The global IT/BPM sourcing landscape over the past decade and a half has been shaped by a number of factors such as cost arbitrage, availability of human capital, IT/IP protection regimes and ease of doing business. While some of these factors outweigh others, developments in other facets of IT/BPM, covering both buy and supply-side markets, such as evolving geo-political scenario in APAC and regulatory changes in Europe and North America, will increasingly weigh in on sourcing decisions in the coming years. This article looks at some of the changes we can expect as this year progresses and business evolves.
The global services industry is expected to increase 3x from 2015-2020, which translates to an industry size of 1-1.5 trillion dollars (US). While new deals are estimated to grow sluggishly in the beginning of the year, they should pick up pace as the year progresses. Budgets are not expected to reduce, but there will be a shift in spending behavior.
Incremental increase is expected in traditional outsourcing deals that have a staff augmentation business model driven by labor rate cards. Spend on new technologies is expected to increase significantly; global organizations will be compelled to meet the ever-evolving demands of a digital marketplace, which will drive new automation and analytical solutions that leverage technologies built on Artificial Intelligence and Cognitive Computing platforms.
BFSI and Healthcare will continue to grow, albeit slowly - their contribution is expected to be a third of the global services industry by 2020; a significant drop from over 80% contribution in 2015. We can expect to see the emergence of new spenders this year.
Spending on risk management programs is expected to increase as well, with risk organizations becoming mainstream. Buyers will setup dedicated risk management organizations to manage changing risk dynamics. Budgets for risk management programs will increase significantly.
The Changing Business Model
Expect to see an increase in deals/contracts moving from being effort-based to becoming outcome-driven. Traditional rate-based deal sizes will decrease while managed services volumes will grow. The buy-side will start moving towards 'as-a-service' and 'pay-as-you-use' models. These are expected to drive majority of new business.
Return of Captive Sourcing
The in-house/captive sourcing model is expected to grow and mature. Rise of the GBS model will signify the transition of GICs from being cost-centric to becoming value-centric. Global brands will harness global talent while their R&D investments and focus increase in offshore and nearshore locations. RPA solutions will begin to mature beyond pilots. Some critical services are also expected to be in-sourced to home locations.
Protectionism and its Effects - Changing Visa Regulations
Changes in visa regulations for skilled foreign professionals, be it application fees or cap on the number of actual visas granted, in client markets such as Europe (Brexit, Visa Policy Changes to Tier-2 Intracompany Transfers), US (protectionist view of incoming administration on outsourcing) or Australia (changes to "457 Visa" regulations), have a direct impact on suppliers in IT/BPM markets such as India, China, Philippines, Mexico, etc., which obtain a significant share of their revenue from these markets. Case in point, the protectionist view of the incoming US administration. With concerns of a tighter visa regime, hiring activity is expected to increase from these geographies, which would translate into higher operating costs.
Evolution of Capabilities
Suppliers will be forced to evolve. The digital market will compel suppliers to invest in new technologies to enable cognitive computing and advanced automation. While new niche players will rise as disrupters, business models will evolve as well. Expect 'as-a-service' models to mature and consolidate.
Mergers and Acquisitions will continue as the big traditional outsourcing suppliers look to develop new capabilities. Hiring on the supply-side will significantly slow down. We have already seen some of it in 2016, with all leading service providers showing reduced rate of new hires. This trend is likely to grow this year, as outcome driven models mature. Tier 2 locations will gain prominence as the established hubs begin to saturate. While pilot projects on automation are expected to increase, the impact on supplier revenues from automation will be minimal in 2017.
The expected outcomes mentioned above are based on trends that are interconnected and have gradually gained momentum, unlikely to diminish in appeal. Disruptive technologies such as Robotic Process Automation, Artificial Intelligence, Cognitive Computing, etc. in the SMAC (Social, Mobile, Analytics and Cloud) space have increasingly offset the need for manpower-heavy processes in the sourcing sector and will continue to do so this year.
The emergence of startups across Latin America and Asia in the fields of FinTech (Financial Technology) and IoT (Internet of Things) offers collaborative opportunities that can not only help suppliers reduce costs, but also add value in terms of productivity gains.
Several examples of firms setting up in-house incubators and startup accelerators have already been witnessed. The rise of tier-2 locations across IT/BPM markets offers suppliers a low cost expansion opportunity without the overheads and limitations associated with saturated markets.
With a fair share of threats and opportunities, there are interesting times ahead for the sourcing industry in the coming years.
NeoGroup and the Greater Toronto Airports Authority will be presenting Proactive Governance Driven by Data and Analytics at the upcoming SIG Global Summit this March 13-16 in Amelia Island, Florida. This session will address what information areas are key to creating a robust governance framework; how to identify potential risks and opportunities in current processes/vendors and how to leverage analytics to derive objective and actionable insights.