{"id":5612,"date":"2023-12-10T00:50:57","date_gmt":"2023-12-10T00:50:57","guid":{"rendered":"https:\/\/www.horsesforsources.com\/?p=5612"},"modified":"2024-09-11T11:38:32","modified_gmt":"2024-09-11T11:38:32","slug":"forget-labor-arbitrage_111823","status":"publish","type":"post","link":"https:\/\/www.horsesforsources.com\/forget-labor-arbitrage_111823\/","title":{"rendered":"Services firms are out of runway. They must forget Labor Arbitrage and conform to Technology Arbitrage"},"content":{"rendered":"
IT and BPO services have been on an incredible run for the last quarter of a century<\/em>, enjoying the relentless double-digit growth of global delivery models fueled by skilled talent pools in more cost-effective regions of the globe.<\/p>\n Who’d a thought the Global 2000 would keep finding more and more reasons to keep spending more and more money on global service providers?\u00a0 Yes, they’ve had a lot of fat to keep trimming, but many have finally cut to the bone, and 2023 has seen a nosedive in growth from most of the major service providers:<\/p>\n <\/p>\n One can argue that the legacy labor arbitrage model was already running out of steam before<\/em> the Pandemic, but the rush to the Cloud, driven by those pandemic-driven virtual business experiences, kept that spending on labor-intensive cloud migrations artificially high<\/em> until everything came crashing down to earth this year:<\/p>\n <\/a><\/p>\n Click to Enlarge<\/em><\/span><\/a><\/p>\n Our latest HFS Pulse data based on ongoing inputs from 600 of the global 2000 enterprises also suggests that labor-driven IT\/BPO services growth is expected to be ~5% in 2024, and AI-driven technology spending is expected to increase at ~9% (See Exhibit 3):<\/p>\n <\/a><\/p>\n Click to Enlarge<\/em><\/span><\/a><\/p>\n The industry has matured where most large enterprises (above $5B in annual revenues) have pulled the basic levers of offshoring either through in-house shared services and \/or 3rd<\/sup> party service providers. And after playing for 3-5 years in the model, while there are incremental improvements that they can achieve, the transformational benefits start to diminish.<\/p>\n Enterprises are running out of obvious<\/em> places where onshore people can be replaced with offshore people, and they have no choice but to investigate new avenues of value that are less<\/em> obvious.\u00a0 And those avenues are only to be found by exploiting technologies that can scale operations, provide rapid access to data that gives you a competitive edge, and grant you access to ecosystems to expand business opportunities.\u00a0 New technologies that enable you to run things faster, better, slicker, smarter, and cheaper than ever…<\/p>\n It\u2019s past time for the IT and BPO Services industry to jump to a new S-curve driven by technology arbitrage if they wish to get back to another season of hockey stick growth:<\/p>\n <\/a><\/p>\n Click to Enlarge<\/em><\/a><\/p>\n The \u201cscale of technology partnerships\u201d becomes far more important in the technology arbitrage era versus \u201cthe scale of people\u201d in the labor arbitrage era.<\/p>\n The fundamental value creation lever in the legacy Labor Arbitrage era has been the centralization of people in a global delivery model. The fundamental value lever in the Technology Arbitrage era is all about architecting and orchestrating the rapidly changing technology ecosystem in line with the client\u2019s business model.<\/p>\n Let\u2019s take the example of the rapidly emerging GenAI ecosystem (see exhibit 5) that an enterprise must build, manage, and keep updated on an ongoing basis as new players emerge, continually enhancing technology capabilities. This becomes too complicated and too costly very quickly, and consequently, the ROI becomes murkier.<\/p>\n Service providers have a significant value proposition to orchestrate this ecosystem to drive real business value for their core customers. Enterprises can’t exploit GenAI alone and need smart partners, which can really help them get ahead of the innovation curve.\u00a0 With GenAI, for example, there are real business pressures from the C-Suite to design AI capabilities that create genuine differentiation in the marketplace.\u00a0 Smart services firms that can engage at the senior level to bring their GenAI ecosystem to life will win in the emerging market, but they need to convince enterprise leaders to take a bet on partnering with them<\/a>.<\/p>\n <\/p>\nExhibit 1. 2023 has proven to be the great Reality Check for IT \/ BPO Services*<\/strong><\/span><\/h3>\n
Exhibit 2. The pandemic fueled the dying embers of Labor Arbitrage, but growth is flattening out<\/strong><\/span><\/h3>\n
Exhibit 3. Labor-driven IT\/BPO services growth is expected to be 5%, but AI-driven technology spending is expected to increase at 10%<\/strong><\/span><\/h3>\n
The reality is that costs are like hedges: they grow back after trimming, and the pruning shears are becoming blunt<\/span><\/h3>\n
Exhibit 4. The new S-curve of Value Creation will be AI-driven Technology Arbitrage<\/strong><\/span><\/h3>\n
Technology Arbitrage = Ecosystem Orchestration<\/strong><\/span><\/h3>\n
Exhibit 5: The technology ecosystem becomes too complicated very quickly (GenAI Ecosystem example)<\/strong><\/span><\/h3>\n