Enterprise perspectives on the 2019 global services market: five things to know – automation, business models, talent challenges, budget centers, and sourcing models / provider mix
Enterprise perspectives on the 2019 global services market: five things to know – automation, business models, talent challenges, budget centers, and sourcing models / provider mix
There is little doubt that 2018 has been an interesting year. And it makes one wonder what’s ahead.
As we all know, the fate of most businesses is now based upon the global economy. In the U.S., the economy has been on fire with great GDP growth, record stock markets (until the recent dip!), and unemployment rates that are at generational lows. But President Trump’s “America First” policies have introduced a layer of uncertainty to the business world. And the rest of the world certainly has experienced a mixed bag of economic results.
So, what’s next? While it is easy to worry about rising interest rates, tariffs, increasing global/regional geopolitical tensions, and maybe even global warming – none of these issues are directly within your business’ leadership team’s control.
Yet, there is one common issue (at least in the U.S./European markets) that is becoming even more persistent, and that is the talent shortage across many different segments of the economy. Our hypothesis is that organizations are going to need to double down on their automation efforts to get more productivity out of their existing workforce.
Do you agree with our automation prediction? Or are there other challenges more pressing for your organization? We want to hear what you think are truly the most important topics impacting your organization and its plans for 2019.
As thank you for your participation, we’ll share a summary of the results; you’ll gain a comprehensive understanding of the areas where your peers are focusing their attention. Are they the same as yours? Completely different? A mix? Will 2019 be a repeat of 2018 Crazytown? Take the survey and see. (Although no promises on getting the right answer to that last one.)
Everest Group’s March 22 symposium, Thriving in a World of Perpetual Change, brings together industry expertise and rich resources to help you identify practical strategies to thrive in a time of global disruption. Join us as we explore ways leading enterprises are planning and organising to take advantage of disruption to improve outcomes.
Ongoing global disruption – in the form of economic uncertainty, political upheaval, legal/regulatory change, and technological development – is forcing the global services market to completely transform how service delivery is organised and executed. Keeping up with the latest developments is difficult enough, let alone understanding and planning for potential consequences.
What you will see, hear, and learn
The programme will be followed by a networking session industry colleagues and Everest Group analysts over drinks and canapes.
Thursday, 22nd March, 2018
3:30 to 7:00 pm
Last year’s event exceeded capacity very quickly – register today to save your space!
As I look back on this year, it’s impossible to unplug digital from the determinants of the year’s most significant business changes. A review of how the rotation to digital impacted the global services market in 2017 provides a glimpse of factors that will be at play in 2018 as companies seek to be more competitive. In this blog, I’ll focus on three of the top factors that affected businesses this year.
Both the global services market and the Indian sector further decelerated this year. When we made projections for 2017, Everest Group was the only firm to make that call. In fact, although we were overly criticized for being overly pessimistic, the market decelerated even more than what we forecasted.
Deceleration is not the same as shrinkage. In the legacy space, the offshore labor arbitrage talent factories went from a growth space to a three percent contraction this year. Also, there has been portfolio rationalization and industry consolidation in that space. As the space shrinks, the larger firms do better than the smaller firms.
This year brought the rotation to digital with companies moving from services based on labor arbitrage to services based on disruptive digital technologies. The digital space now constitutes 25 percent of the overall market and is growing at 20 percent. The legacy arbitrage factory is 75 percent of the overall market and it’s shrinking at three percent. Within the shrinking, the big five Indian players are consolidating the market to take share; so they eked out a 1.5 percent growth while other providers shrank.
Interestingly, the compression driven by the cannibalization of digital and legacy environments is partially offset by new workloads coming into the legacy environment due to changes in market segmentation.
A major factor at play in the services market in 2017 is the market beginning to segment between (a) digital transformation and (b) modernization of IT and business process services (BPS).
The digital market began splitting this year into two pieces: digital transformation vs. modernization. We clearly see two distinct, separate markets emerging in digital. This year we also saw digital transformation pilots go into programs. Pilots that ranged in size from $500,000 to $2 million in size now consistently hit between $50 million to $500,000,000 billion.
The legacy environment is also splitting into two markets: work that will be modernized and work that is too risky or expensive to modernize. We’re now 30 years beyond the inflexion point of where the market began moving from mainframe to client-server environments. Many companies still have a portfolio of applications remaining on mainframes. This is a classic example of legacy work that is too expensive or risky to modernize. As a result, companies are content at this point to let that work remain in the legacy structure. However, this year clearly brought movement in this space of companies building APIs and microservices to connect with that work, whether it is in an internal legacy infrastructure or in an outsourced legacy talent factory. This enables the companies to turn their attention to the work that they need to modernize.
What we haven’t seen is business process services (BPS) modernization take hold. IT is leading the pack currently. At the beginning of the year, we thought that BPS might lead the modernization, but it turns out we were wrong. The IT segment is moving much faster than the BPS segment in modernization work.
Also in 2017, we saw the rise of small provider firms. Where we see industry consolidation on the legacy side, we see vendor proliferation on the digital side. We believe this proliferation is because companies are looking to new firms to do new work. They believe the incumbent service providers are distracted and have a conflict in interest in moving to digital – a self-interest in preserving their profitable legacy arbitrage-based work. Consequently, this year brought a surge in companies looking to smaller, new service provider firms to help them understand and drive both digital transformation and IT modernization.
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.
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.
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.
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.
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.
In early November, Amazon announced that it will expand its presence in Vancouver from 1,000 jobs to 2,000 jobs by 2020. Although this did not receive nearly the same attention as Amazon’s request for proposals for the 50,000 employee location dubbed “HQ2”, there are some valuable clues to glean (see our earlier detailed assessment on the viability of Amazon’s HQ2 strategy and potential locations for our more complete analysis).
We read three important clues in this announcement.
If centers at much smaller scale are valuable to Amazon, why even pursue the HQ2 strategy?
First, Amazon might realize that a single 50,000 location is likely too big and contemplating whether it can make “clusters” (cities within very short distances from each other) produce similar benefits as a single location, which would be multiple buildings anyway. If Amazon believes this, it might be looking to select multiple cities within a cluster for the HQ2 strategy (think Philadelphia, Baltimore, Washington, DC).
Second, Amazon may have intentionally set a very, very large 50,000 employee target to get maximum attention and creativity, but is planning to structure the eventual single location agreement to only commit to 5,000-10,000 employees. Still very large, but something it has a much easier chance to fulfill and then potentially exceed as it so desires.
In summary, we believe these clues Echo many of our earlier perspectives and underscore that the eventual outcome may be quite different than stated – we remain Primed to hear what Amazon decides in 2018.
A decade ago, Everest Group made some predictions about the India global services industry; recently we cracked open the time capsule to check out our predictive capabilities. We found that we got some things right, some things wrong, and some things very wrong. The outcome of our recent analysis, though, is a huge boost in confidence for the prospering India global services industry.
Tuesday, September 26, 2017 | 9:30 a.m. CDT
Everest Group’s H. Karthik, Partner, will be a featured speaker at the Bloomberg Professional BI Analyst Briefing webinar: Changing Landscape of Global Outsourcing.
Topics discussed during the webinar will include:
Join this session to learn about the changing landscape of Global Sourcing and how it will impact the offshore IT services industry.
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?
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).
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.
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.
Increased labor in India as well as other locations have ensured limited salary increase, especially for junior roles
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…
The global services market is in upheaval, and disorder seems to be the new world order. Geopolitical developments, macroeconomic pressures, and unprecedented pace of changes in technology have resulted in huge disruptions to the usual ways of doing business. However, despite the turmoil, the global services market continues to grow, albeit at a much slower pace compared to previous years.
When developing our Global Locations Annual Report 2017, Everest Group spent considerable time and effort analyzing the underlying data to determine if there are some signs of structure amidst the disorder. Here are some patterns and trends visible from our analysis:
There has been significant increase in both number and share of new centers focusing on delivery of digital services. Between 2013 and 2016, the number of such centers grew by ~177 percent.
Both service providers and global in-house centers are growing faster in nearshore locations, such as central and eastern Europe, Latin America, and the Caribbean, compared to traditionally offshore locations (such as Asia Pacific.) This is driven by multiple factors, most prominently the drive towards digitalization and the different talent demands this imposes. The chart below shows the increasing share of nearshore regions in new delivery center setups:
There has been a rapid surge in large enterprises’ and service providers’ service delivery footprint in locations traditionally considered onshore. While firms either retained or reduced the pace of growth in offshore/nearshore locations, they ramped up presence significantly in the United States and continental Europe (see the following chart for new onshore delivery center setups of top-20 IT-BPO service providers.)
1 20 leading service providers across IT and BPS that Everest Group uses as “Index” providers to gauge market trends
This is largely driven by enterprises’ desire to deliver complex services coupled with the advantages of customer intimacy. However, for many providers, this is in anticipation of strict work visa issuance guidelines which may make it imperative for them to have a foothold in the onshore market for hiring talent
While there’s some “method to the madness” in these pervasive trends, there are many operational risks that are likely to add to the disorder. These include:
For more such trends and analyses on the value propositions of different locations through Everest Group’s MAP MatrixTM, which will help you frame your global services location strategy, please refer to our report, “Global Locations Annual Report 2017: Signs of Structure in a Disordered World.”