What is Happening?
With the traditional labor arbitrage model of outsourcing losing its appeal, large IT service providers have been developing software to “virtualize” their operations employees, creating a new “digital workforce” that can be deployed anywhere in the world, at any time. These software platforms incorporate machine learning and predictive analytics to help clients reduce costs, increase scale and improve quality.
While many large outsourcing firms have already taken their products and services to market, mid-sized vendors are fast catching up. For example, we have seen announcements from Syntel, Zensar, Mphasis, VirtusaPolaris and CompuCom around new managed services offerings that incorporate aspects of expert systems, machine learning and analytics to monitor and manage IT operations. These platforms have well documented APIs and connectors to connect to existing customer environments. Notable examples include ITSM tools such as BMC and ServiceNow, middleware from IBM and Oracle and hypervisors from VMWare and Microsoft. While some of the outsourcing providers are building their own platforms, others are collaborating with IT automation technology vendors. IBM, Accenture and Infosys have integrated IPsoft technology, HCL uses Moogsoft while Mphasis, VirtusaPolaris and CompuCom have partnered with Arago to blend this capability into their managed services offerings.
In our view, this indicates that moving into 2017, the rate of adoption of Digital Workforce Platforms (DWPs) by both enterprises and managed services providers is set to take off. We are already beginning to see the effect that DWPs are having on service providers. The inaugural ISG Automation Index™ showed that productivity due to automation is dramatically increasing across all IT towers, including datacenter. We believe that digital labor will fundamentally alter the balance of power in the IT services and outsourcing market; it will provide mid-sized players an opportunity to tap into large enterprise accounts backed by product-based competencies and outcome-based IT operations.
Why is it Happening?
- Legacy technology. Traditional offerings have given way to digital offerings to drive growth for enterprises. New business models based on technology platforms require IT staff to shift focus towards innovation. However, the complexity of legacy technology coupled with groups of individuals working in silos across datacenter components does not allow this model to match the agility and scale required by these new business models
- Operational challenges. Monitoring tools for server, storage and networks generate a plethora of alerts, keeping support staff glued to routine activities and reactive maintenance. IT teams have tried fixing this issue by creating filters at the expense of data that should have been analyzed to avoid other unforeseen issues proactively. Another example of an operational challenge is the creating of knowledgebases for repeated use. Manually creating a knowledgebase of incidents and their resolution takes time and its effectiveness is dependent on the quality of knowledge capture.
- Flat/modest growth in IT budgets. With an immediate imperative to shift spending from operations to strategic initiatives, CIOs have been tasked to find better and cheaper ways to run IT operations. Some of the approaches such as extending the life of datacenter assets have exhausted their potential and the onus has now been placed on service providers to drive down costs.
- Limitations of existing automation tools. Scripting, runbook automation, and other such approaches do not possess the analytics capabilities to handle complex infrastructure management issues. This creates a need for intelligent systems that can enable IT to delegate most of their operational tasks including those with a fair degree of complexity.
- Rising wages in offshore locations. The long established labor arbitrage model is no more sustainable with rising wages in offshore locations such as India. Service providers are keen to reposition themselves from providers of services to providers of services and solutions.
Net Impact
Service provider revenue from intelligent automation-based offerings will likely come at the expense of a decline in the use and value of traditional IT services. IT outsourcing industry players face a far more complex problem than previous disruptions in other industries (e.g., photography, smartphones, mainframes) as these providers have based their business models on headcount. On a relative scale, the mid-size service providers will find it easier to make this transition since they do not have several thousands of employees in support activities.
Moving forward, enterprises will be keenly looking at the willingness of service providers to cannibalize their existing legacy contracts in favor of the new outcome oriented and cost effective solutions. Service providers, by their own admission, see the next few years as a transition period marked by a considerable dampening in top-line and bottom-line growth. This may create a bifurcation wherein these providers have a “two-speed” organization structure. One will be focused on the traditional business which still has some way to go before being largely disrupted. The other one will have teams working on new age technologies. The mammoth tasks are (1) managing the associated cultural change within the organization, and (2) articulating to investors and the world that this is in the best interests of the business over the long haul.
About the author
Pankaj is an analyst with ISG Insights and is responsible for delivering thought leadership in the form of strategic insights, briefing notes and analyst reports. His research includes IT infrastructure with a focus on datacenter outsourcing and cloud. In addition, he supports enterprise clients and ISG advisors with custom research. Prior to ISG, Pankaj was part of the digital consulting services division at Genpact and spearheaded the social media insights team. He was responsible for providing consumer insights, conduct brand tracking studies and advising clients in the hi-tech space on their social media engagement and analytics programs.
