Tag: labor arbitrage

The Infosys Dilemma | Sherpas in Blue Shirts

February 17, 2017

Is Infosys moving in the right direction? At the end of 2014, I blogged that Vishal Sikka, who had been on board as CEO and MD only a few months, had made an effective start in reshaping the company’s strategy. In Q1 2015, I blogged about how Infosys was aligning with the digital direction of the market and rethinking how to optimize its existing services. And a year ago, I blogged about Sikka shifting the company away from the maturing labor arbitrage market with slowing growth and margin compression and into more fertile growing markets. Recently there has been a lot of noise in the media again and a lot of rumors about disagreement among the company’s founders, board members, and activist investors/shareholders. I want to shed some light on their debate, as the Infosys dilemma is really an industry-wide dilemma.

Infosys has been in the press a lot recently, across a number of issues. However, at the heart of many of these stories is a deeper debate that Infosys is having with its shareholders to determine the go-forward vision for the company. At this time, it appears that the two visions Infosys must choose between are “arbitrage first” or “digital first.” Let’s look at these visions from each side’s perspective.

“Arbitrage First” Vision

The vision: Infosys will consolidate its role as the leading labor arbitrage player. It will grow through industry-leading talent based in India and build on its reputation for premium services.

Proponents: Infosys’ founders and activist shareholders advocate this vision, pointing to the fact that this strategy yielded robust margins for many years and gave Infosys its market-leading position. The company they built was aligned against values of personal sacrifice, frugality and expectation of high margins; and they believe the services industry will continue to be dominated by companies that maintain tight cost controls and pricing discipline.

  • The labor-arbitrage market is mature, has stopped growing, and margins have been declining. Providers’ current robust margins will not be sustained into the future.
  • For the past year, almost all the growth in the services space is in digital and cloud offerings, which currently are growing at over 20 percent.

Under this scenario:

  • Under this scenario, Infosys will offset the effects of a maturing market on its stock price with slowing growth by returning substantial cash to shareholders through stock repurchases and increased dividends.
  • Management will take steps to protect its margins by controlling sales and overhead expense and increasing the efficiency of Infosys – already an excellent delivery organization.

“Digital First” Vision

The vision: Infosys will transform into a digital company to create a new source of value for its customers. The new digital business models will involve a new talent base be less dependent on labor arbitrage.

Proponents: The Infosys board of directors and CEO Sikka. When Sikka was appointed, he was given a mandate to implement a digital-first strategy. He clearly understands the challenges and has been moving the firm in this direction.

Market realities:

  • We estimate digital revenues at 25 percent of Infosys’ current book of business. We also believe that, at this time, digital revenues are not yielding as high a margin as Infosys’ arbitrage business.
  • A digital-first vision requires transforming the Infosys culture, rebranding the firm and resetting investor expectations.
  • Attracting and retaining digital talent means Infosys must compete with US technology companies and be prepared to match compensation with the tech industry, thus driving up labor cost and changing some of its benefit and talent management policies.

Under this scenario:

  • The digital-first vision requires transforming the firm, culture and brand. This transformation is a high-risk strategy, but it could result in substantial value creation for shareholders. Infosys must align investor, founder and board expectations to gain room to execute the necessary change.
  • Infosys will need to accelerate investments in new technologies and acquire companies that have already developed a digital business and have a digital talent base.
  • Bowing to the pressure of activist investors’ demand that the firm return substantial cash to the shareholders through stock repurchases and increased dividends will handicap the firm’s ability to aggressively invest in mergers/acquisitions.
  • Shareholders would need to forego Infosys returning cash now, recognizing the company would be more valuable in the future.

Hybrid Vision

In theory, both visions could exist simultaneously in a “hybrid” version. However, I believe that a hybrid vision inevitably will lead to an arbitrage-first company. I argue that the difficulty of executing the digital-first component will be overwhelmed by the near-term benefits of the arbitrage-first vision. By forcing a clear choice, Infosys will achieve better results in either strategy and avoid the pitfalls of conflicting goals and poor execution.

Implications of the Vision Choice

Both the arbitrage-first and digital-first visions are legitimate. But each will lead the firm to a different place. These choices have far-reaching consequence across all of Infosys’ constituents – affecting board make-up, firm governance, employee talent models and compensation. Investment decisions, whether to return cash to shareholders and the brand and promise that the firm communicates to customers also will flow from the choice in vision.

For now, it appears that the digital-first vision is in ascendancy. However, it remains to be seen whether the shareholders will have the patience to see this through given the activist shareholder agitation.

IT Future Shifts from Labor Arbitrage to Productivity | Sherpas in Blue Shirts

February 7, 2017

The labor arbitrage/offshoring model is powerful and relatively simple — compared to investing in productivity for U.S. workers over the past couple of decades. Perhaps your company is like most enterprises in America, having opted for this strategy to achieve cost savings. I believe it’s important to recognize that the arbitrage/offshoring model took companies’ attention away from investing in internal productivity improvements. But there are fewer opportunities now for the labor arbitrage model since it is maturing, and new barriers are arising for sending/maintaining U.S. work offshore.

Read more at Peter’s CIO online blog

80/20 Stands on Its Head in the Services Industry | Sherpas in Blue Shirts

May 18, 2015

The mantra of 80/20 (80 percent offshore, 20 percent onshore) has been the war cry for the services industry for the last 10 years. It has stood for the absolute sweet spot for a services player, particularly in terms of maximum leverage of offshore talent. This has been the most profitable space. Providers that approached this sweet spot have been the fastest growing and most profitable players.

It has been a thing of beauty and a joy forever … well, not really forever. Things change.

What we’re seeing in a segment of the industry is that customers now ask for 80/20 in the opposite way – 80 percent onshore and 20 percent offshore. They’re not asking for their entire delivery platform to do this. But in discrete segments they are looking for a much more intimate onshore model – more industry domain knowledge, more company knowledge and the provider’s teams stood up next to their teams or intermingled with their teams where they can drive to functionality very fast. They also want less churn.

To be clear, it’s not happening everywhere. But the desire to move to this alternative 80/20 model is happening in some of the fastest-growing and most lucrative segments of the industry. For instance, we see this model approaching in digital. We hear customers voice this aspiration in healthcare. And we talk with many large, sophisticated clients that express the desire to change the model.

They’re not looking to lose labor arbitrage completely, but they want to turn the 80/20 model on its head. And they are willing to give up some of the cost benefits of the old factory model for the speed, intimacy, and agility of the new model.

Photo credit: Flickr

Lessons from IBM | Sherpas in Blue Shirts

May 11, 2015

Have you noticed how few service providers have the ability maintain a market leader role when the market changes to favor new technologies, or new service models? It’s very difficult to make this shift, and I’ve seen very few companies achieve the shift – let alone do it three times. Just one. Wow!

If we look back at the service provider landscape in the early 1990s in the classic outsourcing space, the leaders in the service industry were Accenture, CSC, EDS, IBM, and Perot.

Then the growth opportunities shifted to the labor arbitrage model in the late 1990s and early 2000s. Suddenly the group of leaders changed to Accenture, Cognizant, IBM, Infosys, and Wipro.

Now as we move away from those classic leaders and shift to the new models (SaaS, BPaaS, platforms, and consumption-based), there are three leaders: ADP, IBM, and Salesforce.

Lessons from IBM

Looking back at the market leaders over the years, some have disappeared, as the figure above illustrates. EDS is now owned by HP, Perot is owned by Dell, and ACS is owned by Xerox. What stands out in the graph is that only one company has been able to consistently shift when the market shifts – IBM.

How have they managed to do this? Here are some lessons we can learn from Big Blue.

  1. Be willing to divest. IBM has been absolutely ruthless and relentless in forcing itself to divest businesses that constrain the firm and prevent them from successfully moving into the markets.
  2. I blogged about the noise in social media earlier this year about IBM’s potential layoffs and explained it was a reskilling issue. I think this is yet another example of the firm having the discipline to take the medicine and do the things that allow it to succeed and maintain a leadership position.
  3. Buy, don’t build. IBM’s approach to entering new markets is often through acquisitions. The firm is quite willing to learn from others and leverage an existing business. IBM recognizes that business models are different, and it’s very difficult to build a new business model inside of the old one. Therefore, they buy new companies.
  4. Protect new businesses. After acquiring a company, IBM protects that business. They incubate them and allow them to grow. In the last two years, IBM launched two new divisions: analytics (Watson) and cloud. The firm pulls those businesses out of the rest of the company and connects the R&D to Big Blue’s customers in a tight loop. It also protects these businesses from IBM’s mainstream businesses, which would tend to prey on them and inhibit their progress.

These four strategies have enabled IBM to maintain market leadership despite market shifts. They stand out as lessons for other firms seeking to stay relevant and stay in leadership positions in the market.

Photo credit: Flickr

Price Takes a Beating in the Services World | Sherpas in Blue Shirts

April 23, 2015

What I’ve predicted for several years is now happening and the global services industry is experiencing a pricing war. The industry’s core arbitrage marketplace is moving from modest pricing competition to an intense pricing war. Providers’ prices are coming down not by 3 to 5 percent but in some cases by 20 to 30 percent. I’ve blogged about this inevitability for some time, and the last six months showed rapid movement in a downward spiral. Pricing disciplines that providers previously exercised are collapsing. Why has pricing become so precipitous?

Who is driving the intense pricing competition?

Mature enterprise clients, which are on their second or third generation of sourcing, are instigating this market move. They themselves face unrelenting cost pressures and point to providers’ high margins as proof that there are plenty of gains to be had. At the same time as they eye the margins, they are convinced that the next generation of cloud, automation, and as-a-service offers provide breakthrough cost advantages; and they seek to combine all this into step-change gains.

With these raised expectations also comes a willingness to switch providers and a realization that the barriers to switching have been greatly reduced. This is evident in our statistics, and I blogged last year about the increasing anti-incumbent bias.

Factors exacerbating the downward spiral

In addition to enterprises’ effort to drive pricing down, other market forces add to the momentum toward a pricing war. As enterprises’ willingness to switch providers increases, incumbent service providers are increasingly in an untenable situation. Investors reward firms that demonstrate growth; so providers can’t afford to have lower-priced competitors capture large chunks of their existing revenue. In addition, the maturing arbitrage market no longer gains share from traditional models at the same rate.

As the prospect of losing existing customers becomes increasingly painful, a retain-at-all-cost dynamic is increasingly the tone forcing account teams to drop price for existing customers while encouraging providers to use lower prices as the way to win new customers.

All these actions create a downward spiral that feeds the enterprise customers’ belief that pricing must come down. And voila! We have gathering momentum on a pricing war.

Industry implications

I think the implications for the industry are very significant. The days of relying on contractual switching costs to protect providers are over. Switching costs have eroded and providers are left with no choice.

I think the new normal will be much more competitive pricing – certainly for mature clients, but also it will spread to new clients. Clearly the idea of getting COLA adjustments is an uphill climb.

I’m not saying there is a race to the bottom in all market segments. Certainly providers in the growth areas such as as-a-service models and digital technologies and value-added areas will be able to command high margins. The challenge for the industry is that the core of business is in the quickly commoditizing spaces with a customer base that is unwilling to pay a premium. We must accept that this is happening.

It brings to my mind words in a Dylan Thomas poem: “Rage, rage against the dying of the light.”

Photo credit: Flickr

Why Hasn’t Automation Made Much Progress in Services? | Sherpas in Blue Shirts

April 13, 2015

I hear people in the services industry asking why automation hasn’t taken off yet. Actually, as long as I’ve been in the industry since the 1980s, we’ve been working on automation. Back in 1983 we were talking about automating business processes and the elimination of most of the people in the services value chain. So why hasn’t it made an impact yet?

I think there are three primary reasons for this phenomenon.

First of all, we actually have made incremental steady progress in automation. It’s just that the number of processes turned over to third-party providers has grown exponentially at the same time. In this much larger set of services, it’s easy to miss the progress made in automation.

Second, when labor arbitrage came into the market, it was so much simpler and quicker to get a payback using that strategy. So it delayed progress in automation.

Third, the automation journey is really hard work because we’ve moved to a point where pockets of labor are connective tissue. And process components continually change (such as IT infrastructure or the F&A process). This rate of change overwhelms automated models. These changes require rethinking automation.

Moreover, the cost of automation is high.

The good news is we’re entering a new phase of automation that I believe will make significant progress. So what’s different now that will enable automation to move forward?

First, the time is right. The labor arbitrage model is mature and the industry is turning to new sources of value. So we’re going back to automation as a source of value.

Second, today’s tools are much easier to use and quicker to implement. Thus, the cost of automation is dropping very precipitously.

Finally, providers are starting to merge services with integrated platforms and put artificial intelligence into automated or robotic tools. This enables adapting to change much more rapidly and facilitates machines learning in a similar way as employees learn.

The net result? Although we are early in this next phase of automation, I believe we have hope of going further than before. The desire is strong, tools are better, and companies’ ability to adapt to change is much stronger than it was. This should allow us to dramatically raise the level of automation that services clients value.

KABOOM! Is an Implosion of the Services Market Coming? | Sherpas in Blue Shirts

February 26, 2015

There is rising concern among the Indian service providers that their arbitrage model is about to go through a significant and abrupt change – and not to their benefit. As I look at the various factors driving their concern, I see a set of challenges that will fundamentally reshape the industry and create new winners and losers. What remains to be seen is how quickly it will happen and exactly how it will affect the providers. Here is my analysis of the situation.

What is driving providers’ concern – even fears for their business?

Challenge to FTE model. Clients want automation, and the providers fear that automation will require far fewer people to deliver services. They now want to buy software-as-a-service rather than people. It’s basically a substitution of technology for labor, which manifests itself as robotics, SaaS and cloud. Growth of the Indian ISP businesses is slowing as the customer demand now is to have a different conversation around capabilities instead of just moving the work to India for labor arbitrage.

Challenge to factory model. We’re seeing increasing commoditization of services. The Indian providers recognize that they built factories that, at the core, break work into different constituent pieces and drive that work to be done with the most junior people possible. But that actually caused commoditization. The client mindset is: “If you can segment the work like that, why not go ahead and automate it?”

Clients today want domain industry knowledge, rare skills, more capabilities on site at the client location and more intimacy from their service providers – and all four of these demands are hard to deliver in the factory model.

Challenge to profit margins. The challenge to the FTE and factory models drive providers’ fear that they won’t be able to maintain profit margins like those in the past built on labor arbitrage.

We’ve known that arbitrage wouldn’t last forever and that providers couldn’t keep extending it indefinitely. It had natural limitations. Now we see the market moving in a new direction. At Everest Group, we believe this will fundamentally reshape the industry.

Kaboom

Important issues in heading in the new direction

I think there are important questions around the reshaping of the Indian ISPs’ businesses.

In what way will the change manifest itself? Will the change in business models result in growth, cannibalism, or both? And to what degree? Will the change, for the most part, only affect where the new growth opportunities are? Or will it cause providers to cannibalize their existing client work?

If it just affects where new work is, it’s much easier for challengers to capture those opportunities. But it’s more difficult for incumbents to transition. For example, in automation they would need to cannibalize the existing work by reducing the number of FTEs, which also will reduce revenue. It will be difficult for incumbents to react to their existing clients’ demands in the change in direction.

There are other questions:

  • How soon will the changes come?
  • How will the Indian providers react?

These are unanswered questions today, but they’re very important. How quickly it happens will affect how the incumbents react. And how they react will determine whether they will succeed or whether challengers will reap the benefits of the new direction the market takes.

What do you think? Are we going to watch the implosion of the services model where it clashes in on itself and technology cannibalizes the industry, shrinks the revenue, changes the FTE model to a transaction model and shifts the terms and conditions to favor new players over old players?

The Truth in IBM and TCS Layoffs and What it Means to Services Industry Customers and Providers | Sherpas in Blue Shirts

February 2, 2015

Over the last few weeks, we saw “bad news” about massive layoffs at IBM (100,000) and TCS (25,000), two of the industry’s largest services companies and market leaders. Those numbers proved to be overstated, but clarification on the real numbers isn’t what’s important. The numbers distract from the real issue. Attention-grabbing news headlines and social media’s frequently salacious, overhyped comments created a “fog” around the true picture of layoffs at both companies. So let’s cut through this fog and look at the truth of what is happening and the real issue for services providers and customers.

The truth

Social media and irresponsible reporting allowed initial numbers that later turned out to be significantly over-stated. The official number for TCS was less than 5,000 and IBM called the 100K number “baseless” and “ridiculous.” But even the subsequent clarifications on numbers distract us from the real issue – the fact that the services industry is witnessing a fundamental discontinuity and is in need of massive reskilling to meet customer demands.

Layoffs at IBM and TCS are not signs of companies in distress, and neither company is leaving the services space. Rather, these are two market leaders proactively dealing with the major disruptive transition now happening in the services space. IBM and TCS have been market leaders, IBM the undisputed leader in infrastructure services and TCS the largest provider in the arbitrage and offshore space.

Both companies recognize that they don’t have enough of the new skills needed for the new digital services markets and both have too much talent in the skills that made them leaders in infrastructure and labor arbitrage – services segments that are now diminishing as customers switch to digital services and new consumption-based models.

From our discussions with both companies and with some of their customers, it’s clear that their customers are demanding they take steps to acquire the necessary new skills so they can serve customers’ new demands. For example, providers’ reskilling efforts may need to include such talent as creative UX experts and data scientists.

As leaders, both companies understand that the services market is changing fundamentally. Services and technology leverage are shifting from being an efficiency/cost play to one generating revenue and growth for customers. Both are simply taking necessary steps to ensure they stay relevant and retain their leadership positions as the market evolves and customers demand new skills to address their needs.

IBM’s recent moves appear to be radical and more significant, but that’s because its acquisitions are larger (such as acquiring SoftLayer so it can compete on AWS’s level for cloud services) and it’s also divesting the kinds of business (such as voice services and chips) that could hold Big Blue back from continuing to be a leader in meeting customer expectations.

Issue for services customers

All organizations using third-party resources these days should ask their existing and/or future service providers what steps they are taking to ensure relevance and necessary talent to deliver services in new business models and new technologies.

Issue for service providers

We at Everest Group believe the reskilling actions of IBM and TCS are a harbinger of things to come for all service providers – ongoing rolling waves of disruption affecting talent needed for the fundamental changes happening in the services space. I’ve been blogging about these changes (growing maturation of services, pricing pressures, lower demand for labor arbitrage and shifts in customer demand) for more than two years. With the proactive steps of IBM and TCS, the industry now has tangible proof that the landscape is indeed changing.

Global Services Trends and Tipping Points for 2015 | Sherpas in Blue Shirts

January 12, 2015

It’s the season when analyst/advisory firms flood the media their predictions and top-10 lists. One problem with those lists is the services world rarely has 10 things that are different from the year before. Another problem is we tend to hype new technologies and business models and make predictions about their impact in the next year, when in reality they take multiple years to validate and start to build traction. So rather than falling into this trap that I and others fall into every year, here are my thoughts on a few big secular services trends and their tipping-point positions.

Cloud

We’re over the tipping point here. As I blogged previously, the cloud experiment is over. The last three years have been a grand experiment in examining cloud and the cloud products family. 2015 will see enterprises increasingly planning and implementing new functionalities in the cloud environment.

Labor arbitrage

We’re now atop an inflection point for change in the labor arbitrage market. It’s alive and well and still powerful, but in 2014 we saw value propositions that are dominantly arbitrage based diminish in effectiveness. We also saw the growth areas increasingly shifting to an “arbitrage-plus” model in new areas. The implications are that arbitrage-based offerings will be less effective and their growth rates will continue to drop.

2015 will be a year in which provider growth is driven by differentiation around industry knowledge, firm knowledge and functional knowledge, rather than cheap resources from India. Firms that pivot and provide more and better resources in country, more focus around industry and function, more specialization for those that will succeed.

Service providers talked the talk of differentiation in 2013-2014, but they didn’t walk the walk. In 2015 providers that are successful in growing share will execute really great, meaningful differentiation rather than just giving lip service to differentiation.

Automation

The tipping point for automation is still in the future. The industry has had a couple of years of experimentation with automation, but we don’t think the experimentation phase is finished. We have yet to see the automation play done at scale either on infrastructure or BPO; it is yet to move into the mainstream and is yet to be acknowledged for the full power and capability that it possesses. So the stories of automation destroying the arbitrage game are premature.

We think that, much like cloud in the last three years, in 2015 the automation journey will continue its experimentation and advance toward a time where it is implemented at scale and is able to change the value proposition in a meaningful way.

In 2015, we do not expect automation to take meaningful share from the BPO or infrastructure players. But we expect many more proof points to develop and more hype or industry attention to focus on automation.

As a service

We’re not near a tipping point in moving to a consistent as-a-service model, but we’re definitely seeing a growing uptick in experimentation with this model. In 2014, we saw a number of important companies experimenting with implementing as a-service solutions, but they weren’t multi-tenant. What they’re doing is taking their entire supply chain and turning it into a consumable, as-a-service supply chain and achieving similar benefits that are derived from a multi-tenant SaaS offering but without having the multi-tenant characteristic.

The implications of early experimentation are very significant for legacy environments. We expect 2015 to have a number of announcements of leading firms implementing this approach. We believe this is an important development but will not become an industry standard for several years to come.

Service provider landscape

As to the service providers, in 2015 we expect some changes in dominance and success. Cognizant and TCS always do well and will do so again in 2015. What’s interesting is to look at those that are going to change their fortunes. Specifically we’re watching two companies: IBM and Wipro. In 2013-2014 both made structural changes that position them well for entering 2015.

IBM decided to address the cloud issue head on. Big Blue’s purchase of SoftLayer, the moving of IBM’s middleware suite to an as-a-service delivery vehicle and willingness to deal directly and forthrightly with customers on cannibalization issues positions IBM for a potentially strong turnaround in 2015. We already see signs of that in the three megadeals IBM announced in the last quarter of 2014. We believe IBM is in for a strong year in 2015 if it stays the course.

Likewise, I’ve blogged before about Wipro laying the groundwork for a resurgence. Specifically I call out the firm’s early adoption of automation and increased focus on the large megadeal space. We believe Wipro’s adoption of automation allows the provider to be a cost challenger without giving up margins in the multi-tower megadeal space. I expect Wipro will continue its momentum into 2015, building on early successes.

This is not to say that other service providers won’t do well. I highlight these two because they took big steps to turn around their business and position themselves for the future and for velocity coming into 2015.

Photo credit: harmish khambhaita

EG with tagline Neg
Linkedin-in Facebook-f Play Instagram
Better Decisions Powered by Tenacious Research    

Contact Us

Who We Are

About Us

Newsroom

Office Locations

Partners & Affiliations

What We Offer

Memberships

Custom Decision Support

Published Research

Careers

Why Everest Group

Explore Openings

Equal Opportunity Employer

Resources

Access Reports

Citation Policy

Everest Group Market Intelligence (EGMI)

Legal

Using the Reports Portal

©2023 Everest Global, Inc.         Privacy Notice          Terms of Use        Do Not Sell My Information

How can we engage?

Please let us know how we can help you on your journey.

Contact Us

"*" indicates required fields

Please review our Privacy Notice and check the box below to consent to the use of Personal Data that you provide.
Consent*