December 11, 2017
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.
Global Services Market Deceleration
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.
Market Segmentation Changing
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.
Rise of Small Firms
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.
