Service providers see declining revenues and margins; cybersecurity, desktop and mobility services gain traction as enterprises adapt to work-from-home
Q2 results are in, and Everest Group reports the Global Sourcing industry is suffering from the negative business impacts of the COVID-19 pandemic. Two trends illustrate this: First, the worldwide setup of Global Business Services (GBS) centers, also known as Global In-house Centers (GICs), fell sharply (more than 48%) as offshore/nearshore activity dropped 46% and onshore setups dropped 52% for the quarter. Second, although overall outsourcing activity ticked upward slightly (2%) for the quarter based on the number of deals signed, service providers reported a decline in both revenues and operating margins.
In offshore and nearshore locations, GBS market activity declined from 44 in Q1 to 24 new setups in Q2. In onshore locations, GBS market activity decreased from 33 new setups in Q1 to 16 in Q1 2020. New center setup activity in India reached an all-time low, after seeing only 8 new setups in Q2 as compared to 16 in the previous quarter.
Based on financial reports from Q1 2020, the consolidated revenue and operating margin of service providers witnessed a decline, -1.5% and -21% respectively, in comparison to the previous quarter.
“The global services industry is certainly feeling the pain of the economic downturn caused by COVID-19,” said H. Karthik, partner at Everest Group. “Enterprises and service providers functioning in sectors such as travel and hospitality, aviation, retail, automotive and manufacturing sectors have been hit the hardest in this quarter due to extremely low demand and supply constraints. Further, delays in new project renewals and cancellations of ongoing outsourcing projects have been witnessed in a number of cases. This has been followed by cost optimization measures that included layoffs for several enterprises and service providers.
“However, governments across the world have announced stimulus packages and relief measures,” continued Karthik “The G20, for instance pledged to infuse over US$5 trillion to support economies and protect workers and businesses. This infusion of support provides hope for recovery, and we continue to expect that significant containment in the spread of the virus will lead to further recovery of sourcing activity as lockdowns and travel restrictions can be eased.”
These global sourcing trends are detailed in Everest Group’s recently released Market Vista™: Q3 2020 report. The report shines a spotlight on transaction trends and outsourcing deals, GBS-related developments, offshoring dynamics, location risks and opportunities and key service provider developments.
***WEBINAR, Thursday, September 10***
Everest Group is hosting a complimentary 60-minute webinar, “Impact of COVID-19 Beyond WFH: The Future of Delivery and Locations Strategies.” Everest Group experts will provide a fact-based view of the already-visible effects of the pandemic and discuss the implications of these developments on future delivery and locations strategies, including key changes to delivery portfolios, trends in onshoring versus offshoring, locations portfolio consolidation versus diversification, rise in large scale hubs versus small scale centers, and adoption of a remote or work-from-home delivery model.
The live webinar will be held on Thursday, September 10, at 9 am CDT. Register here.
Highlights of the Market Vista Q3 Report:
About Everest Group
Everest Group is a consulting and research firm focused on strategic IT, business services, engineering services, and sourcing. Our clients include leading global enterprises, service providers, and investors. Through our research-informed insights and deep experience, we guide clients in their journeys to achieve heightened operational and financial performance, accelerated value delivery, and high-impact business outcomes. Details and in-depth content are available at http://www.everestgrp.com/.
A sustained focus on digital, agility, and advanced technologies is likely to prepare enterprises for the future, especially following COVID-19. Many enterprise leaders consider IT infrastructure to be the bedrock of business transformation at a time when the service delivery model has become more virtual and cloud based. This reality presents an opportunity for GBS organizations that deliver IT infrastructure services to rethink their long-term strategies to enhance their capabilities, thereby strengthening their value propositions for their enterprises.
GBS setups with strong IT infra capabilities can lead enterprise transformation
Over the past few years, several GBS organizations have built and strengthened capabilities across a wide range of IT infrastructure services. Best-in-class GBS setups have achieved significant scale and penetration for IT infrastructure delivery and now support a wide range of functions – such as cloud migration and transformation, desktop support and virtualization, and service desk – with high maturity. In fact, some centers have scaled as high as 250-300 Full Time Equivalents (FTEs) and 35-45% penetration.
At the same time, these organizations are fraught with legacy issues that need to be addressed to unlock full value. Our research reveals that most enterprises believe that their GBS’ current IT infrastructure services model is not ready to cater to the digital capabilities necessary for targeted transformation. Only GBS organizations that evolve and strengthen their IT infrastructure capabilities will be well positioned to extend their support to newer or more enhanced IT infrastructure services delivery.
The need for an IT infrastructure revolution and what it will take
The push to transform IT infrastructure in GBS setups should be driven by a business-centric approach to global business services. To enable this shift, GBS organizations should consider a new model for IT infrastructure that focuses on improving business metrics instead of pre-defined IT Service Line Agreements (SLA) and Total Cost of Operations (TCO) management. IT infrastructure must be able to support changes ushered in by rapid device proliferation, technology disruptions, business expansions, and escalating cost pressures post-COVID-19 to showcase sustained value.
To transition to this IT infrastructure state, GBS organizations must proactively start to identify skills that have a high likelihood of being replaced / becoming obsolete, as well as emerging skills. They must also prioritize emerging skills that have a higher reskilling/upskilling potential. These goals can be achieved through a comprehensive program that proactively builds capabilities in IT services delivery.
In the exhibit below, we highlight the shelf life of basic IT services skills by comparing the upskilling/reskilling potential of IT services skills with their expected extent of replacement.
Exhibit: Analysis of the shelf life of basic IT services skills
In the near future, GBS organizations should leverage Artificial Intelligence (AI), analytics, and automation to further revolutionize their IT capabilities. The end goal is to transition to a self-healing, self-configuring system that can dynamically and autonomously adapt to changing business needs, thereby creating an invisible IT infrastructure model. This invisible IT infrastructure will be highly secure, require minimal oversight, function across stacks, and continuously evolve with changing business needs. By leveraging an automation-, analytics-, and AI-led delivery of infrastructure, operations, and services management, GBS organizations can truly enable enterprises to make decisions based on business imperatives.
If you’d like to know more about the key business transformation trends for enterprises in IT infrastructure, do read our report Exploring the Enterprise Journey Towards “Invisible” IT Infrastructure or reach out to us at [email protected] or [email protected]
Transformation has become an imperative for all industries, more so during the unprecedented COVID-19 pandemic. A majority of our clients have highlighted the increasing pressure to manage their margins and balance their long-term vision and strategy with short-term needs in a post-COVID-19 landscape. One way for enterprises to achieve this objective is by re-assessing the setup model for their future Global Business Services (GBS) centers.
This blog focuses on one such setup option – Build Operate Transfer (BOT) – and its commercial underpinnings. In these uncertain times, BOT seems to be an especially relevant option, as it offers the unique advantage of lower short-term investment and a better long-term business re-prioritization opportunity. But only if the price is right.
Let’s take a closer look.
In a BOT sourcing model, an enterprise can partner with a third-party service provider to build a delivery center (which includes investing capital, leasing the facility, and sourcing talent), operate it for a pre-defined period (based on the operational agreement), and allow the enterprise the option to transfer the center back to itself. The model helps avoid upfront capital investment, reduces operational risk, limits the burden of managerial and operational oversight, promotes new capabilities, and expedites speed-to-market. As it comes with an exit option, enterprises can also test the model without fully committing to it.
In fact, as part of a recent engagement, we helped a global technology firm assess the best-fit setup option for its GBS center in India. The firm opted for BOT, preferring to partner with a local service provider to reduce financial and operational uncertainties. While the BOT model’s benefits were evident from the start, a key learning from the engagement was that these benefits come at a relatively high cost. Thus, understanding the price tag is key before committing to the model.
While the key cost components of a BOT model can vary based on the specifics of the service contract, we outline below standard commercial practices prevalent in the market across the build, operate, and transfer stages.
In the build phase, the enterprise is either not required to invest or invests a limited amount, and vendors typically provide most of the upfront investment. In most cases, the service contract stipulates that the service provider’s investment includes setting up the facility (which includes both real estate and technology infrastructure), establishing the hiring mechanism, and laying the ground for services delivery. The service provider recovers this investment in the next two stages.
In the operate phase, the service provider charges the enterprise an ongoing fee to meet all operating expenses and day-to-day operations and to track and maintain pre-determined Service Line Agreements (SLAs). The ongoing fee includes the service provider’s margins, which are typically 2-5% higher than those in a pure outsourcing construct. The additional margin is often dependent on the scope, scale, and nature of services, the service provider profile, extent of initial investment, and lock-in period.
In the transfer phase, the service provider typically charges the enterprise a one-time transfer fee, which could vary widely – 20-30% in some cases – based on other contractual agreements, in lieu of transferring back all services and procured assets. Typically, this fee is charged as a percentage of the ongoing annual fee in the build phase, and an enterprise can pre-determine this percentage in the service contract. Beyond this, if rebadging is required, the service provider charges the enterprise a one-time transfer fee to give up employer rights on resources that are successfully rebadged.
Considering these cost elements, a BOT construct can be about 15-30% more expensive than a de novo / fully owned GBS model. Hence, each enterprise needs to consider the cost-benefit trade-off when selecting a suitable setup option for itself.
When evaluating future GBS setups, we urge enterprises to be mindful about the overall business case and assess both the financial and non-financial aspects of the setup model. Doing so will help them understand both the costs involved and associated benefits. Our research strongly suggests that enterprises are likely to find a robust business case for the BOT model to navigate these uncertain times.
60-minute webinar delivered live on Tuesday, June 23, 2020
The future is now for Work From Home (WFH). While WFH is not a new concept, COVID-19 has dramatically changed the way global leaders look at the need for, and benefits of, WFH. As a result, scaled WFH is inevitable in the global services industry, even after COVID-19-related restrictions ease.
In this webinar, we will share insights you can use in developing your global business services (GBS) WFH strategy including:
You’ll get answers to questions such as:
Who should attend and why?
This session will help leaders across organizations evaluate impact and uncover opportunities:
Can’t join us live? Register anyway!
All registrants will receive an email (typically within 1-2 business days of the live presentation) containing the link to the slides and on-demand playback.
American politician Rahm Emanuel advised, “You never want a serious crisis to go to waste.” As companies begin to exit the COVID-19 crisis, they look at the business world through new eyes. In a recession, they need to reduce costs. Further, most employees now work from home. Together, these factors, forced by the pandemic, cause boards of directors and CXOs to ask, “How can we operate as a leaner, more competitive company structurally?” But they look at more than how to operate more cost-effectively. They look at how they can add more strategic value in their operations.