November 16, 2010
The number 11 holds far-reaching significance in numerology, in the bible, among doomsday theorists, and in the dice game craps, to name just a few instances. What’s the significance of Everest Group’s 11 predictions for the global services industry in 2011? Let’s take a look.
1. Unleashed discretionary spend that fueled the 2010 global services industry will fizzle out by the end of Q2 2011, resulting in market growth flattening.
While most forecasters suggest accelerated market growth through 2011, we predict a flattening of growth in the global sourcing market as companies work through pent up demand. Assuming economic forecasts hold, we expect to see continued increased activity fueled by the discretionary spend that began in 2010 to last through Q2, then drop back to its “natural” level consistent with the economy. Transformation agenda activity, precipitated by changes in the industry, will increase slightly in tandem with a slowly recovering economy. “Run and maintain” activity will also move in the direction of the economy.
2. Provider pricing power will not regain pre-recessionary traction in 2011.
We predict low and modest pricing power in the provider segment, or a return to pre-recessionary pricing levels. This will force them to continue to differentiate themselves by performance outcomes, rather than price. As a result, select providers will grow disproportionately, taking clients away from others.
3. Global companies will continue to channel efforts toward services portfolio rationalization and increased adoption of hybrid sourcing models.
While for the last decade the industry worked to understand, test and deploy models to capture value from labor arbitrage, organizations with mature global services portfolios are now focused on making them more effective and able to deliver end-to-end impact. The global services market has shifted accordingly, helping global companies extract value from third-party service providers, shared services organizations and combinations of both via hybrid models. At the same time, attractive new markets for labor arbitrage remain for mid-sized companies who are late adopters of more robust sourcing strategies or for portfolio extensions of mature clients.
4. More inflammatory dialogue on offshoring, driven by political posturing in a weak economy, will drive offshore companies to establish a greater onshore presence.
2011 may see more protectionist measures proposed by the United States and politicians due to the high level of continuing unemployment. Most of these measures will fail to gain traction and pass into law, and those that do will be difficult to implement and audit. Yet the increased negative press will drive the major offshore providers to increase their onshore delivery capabilities, a trend already well underway per their need to deepen relationships with clients and add more complex and intermit work to their offerings. The United Kingdom will also likely move in a similar direction with proposed quotas on non-EU immigration of skilled workers. While it’s very unlikely that U.S. politicians and legislative agendas will have a significant impact on the sourcing industry, these pressures will probably eliminate or significantly restrict new markets for offshoring with government buyers.
5. Strong sourcing market growth will be in geographies with strong economies, led by Brazil, China, India, and the Middle East.
Countries with strong economies represent big markets with big demand for transformational and discretionary spend activity. Consulting firms and service providers will focus efforts on reaching these robust markets.
6. Cloud computing will be the technological breakthrough causing the most disruption.
While it will take time for cloud computing to mature and for companies to adopt it on a widespread basis, it is currently creating significant discontent and disruption in delivery models, and will continue to do so in 2011. Expect to see service providers continue to push development of cloud solutions and, in some cases, acquire smaller players to gain intelligence and/or expand capability offerings.
7. Industry consolidation will pick up speed.
Industry consolidation will be driven by several factors: 1) Infrastructure hardware providers seeking to extend services; 2) Japanese service providers engaging in increased M&A activity as they continue to look to expand their global networks; 3) Buyer organizations’ continuing desire to have a smaller portfolio of service providers; and 4) service providers seeking diversified offering capabilities as they continue to see traditional growth areas slow.
8. Emerging low-cost destinations will increase their momentum.
The new, emerging destinations such as South Africa, Egypt, and Argentina will continue their impressive rise as attractive locations for specialized services, providing an increasingly important complement to the mega destinations of India and the Philippines. This increased importance will drive substantial job growth and present increased demands on countries infrastructure and, in turn, command more support from governments in the form of increased investments in regulations that are more attractive and policies, and more proactive measures to attract and maintain inflows of work and investment.
9. Cities, Counties, States and Provinces will join the party.
Proactive government entities, such as cities and states that have traditionally outsourcing to other locations, will realize the untapped potential of becoming mini hubs of global services work. These innovative government entities will be able to make targeted investments that attract high paying services jobs into their jurisdictions, leveraging the under-employment of key skills combined with emerging work from home and telecommuting technologies and business models. Over time, these will enable a new class of complementary and compelling services offerings, further enriching global services portfolio options while greatly enhancing the standard of living and tax bases of the locations that embrace this new model.
10. There will be rising dissatisfaction and pricing pressure on the traditional IT infrastructure market.
HP’s move to take out a substantial portion of EDS’ cost structure has already set off a chain reaction as other IT infrastructure companies increasingly recognize the new competitive realities and strive to cut costs and match price. The primary vehicle for cost reduction will be to move a greater portion of the delivery staff offshore to low-cost destinations, primarily in India. This mass migration of work is and will further stretch offshore delivery capabilities, resulting in decreasing quality and communication problems. We expect these issues, combined with the rising expectations emanating from the emergence of new disruptive models such as cloud and Remote Infrastructure Management Outsourcing (RIMO), will amplify the already growing dissatisfaction in the buying community.
11. Arbitrage will increase.
We expect increased wage inflation in the low-cost destination countries, and increased fourfold pressures as currencies of developing countries increase relative to their nation currencies of the Euro and Dollar. Nevertheless, we still expect it will become cheaper for providers such as Infosys, Wipro, TCS and others in that class, to provide work out of their low-cost destination locations relative to the cost of delivering them onshore. This is not to say we expect pricing drops from these firms; indeed, they will likely be vocal in pointing to their rising costs as a strong rationale for pricing increases. This arbitrage increase will apply to the overall cost of delivering the work, and may be misunderstood at an individual person or job class level. The reason for this surprising and counter-intuitive prediction is that we believe the class of providers that has mastered talent factories will be able to apply lean process improvements, and continue down-shifting their work to more junior and cheaper resources, overall widening an already growing arbitrage gap. This downshifting of work, which has been under way for a number of years, will be accomplished without materially affecting the quality of the services delivered.