The amount of IT outsourcing business is up for grabs, coupled with an eruption of emerging technologies and delivery models. This has made 2015 a buyers’ market for IT services from System Integrators and outsourcers. Indian providers, whose value propositions have been based on the cost savings generated by labor arbitrage, are most at risk. The real differentiator is the provider’s strategy and readiness to adopt automation and newer business operating models. Those providers that want to move beyond the price wars will need to adopt and make investments in automation, analytics, and design thinking that could cannibalize their existing revenues in the short term.
Every major provider has to create offerings with – speed, agility, automation, and flexibility while cutting costs on the effort side. This is possible with rapid advancements in cloud middle-ware technologies and broader adoption of public and hybrid cloud environments giving buyers a number of new deliver options today with varying price points and risk profiles. Production environments can be shifted faster into cloud. Scope that may have been included in an infrastructure deal on top of a dev and maintenance spend will be shifted to cloud and SaaS spend.
As with the digitization trend, significant dollars are shifting away from supplier of a service to a different set of suppliers as the price point to deliver automated services also drops. For e.g. from supplier of IT services to supplier of cloud PaaS or SaaS. The large number of outsourcing contracts up for renewal may act as an accelerator or serve as the tipping point for broad adoption of cloud and cloud based disruptive middleware to embrace next generation application experience. Indian outsourcing providers need to be aware and proactive on these paradigm shifts that impact both the delivery and business models that have been static backbone of the industry.
To succeed in this new environment, outsourcing providers must adopt radically different business models, not a tweak here and there. In the past these tweaks worked. But now one cannot miss the signals of a fundamental market shift or risk losing market share as a result. It will surely result in consolidation among second tier providers and a shift to digital and engineering services for many of the others. The suppliers most at risk will be those that do not have clearly defined strategies and are still relying primarily on labor arbitrage or antiquated infrastructure support models.
The business opportunity is huge in the market, particularly around enterprise mobility and next wave of digitization, as the Internet of Things becomes a reality. The digitization opportunity suggests a massive amount of software needs to be built. The more processes can be automated, the more manual labor cost can be removed and the higher margin of the delivery. While greater automated deals may get smaller in dollar value, they will get more profitable. A $10 million dollar deal that delivers a 20 percent margin becomes a $7 million dollar deal at 50 percent margin, for example.