluating the need for a contingent workforce management program and advising in the technology implementation stage, that make it practical for these first generation buyers to outsource their contingent workforce management.
  • Value-added services and customized solutions for experienced buyers: With a significant portion of their portfolio now consisting of second-and third-generation buyers, the Leaders have begun offering value-added services such as contingent talent branding and talent community management, which helps improve the candidate experience and results in better fill rates and acceptance ratios. They are also offering innovative payment models such as gainsharing or risk sharing programs, such as indemnification of contingent workforce management services.

While the Leaders in our 2017 Managed Service Provider PEAK Matrix™ have taken considerable steps to gain the title, the market is still wide open for innovative and proactive providers. Investing in new technologies and capabilities, and quickly addressing market trends will help other providers emerge victorious.

Impact of Digital on Outsourcing Contract T&Cs | Sherpas in Blue Shirts

Many enterprises today are restructuring their existing outsourcing contracts with changes to scope, pricing mechanisms, and SLAs to help ensure they reap the benefits of the emerging digital technologies being used in their engagements.

For example, because the focus has shifted from quality of service delivery to service innovation and business outcomes, we are observing more incentive and benefit sharing mechanisms being added to digital services contracts. And because enterprises are mindful of the uncertainties that exist in the digital transformation journey, they are willing to include some contractual flexibility around scope changes, SLA revisions, etc.

However, one important area that has been somewhat neglected in this digital-driven contract realignment is terms and conditions (T&Cs.) In these contract T&Cs, enterprises must do all they can to safeguard themselves from potential risks, even those that are unforeseen. Consider the case of a global consumer goods company, whose outsourced RPA solution was working incorrectly due to issues with the automation technology platform. It took six months for the base product to be updated and fixed, but the enterprise could not recoup lost opportunity costs from its service provider because such a scenario was not adequately incorporated into the contract T&Cs.

Key outsourcing contract term considerations

Following are just some of the areas that enterprises should consider including in their digital automation outsourcing contract T&Cs.

  • Who owns the IP rights to the automation bots? Does this change when the solution has cognitive features that generate business insights?
  • Can the service provider reuse the automation solution with other enterprise clients? Can it do so with the buyer’s competitors?
  • What happens to the automation solution on contract termination? What part of the automation solution can be retained by the buyer? If the solution is non-transferable, what assistance is the automation provider contractually obligated to provide?
  • If the automation solution fails to work as originally designed, who is responsible for the damages that arise?
  • Does the outsourcing contract provide flexibility to incorporate additional scope or automation projects, or will separate negotiations and contracts be required?
  • What happens if the provider under- or over-performs on the productivity improvement or cost savings targets? Will the parties share the benefits or opportunity losses?
  • What happens if there is a change in the process or underlying IT system? Who will be responsible for the subsequent changes in automation solution?

Of course, there’s a double-edged sword here: in general, the more stringent the T&Cs, the higher the price charged by the service provider. So, you need to carefully weigh the risks versus the rewards.

Have you experienced an issue relating to non-inclusion of any clause in your digital services contract? Or did you successfully safeguard your company through a specific term or condition? Please feel free to directly share with me at [email protected].

Pharma Service Providers’ Role in Tempering Pricing Wars | Sherpas in Blue Shirts

Shortly after the U.S. Food & Drug Administration (FDA) approved Novartis’ CAR T-cell drug, Kymriah – which is used for pediatric B-cell Acute Lymphoblastic Leukemia – last month, Novartis announced its price…a whopping $475,000 per patient. This is certainly not the first market instance of highly expensive drugs (see below.)

But it might just be the tipping point for stakeholders – including regulatory bodies, payers, physicians, advocacy groups, and patients – to start having constructive discussions with drug manufacturers on how to make drugs that treat extremely rare diseases more accessible to the very small share of the population that needs them.

eg13
It is certainly time for pharma companies to overhaul their operations in order to mitigate price anger and get such drugs into the hands of those whose lives depend on them.

One way they can do so is by employing pay-for-performance, or outcome-based, contracts, wherein the manufacturer charges for the drug once it proves effective, say one or two months into treatment. Note that this pricing model hasn’t yet really taken off, especially in the United States, where the fragmented multi-payer environment acts as an added roadblock. Indication-based pricing, wherein there are different prices for different conditions, is another model that biopharma companies can use, but the U.S. market does not have mechanisms in place for it, at least as of now.

Other ways of ensuring patients are able to benefit from such critical drugs are through mixes of personalized offline and online marketing campaigns directed specifically to the relevant patient and physician pool, and improved and comprehensive patient support programs to help in solving “last mile connectivity” issues.

But at the end of the day, stakeholder backlash might – and should – force pharma companies to drive down their own costs to make these expensive, personalized medicines more affordable. And this is where outsourcing service providers can help.

The third-party service providers that are already servicing the pharma industry need to prepare or bolster solutions and capabilities around areas including patient and market access, data analytics, omnichannel marketing, IoT, automation, portals, applications, customer support, pricing analytics, infrastructure modernization, and cloud orchestration. Service providers that are struggling to enter the life sciences space should view this as a window of opportunity to get a foot in the door of these companies. Doing so will mean additional business for both these types of vendors; it could also mean reduced pricing pressure for the patients who need such vital treatments.
The future of personalized medicine depends a lot on success of such drugs, and biopharma companies can no longer afford to sit back and operate like they always have. For a detailed discussion and analysis around these solutions, and to learn about other trends in the life sciences market, look out for our soon-to-be-published State of the Market Report.

Gazing into the Global Services Crystal Ball: Sometimes you get it Right, and Sometimes, Not so Much | 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…

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