December 16, 2013
It’s the time of year when we turn our attention to reflecting on what happened over the the past 12 months and weigh the significance of the year’s events. I think we can showcase 2013 in five primary aspects.
1. Market growth
First let’s think about the market itself. We began the year expecting more robust growth, but I was disappointed in the first two quarters. The developing markets did not sustain their level of growth as in previous years, so we saw a drop-off in the developing markets space.
However, the market has gotten stronger over the year. So taken as a whole, I think it’s disappointing in light of our expectations, but we certainly are finishing with growing momentum. We’re seeing signs of growth in the United States, Canada, UK, Germany and the Nordics.
Net-net, 2013 brought a modestly positive level of growth but didn’t meet expectations.
2. Changing of the guard
This year the differences among the Indian heritage firms emerged more distinctly.
- Cognizant and TCS are setting a torrid growth pace.
- We have seen the rebound of the smaller firms such as Virtusa and Syntel outperform even Cognizant and TCS.
- HCL doubled down on infrastructure and is preparing to try to accelerate its BPO and apps offerings.
- TCS seems to have made its growth and platform plan work.
- Infosys is going back to its roots in labor arbitrage.
- On the MNC side, IBM made strides to close the gap that Accenture had opened up in the transformation space. Big Blue made a commitment to increase its consulting and transformation expertise.
- We also saw the rise of the Big Four and significant steps forward by the audit-related consulting and integration practices. The largest of the four, Deloitte, is playing an increasingly prominent role in major transformation. E&Y and PwC are taking steps to join them with PwC buying Booz Allen consulting and E&Y coming out with an audacious growth plan to get to $51 billion by 2020.
Due to these significant differences in both growth and product offerings, the industry players are no longer moving in lock-step.
Furthermore, the industry has almost uniformly taken an increased interest in building industry-oriented offers and verticals and has shifted down that path.
It has been a fairly quiet year for major acquisitions. Although there seems to be plenty of interest in inorganic growth, 2013 did not show big movements in that regard.
4. Impact of cloud
In the past 12 months we saw central enterprise organizations, CIO, CTO and shared service organizations taking tangible steps to embrace the cloud or next-gen models. Although that has had a very modest impact on revenue, it’s clear that they have moved from a “watch” to a “drive” posture. Where previously cloud was almost the exclusive providence of the business stakeholder units, 2013 showed that the enterprise is prepared to take a more active role in those decisions.
Although cloud had some modest impact on the industry in terms of growth, it foreshadows significant changes in the future.
5. Immigration and H-1B visa reform
Immigration reform and its associated H-1B visa reform raised its head and had a bigger impact than we anticipated. Service providers found that it was harder to move talent around globally. It became more difficult to get U.S. visas; and in the iGate-Royal Bank situation it became harder to get visas into Canada. Certainly the thresholds and scrutiny were raised around talent entering the UK and Europe.
The year brought the rising prospect of structural changes to immigration legislation; if enacted in the U.S., Canada and Europe, it would further complicate the free movement of labor. The net result is that it would not destroy the labor arbitrage model, but it would make it more expensive and lower the profit margins for some providers.
There is uncertainty and potential risk around the law, if enacted by Congress, raising further barriers for the movement of talent. Already we have seen two major developments in 2013.
First, the GICs (Global In-house Centers) or captives continue to solidify their situation and incrementally increase their influence in the industry. The industry experienced the normal handful of exits, but there were more than offset by new starts of GICs or captives.
More importantly the past year saw the GICs deepen their value proposition to their parents; they became more self-confident, extended their reach into more important functions and started taking over some third-party management functions that hitherto were executed out of the parents’ domestic operations.
A second aspect of industry change linked to immigration this past year is re-sourcing — moving work from low-cost locations into higher-cost locations. There has been a lot of talk about this. Although we saw little evidence that it happened in a material way in 2013, I think the prospect looms that at least some adjustments will be made.
As the industry matured and can better segment workloads, it is clear that the one-size-fits-all offshore talent factory does not fit every situation. Buyers are becoming more selective about what goes into those talent factories and what work is done domestically or in close proximity to the origination of the work.
The net result of that is, although 2013 did not bring a shrinking of work, we saw a reallocation of work. The actual numbers have continued to grow and increase, but buyers intentionally put more work into a right-sourcing model. So there was a modest overall impact on this in 2013, but it is something to watch in the future.
Of the five areas described, if I were to select the one that likely will have the greatest long-term impact on the industry and greatest impact in 2014, it would be immigration and H-1B visa reform. If Congress enacts the law, it could have a very significant impact on the industry. And if Senator Durban were to get his way with the H-1B visa provisions, it would go a long way toward leveling the cost advantage that the Indian heritage firms have over the MNCs.