R. Arun Kumar, Sr. Vice President, Global Sales Leader, Application Services, Capgemini
Continued macro-economic concerns and the ongoing recessionary indicators across the globe are affecting almost all industry sectors and becoming an endemic boardroom issue. The C-suite has had to adjust their strategies and investment plans to a capital-starved, low-growth environment. Added to these are the additional, and in some industries, excessive, regulatory requirements that are adding to the costs and diverting precious resources away from value generating activities.
In this context, leading CIOs are struggling to demonstrate alignment and specific linkage between overall Business Value, and their IT Operations and Transformational initiatives. They are also unhappy with existing sourcing models and arrangements. At the same time, the IT Global Sourcing playbook is being re-written, upending traditional sourcing models. Several disruptive trends are responsible for the same, making CIOs sit up and take notice.
These disruptive trends, ranging from changes to the talent market, cost structure, automation, consumerization, and flexibility, have been gathering on the horizon for several years. They are now getting unleashed in a perfect storm across the IT services landscape, radically altering the playing field.
Five disruptive trends stand out in terms of their current and potential impact to the global sourcing industry, especially in the IT services context. Some of them are also paradoxical and counter to what the conventional wisdom of the day is! To understand them better, it is important for me to provide a little historical context and draw parallels with another important industry of our times, the Auto Manufacturing industry.
It has almost been an axiom in the IT services industry that it follows, with a time lag, the Manufacturing industry, and more specifically the Auto Manufacturing sector, in terms of evolution, and sourcing practices.
It was the US Auto industry that started with global sourcing for cost reasons, more that 40 years ago, to procure parts and components cheaply from Japan and other low-cost locations. The Japanese used that as an entry point into a highly lucrative US market, and soon bested their western competitors when it came to quality. The quality practices and maturity they introduced soon became industry standards, and created barriers to entry for others until they were able to catch up. The bar kept going up, with better customer service, improved fulfillment, and game-changing innovation, and there soon came a time in the late 90s and early 2000s when the biggest, as well as the best, car manufacturers were Japanese in origin, not American.
The IT services industry has followed a similar trajectory, with one significant difference. It was India, not Japan, which capitalized on the need for lower costs to deliver IT services, and then parlayed it into better quality and an overall seamless global delivery model that proved difficult for the western competitors to replicate for several years into the late 90s.
Globalization, advances in technology, and internet, during the mid to late 2000s, has allowed the nimbler and deeper pocketed western firms, whether in the Auto sector, or the IT Services industry, to somewhat level the competitive field by creating their own mature global delivery supply chains and innovation centers.
The five disruptive trends that I am about to elaborate extend this symbiotic pattern that has existed between the Auto and IT services sectors, and you will soon see why:
Disruptive Trend #1 - Reduction in FTE Costs as a % of Total IT costs
The labor cost as a percentage of overall operations and production costs has been coming down in several industries. Nowhere has this reduction been starker and more noticeable recently than in the Auto sector. If you don’t believe me, ask anyone from Detroit or from the surrounding Rust Belt in the Midwest! When you look at the long historical arc, this is not surprising at all.
This reduction in labor costs is happening in the IT Services sector too. FTE/Staff costs, as they are referred to, have been steadily dropping in terms of overall share of IT costs, since the late 90s, driven by lower-cost locations, and higher productivity, and this reduction has accelerated in the last 3-5 years due to operational cuts.
The reason I bring this up as a disruptive trend is simple – if a particular aspect, in this case FTE costs, becomes a smaller factor in the overall TCO calculations, the extra benefit one can realize by cutting it further is that much lesser. And the location itself becomes possibly less critical. Especially when there is a growing sense among the CIOs that further reduction in FTE costs could actually eat into their ability to execute well.
Disruptive Trend #2 - Increased Availability of Affordable Talent in Local Markets
In early 2000s, lack of quality talent, combined with a huge labor arbitrage, fueled the offshore global delivery of IT services from countries like India.
Persistent high unemployment in the western economies, especially in US and Europe, and high inflation and corresponding wage increases in some of the developing countries that are also suppliers of cheap talent, like India and China, is leading to a situation where the labor arbitrage inherent in the cost structures is nowhere close to where it was even five years ago.
Some other structural reasons are at play too. Over the past decade, there has been a steady influx of H1-B and L1 visa holders from India-based IT services companies into the US (average of 100,000 such visa holders per year), and a lot of them have now either become Green Card holders or naturalized citizens, adding to the local employment pool of affordable talent in the IT market.
The local, state and federal governments have also made it easier and more attractive to hire local talent through tax breaks, the JOBS Act, etc. In the current economic and political environment, there is increased sensitivity to the Regulation, Reputational, and Concentration risks as well, that large companies are beginning to consider more closely.
The recent announcement by GM CIO, Randy Mott, to bring back over 90% of the currently outsourced IT work as part a broad-based IT Transformation is an early indicator of this trend. In fact, Mr. Mott has gone as far as to say that he doesn’t think “GM can be creative or fast enough with outsourced IT.”
Nett, there is affordable IT talent available for companies to hire in their local geographies. And CIOs on the cutting edge like GM’s Randy Mott are tuning into that!
Disruptive Trend #3 – Higher Automation in IT Services
Robots are becoming more ubiquitous in the factory assembly lines and workshop floors of manufacturing plants worldwide. A recent New York Times article reported the increasing use of low-cost but sophisticated robots and other automation tools in Automotive plants, and even at Foxconn, the back-end factory for Apple’s iPhone and iPad components.
How can IT be far behind? Componentized code factories, intelligent production support platforms, reusable enterprise package modules, even automated tools like CAST that can provide a complete inventory of the integrity and robustness of an application portfolio without human intervention, are the robots in the IT services world.
Increased Automation is also accelerating the first trend above around reduction in FTE costs as a share of the total IT costs. While jobs may be at risk at the lower end of the value chain like support and maintenance, there will be a need to hire people who understand design, process, architecture, and integration.
Disruptive Trend #4 – Flexible Delivery Options
When we bought our Toyota Camry Hybrid three years ago, we didn’t expect it to have been assembled either fully inside or fully outside of the US. A lot of auto design, manufacturing, and assembly is now being done in a truly global scenario, and quite a bit of it is being done in a distributed manner, with various parts and components get manufactured in multiple locations/countries, and being brought together in a completely different location. What matters is an ability to manage the components, the supply chain, and the customer service. For the end-user, like me, it is not terribly important to know where individual components or parts of my Camry or my iPhone came from, as long as the end product meets my expectations.
The IT services industry is spawning its own flexible delivery through the emergence of Cloud-based services, on top of the already distributed and global services model it has perfected. It is only now that Cloud-based Services and Delivery are becoming mainstream even for enterprise-based Applications, and companies are seriously looking into adopting it in an industrial strength manner through Public, Private, or Hybrid clouds.
Companies now have a choice in terms of services delivery options that are not just broken down into two categories: insourced or outsourced, but both delivered through people. Cloud-based platforms and As-a-Service models are making the choice richer, though more confusing!
Disruptive Trend #5 – Simplification and Rationalization
The era of binge and excess is over! With the great recessions that swept the globe during the last decade, we have all had to tighten our belts, whether in personal or professional lives. Companies have been no different.
Capital-intensive outlays on new licenses and packages are not happening any more. The phase of each department or unit buying and installing their own IT systems, and infrastructure, and the CIO trying to get everything to work together is a nightmare no one in the industry wants to relive (except maybe the middleware makers and integrators!)
There has also been a proliferation in terms of vendors, and in terms of the types of services being delivered from various in- and out-sourced providers.
Maximizing existing assets, simplifying the cluttered IT landscape, integrating the services, and rationalizing the portfolio, to enable a leaner, agile architecture, and a streamlined governance and operational set up, is what CIOs are really thinking about.
Does the current IT portfolio support the business as it becomes more mobile, social, data-intensive, while still keeping it secure and readily available to users? If not, how can it be evolve to that future state within the limited investment and budget constraints of the organization? This is the top most concern for any self-respecting CIO of a Global F1000 organization.
This increases the need for top-flight integrators, not just of the traditional Systems Integrators types, but Integrators who can help integrate Packages & Products, integrate multiple Vendors & Providers, integrate disparate Services, and help provide the overall governance and program leadership that can lead the CIOs towards the desired Simplified and Rationalized future state, while still keeping an eye out for Business Value.
These disruptive trends are tearing up the IT Global Sourcing playbook as currently written and opening up the path to a completely new paradigm around Sourcing Strategy, Decision frameworks, and Models. In the next article in this series I plan to discuss the contours of a New Global Sourcing Playbook that is upending the traditional sourcing models, and will be required by the CIOs as well as IT Service Providers to get ahead of the curve and make sure they continue to deliver value to the business.