Tag: economy

Trump Administration Policy Implications for the American Job Market to be Discussed in Everest Group Webinar | Press Release

Experts weigh in on how President Trump’s policies may impact the American economy, US talent models and companies with a global workforce

U.S. President Donald Trump has pledged to “Make America Great Again” by implementing policies to protect American jobs, but will the early actions and proposed policies of his administration have the desired impact? And how should business leaders in the U.S. and abroad prepare themselves for what could be a significant shift in the global landscape for jobs?

Everest Group—a consulting and research firm focused on strategic IT, business services and sourcing—will address these questions in a complimentary webinar offered this week. The webinar—“Make America Great Again: How could President Trump’s policies reshape the American job market?”—will be held on Wednesday, April 5, at 10 a.m. CDT.

***Register for the webinar here***

The one-hour event will delve into these issues:

  • US job losses and the state of the economy
  • Trends in the workforce driving the U.S. administration’s actions and its impact on U.S. competitiveness
  • Initiatives taken by leading countries and companies to enhance global competitiveness
  • Implications for global talent and business models in the near and medium term

The webinar will be hosted by Everest Group’s Marvin Newell, partner, and Hardik Chokshi, senior consultant.

Is the Services Industry in Decline? | Sherpas in Blue Shirts

Information Services Group (ISG) publishes a quarterly “ISG Outsourcing Index,” which is widely read in the services industry. Q1 2015 wasn’t a pretty picture. The Americas saw a modest 10 percent gain in ACV, and India/South Asia showed strong. But the rest of the world took a bullet, so to speak; EMEA’s ACV declined by 25 percent, Asia Pacific by 45 percent, and Australia/New Zealand had one of the weakest quarters in a decade. So the modest gains are dramatically offset by large losses elsewhere. This is further evidence of what I’ve been blogging about for some time – the industry is at an inflection point and preparing to shift. Let’s look at where the shift is headed.

But, first, a word of caution. We at Everest Group stopped publishing our index based on publicly announced deals many years ago because we found the data was inherently flawed. If all you use is publicly announced deals, you’re only looking at the large transactions and only some of those because many deals are not published. The next-generation deals and smaller deals are typically not announced. So the data is inherently noisy. Having said that, there is some value to looking at what’s happening in publicly announced deals. As such, the ISG Outsourcing Index is as good as any.

Four themes in today’s market 

The services industry is now in a mature state. As such, it has four major characteristics or themes in what’s happening:

  1. Affected by economic cycles
  2. Brownfield deals
  3. Pricing pressures
  4. Shift toward smaller transactions

Cyclical impact. As a mature industry, the services business is affected by the cyclical economy to a much larger degree than it has been in the last 15 years. To wit, where we have a growing economy in North America, the industry has share increases; where there are struggling economies in the rest of the world, the industry has share and ACV decreases.

Brownfield deals. The services world now is largely defined as brownfield deals in that the majority of activity is recompeting existing scope rather than capturing new scope. In this world, awards are smaller transactions for shorter durations.

Pricing pressures. In a recent blog post, I detailed the pricing pressures now hitting service providers and resulting in a major downward spiral and pricing wars. The ISG data also reported the downward-pricing situation. Brownfield deals also exacerbate this situation as they’re hinged on winning recompetes with existing customers, which are intent on driving prices down.

Shift toward smaller transactions. In addition to the brownfield impact there is an uneasiness in the market due to customers’ desire to break up current deals and shift to next-generation models that are automation based, as-a-service or digital. We see this movement clearly as we look at the unannounced deals that we track at Everest Group. Our observation is that these unannounced deals are taking share but with small ACV awards.

This phenomenon is particularly prevalent in the infrastructure martketplace, where there has been a secular shift from large, bundled, asset-heavy transactions to asset-light, unbundled transactions with shorter duration. The emerging markets of cloud computing and as-a-service accelerate this movement. Finally, we see tangible evidence of enterprises preparing to make large-scale shifts to cloud by adopting shorter, more flexible transaction structures for their legacy infrastructure and applications.

Bottom line

The industry faces the prospect of a maturing market impacted by economic cycles, pricing pressures, brownfield focus, and customers shifting to new models. The good news is that the new models and technologies are growth areas for the industry. However, these deals are smaller and are not usually announced deals and therefore don’t show up in the ISG Index.

The Reason for Joy This Season | Sherpas in Blue Shirts

I’ve observed an unusual acceleration of new activity here at the end of the year — a season when global services initiatives activity traditionally tapers off dramatically. It looks like this year the industry is getting a big Christmas / New Year’s present of accelerating sales. What’s the reason for this strong uptick in new initiatives, so unusual for the November-December season? It’s a little too early to tell, but I believe two big factors are driving the uptick.

Reason for joy

Both reasons are a result of the end of uncertainties in two big areas of the market. With more certainty, organizations are moving forward.

Reason #1

The first reason is the North American economy is finally starting to give organizations confidence to open their wallets and spend on transformational activities. With the GDP expanding and the U.S. economy on a much sounder footing in the third and fourth quarters, companies are kicking off new initiatives. When the economy was uncertain, organizations didn’t focus on structural changes; but with a rising economic tide, the services boat seems to be floating better.

Reason #2

The second reason for the unusual activity at this time of year is that the cloud experiment is over and organizations now have a clear path for what they want to do with cloud and other new-generation technologies.

For three years organizations have been diligently piloting cloud and new-generation technologies. We’re now at a point where organizations have sufficient confidence in the technologies themselves, whether it’s digital, mobility or cloud. So organizations are willing to adopt these technologies on a greater scale.

From false starts to strong finish

2014 has been a strange year with several false starts for the services industry. But we’re observing a strong finish. Combined, these two new certainties around the economy and new technologies are creating the long-awaited uptick in new global services. So it looks like it will be a very happy Christmas and a wondrous new year.

Photo credit: Matthew Paulson

Surprising Strong Profit Performance by Syntel and TCS Bodes Well for the Industry | Sherpas in Blue Shirts

The Q2 earnings reports for Syntel and TCS show not only a strong performance for both companies but, surprisingly, show stronger earnings growth than revenue growth. We’ve seen stronger earnings than revenue results with other providers in the past, but this is surprising. That’s because it reverses a trend the industry has been experiencing.

This strong performance comes at the same time we’re seeing a rupee appreciation, which puts a slight downward pressure on margins and reduces Indian providers’ ability to make money.

But as we dig below the surface for deeper significance, the strong earnings indicate that the industry is maintaining pricing. Amidst competitive pressures, providers are successfully resisting significant price discounting on new work, despite well-documented attempts by procurement organizations to drag pricing down. So the Syntel and TCS earnings reverse a trend of increased pressures on margins.

I think this is a result of further honing their offshore model and flattening their labor pyramid. It’s particularly impressive given that we’ve had modest rupee appreciation during this time frame.

The news is encouraging and bodes well for the industry, particularly given the modest uptick we see in the recovery of the global and North American economies.

Why BPO Providers Are Disappointing Investors | Sherpas in Blue Shirts

Out of 22 outsourcing stocks, a few have outperformed the S&P to date this year: EXL Service, Global Payments, Star Tek and UEPS. But 18 have underperformed by an average of 9 percent so far. Why is this trend happening?

First, investors are always forward looking, and stock disappointments or exuberance are relative to the prior year. We saw great appreciation in stocks across the industry in 2013. But this year we’re well off that pace. With stocks at full value last year, they have less progress to go.

Several other factors are in play. Protectionist sensitivity to moving work offshore affects several providers. Rising labor costs, attrition and currency fluctuations take another hit. Competition and pricing pressure are intense in some segments. And some providers are dealing with a stepped-up pace of regulatory changes as well as integration challenges of acquisitions.

Top driver

But I believe the biggest factor is that the global services space is maturing. The strong, robust growth driven by the secular shift to offshoring or labor arbitrage is starting to flatten.

As a result, the industry is in search of the next set of S curves that can drive growth. There are a number of interesting contenders:

  • Cloud
  • As a service
  • Digital
  • New functional areas that companies are willing to contemplate giving to third parties
  • Vertical industry plays in healthcare or financial services driven by wrestling with regulations and driving further into compliance and dealing with regulations

All these areas are promising for industry growth. However, these new growth opportunities are not sufficient to offset the declining rate of growth in the broader arbitrage segment. So what does this portend for the future?

The future

I think at least until — and unless — these new areas develop enough scale for robust revenue growth, we’ll see the kind of cyclicality that we’ve experienced over the last few years with the industry’s fortunes tied to economic cycles rather than an underlying growth engine.

Recession-Era Pricing is Here to Stay in Sourcing Deals | Sherpas in Blue Shirts

Originally posted on Spend Matters

The slowly fading recession has left a profound impact on pricing in sourcing contracts. That impact is seen in a trilogy of forces with long-term ramifications that will keep pricing at recession-era levels for the foreseeable future, even as contract volume rebounds with pent-up demand. This “new normal” imparts lasting implications on future sourcing agreements.

Read more on Spend Matters

Photo credit: Andreas Levers

Slow Growth of GICs… Is the Model Losing Its Sheen? | Sherpas in Blue Shirts

The Global In-house Center (GIC, formerly referred to as captives) market was once thriving with unprecedented statistics – 97 new GIC set-ups in 2009, 105 in 2010, and 103 in 2011. Then there was a dip, with only 75 new centers in 2012, and 69 in 2013. This, coupled with numerous acquisitions of GICs by service providers, (e.g., KBC Group’s financial arm by Cognizant, Bayer’s Indian IT operations by Capgemini, and Hutchison Whampoa’s India-based call center operations by Tech Mahindra), is likely to raise questions and concerns about the future of the in-house model.

GIC Landscape Report 2013-I1

Let us look at the ground realities of the GIC model’s growth and evolution:

  • Indeed, the rate of growth of GIC set-ups has slowed down. However, this can largely be attributed to a weak economic scenario and slow decision-making cycles, and should not be construed as weakening confidence in the GIC model. As the future outlook of the global economy is positive, we expect the GIC market to gain momentum in the near future
  • Established GICs are evolving in their journey to be a partner of their parent firms, rather than just an offshore cost-saving entity
  • The success of the GIC model in pioneer delivery locations such as India and the Philippines is leading buyers to explore and diversify to other locations
    • CEE countries are witnessing increased activity due to aggressive government incentives, the language advantage, and the nearshore proposition
    • Relatively untapped regions in the Middle East and Africa reported an astonishing eight GIC set-ups in the last year alone
    • Firms are expanding their GIC operations to tier-2 and 3 cities due to saturation in tier-1 cities in mature locations such as India

GIC Landscape Report 2013-I5

  • While the technology, manufacturing, distribution and retail, and BFSI industries continue to have a strong foothold, other verticals – such as conglomerates, business services, hospitality, and printing and publishing – have emerged to gain a noticeable share of the GIC market.

Further, while buyers’ moves from an outsourced to an in-house model rarely receive considerable fanfare, they do paint a picture of the health of the GIC model. For example, HP had been General Motor’s main IT vendor per a US$2 billion contract awarded in 2010, but in 2012 the automaker decided to insource a huge amount of its services as part of its new strategy, leaving HP with only a few. AstraZeneca plans to reduce its outsourcing work, which is currently spread across multiple Indian software service providers. BT plans to have more control of its processes by taking back its outsourcing contracts from service providers, and increasing its capacity in existing shared services centers in India and Malaysia.

The bottom line is that while GIC set-up growth may be slowing, the model continues to be an integral component of organizations’ sourcing strategy. Firms continue to leverage both sourcing models (service providers and GICs) based on best fit with their sourcing needs, cost and value objectives, and services demand profile.

For more insights on the GIC model landscape, please refer to our recently released report “Global In-house Center (GIC) Landscape Annual Report 2013.” The report provides a deep-dive into the GIC landscape and a year-on-year analysis of the GIC trends in 2013, comparing them with trends in the last two years. The research also delivers key insights into the GIC market across locations, verticals, and functions, and concludes with an assessment of strategic priorities for GICs.

The Son-in-Law | Sherpas in Blue Shirts

To date, the global services industry in 2014 has all the signs of being a “son-in-law.” As many parents will tell you about their prospective son-in-law: “He’s nice, but … I was hoping for something a little better.”

2014 arrived with so much promise, both in IT and BPO. Europe’s economy was improving. We hoped the U.S. economy was ready for robust expansion. We hoped we would see a surge in discretionary spending. And we hoped that the uncertainty that characterized the past four years would recede. We also anticipated that disruptive technologies and new solutions in cloud, big data and analytics would generate robust growth opportunities in the services space.

All these things happened. The economy has stabilized and new technologies are generating growth opportunities.

But as we look at the net results of the first quarter, well — it’s nice … but it does feel like a son-in-law. We were hoping for something a little better.

2014 Outlook for the Global Services Industry | Sherpas in Blue Shirts

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.

Is It Time to Sing “Happy Days Are Here Again?” | Sherpas in Blue Shirts

After several years of believing that discretionary spend would come back into the marketplace, it appears that we are, in fact, experiencing an uptick. This increase in demand is definitely welcome after recent years of suppressed demand.

The question is: How long will this trend continue and will we move back to the heady growth of days of yore?

The answer is yes and no. Yes, the growth trend is likely to continue. We seem to have an improving economic condition in both North America and Europe for both structural outsourcing as well as discretionary spend. I think we can look forward to modestly improved growth rates.

However, we need to remember that we’re at a very different level of market saturation for outsourcing services than we were five years ago. It seems unlikely that the market will return to the 20+ percent growth rates. I think what we’re looking at today is a small increase in growth, not a large one.

Having said that, let’s take what we can get and celebrate! As the French Mardi Gras saying goes, let the good times roll — but not to the point that we wake up with a reality hangover.

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