The Doyle Report: Innovation and Commoditization Are Undermining Outsourcing

The Doyle Report: Innovation and Commoditization Are Undermining Outsourcing

Innovation and labor trends are negatively impacting the businesses of large information and communications technology (ICT) outsourcers.  

Artificial intelligence (AI). Data automation. Even price commoditization.

All of these and more are negatively impacting the businesses of large information and communications technology (ICT) outsourcers.

There’s news this week that one of the biggest players, Cognizant, is looking to reduce its workforce by roughly 6,000 workers, according to the Times of India. WiPro, Tata Consultancy and Infosys have all moved to reduce their workforces as innovation and price competition put strain on several types of outsourcing. Two years ago WiPro’s CEO said that improvements in innovation could contribute to a workforce reduction of 47,000 at his company by 2019. That’s one-third of WiPro’s overall worldwide workforce.

As mentioned, improvements in automation, AI and digital services are a big reason why. (So too, to a lesser extent, is a highly charged political climate in which offshoring and generous granting of H-1B visas is seen in some circles as “Un-American.”)

This could especially hurt big Indian outsourcing companies, which generate one-third or more of their revenue in the U.S. Not surprisingly, many industry watchers have begun to wonder about their future. In January, for example, The Economist declared, “Indian outsourcing specialists must reboot their strategies.”

When you consider that most of these companies were growing at double-digit rates until only recently, that’s quite a statement. But alas, it’s very true. The outsourcing providers that made their mark by providing back-office support to corporations now find themselves in a pinch. WiPro grew just 6.4 percent in 2016, which sounds good but is nonetheless a far cry from the 20-percent growth rates it enjoyed a mere few years ago.

Before you dismiss this development as some global economic trend that won’t impact you, reconsider. Knowing a good many ICT service and support companies here in the U.S. provide many of the same services, albeit on a smaller scale, some vendor channel executives have begun to rethink their strategies. They haven’t yet shifted their go-to-market priorities, but they are being more candid with their employers about the fate of commodity services providers who don’t operate at scale or have vertical market or specialized applications expertise.

Said one senior vice president of channels and alliances at a tier one software vendor recently, “’Your mess for less’ outsourcing is a much harder business to make work these days. IP-assets on design and delivery will simply trump labor in IT management.”

Even if you argue with the premise, it’s hard to dismiss the economics. Again, consider what The Economist said in January: “Budgets globally are growing steadily, at about 3 percent a year reckons Gartner, a research outfit. But an increasing amount of the money is spent on trendy stuff like analytics or the Internet of things. Such new ‘digital’ services will rise from a tenth of total IT spending in 2014 to over a third in 2020 according to McKinsey, a consultancy.”

Are you prepared for that? Or the cloud revolution, which is just getting started? Many are beginning to wonder. If you missed it, take a moment and read, “Does Public Cloud Spell Doom for Channel Partners?” from Virtualization Review. That’s you that they are talking about!

How should you respond? The answer, ironically, might be to borrow a page from the handbook of the Indian outsourcing giants that have made steep investments into digital services, cloud services, data analytics and AI. Take Tata Consultancy, which recently published a new study on AI. It found that “84 percent of enterprise companies surveyed think AI is essential and nearly half see it as transformational.”

Realities like this have forced Tata and others to invest heavily in the very technologies that are contributing to their upheaval. It’s something you should consider, too.

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