Almost every week in the last few months someone has asked me about the general mood on the streets of Bangalore. What are the IT professionals in the Silicon Valley of East making of the changes in the industry? How is the senior management of offshore headquartered service providers preparing for the future? While there are several versions of the predicted future, everyone agrees that this is a watershed moment in the evolution of the IT outsourcing and offshoring industry.
The overall mood is somber at best in most places. Folks at mid-level are trying to make sense of the sweeping changes they are seeing at their companies. There’s a freeze on recruitment and companies are laying off people in thousands. This is beyond anything in the past and hence difficult to fully comprehend for most people. The events of 2008 and the changes that it brought upon the IT outsourcing industry were generally the same as those experienced in the business environment globally. The changes this time seem to be largely confined to the IT outsourcing industry, stemming from concurrent external and internal factors, the sheer timing of which are exacerbating their impact.
External Factors One of the key external factor relates to the environmental changes that have crept in from their largest market (US). The changing visa norms are already hurting the providers in a big way as they grew riding on the labor arbitrage opportunities of the ‘90s. The new world will see local hires (than expats) in onshore roles. Not only will this reduce profits, but it will also affect operating models as local hires lack the experience of working in the onsite-offshore model that expats possess.
Another external factor is the emerging wave of repatriating work back in-house that many companies had started in recent years. There are several factors contributing to this decision but overall the market essentially shrinks as companies reduce outsourced IT services.
One of the critical internal factors that is driving several changes stems from the blatant increase in workforce that providers experienced as revenues moved up over the years. Almost all revenue forecasts until recent times were accompanied by targets to linearly increase headcount. In an almost gold rush-like frenzy, the providers were busy adding staff to increase revenue with little attention to when the pyramid would crumble. Those realities are now haunting most large service providers. The uberization of IT services, with on-demand and low capex driven spending has reduced on-premise complexity of IT for enterprises. Even large companies have now embraced cloud based productivity, messaging, HR, CRM and ERP applications which have done away with the need to build, maintain and manage applications and related infrastructure. The pie has obviously shrunk. With the digital economy riding on social, mobile, analytics and cloud solutions, outsourcing contracts have shrunk in size and duration. Enterprises are more open than ever to work with multiple providers—including niche providers—to get the best solution rather than go with one large provider who brings integration as a value. Many large providers have lost revenue to much smaller companies or even start-ups who are more nimble and hungry. Another factor that has been written a lot about, is the higher level of automation that has been attributed to redundancy of jobs at service providers. This one factor is highly debatable based on insights from people inside most service provider organizations. The reality seems to be that most automation programs have not yielded results to bring outright reduction in workforce. However, service providers are finding this as the best reason to blame for workforce reduction. The reduction is often happening due to other factors listed above but attributed to automation.
Apart from the internal and external factors listed above, some of the largest offshore headquartered service providers are also dealing with the agony coming out of succession planning issues, boardroom squabbles or rumors of sell-off. These couldn’t have come at a more inopportune time for them. With all these factors, the uncertainty quotient is very high. Time will tell how things pan out. Whichever way things move on, it is clear that this is part of the industry maturing and being guided by underlying business drivers. A course-correction always ensures that in the long run things are grounded and set for sustained value delivery. Despite the pain, this one would be no exception.