Services Industry Needs A Balanced Global Operating Model

As the labor arbitrage services model matured, the use of digital technologies and models five years ago had a significant impact on services delivered from third-party providers or offshore captives or GBS (Global Business Service) units. Adding the DevOps model into the mix had a profound effect. The result: we now need a new services model. 

The impact of digital

Part of the offshore labor arbitrage services model in place for the past 20 years was its dependence on building talent factories in low-cost locations. Operational excellence and economies of scale added up to a substantial cost reduction, which made the value proposition rich enough for companies to justify transferring their work to third-party service providers.

Migrating work offshore got a further boost when companies in North America, Europe, Australia and New Zealand could not find enough in-country labor pools to satisfy their needs for deeply specialized digital skills in areas such as cloud, automation, AI and analytics. 

Another dimension of this impact of digital is that the role of technology becomes more vital as companies move further into digital transformation. Therefore, the way that companies desire to control the tech stack and the operating model changes.

We see this clearly happening now in financial services. As banks become more and more fintech companies and the technology and the operating model are vital to how to compete, the desire for the bank to exercise greater control of the operating model and technology increases. This does not mean they will no longer use third-party services; but the way they use them will be different.

The impact of DevOps

The DevOps model, originating in Silicon Valley and now successfully used by enterprise application development and maintenance teams, changed the nature of teams performing process and function services and thus is a challenge to the existing offshore labor arbitrage factory talent model.

Offshore talent factories have a pyramid structure with a leader, a few senior members and a lot of junior members. The DevOps model leans toward contiguous, persistent (ongoing) IT teams near the business users or at least in the same time zones. Persistent teams stay in place over time so they can build expertise in the work being done, the technology stack, data management and the analytics required to drive the technology stack.

Deep expertise is the requirement for members of these teams, and these engineers have experience in driving against a goal in the business and in the tech stack that they use to develop the service. And the team members must be paid a higher premium for their deep expertise. This poses a significant challenge to the shared services GBS model as well as the third-party model.

Compared to the offshore factory talent model, the DevOps team model fundamentally changes the way work is done.

It also changes the effectiveness and productivity of the work. The combination of technology, data analytics and persistent teams yields a level of effectiveness and productivity that is many times that of the labor arbitrage model. In some instances, we at Everest Group documented that these new operating models are 200-300% more efficient than the old labor arbitrage model. Given that labor arbitrage realizes on average 20-25% unit cost reduction, a 200-300% improvement in productivity is dramatically better. Therefore, companies are moving more and more work to these new models.

I am not saying that there will no longer be shared services / GBS units or offshore third-party service providers. But the way they deliver work is changing quite rapidly. I also do not expect all work to move away from old service models; but as the new models start delivering even close to their potential, companies will look to operate this way.

Need a rebalancing of the services industry

What this points to is a seismic shift that is starting to happen in the third-party service companies and the shared services companies.

We can see the early stages of this seismic shift happening in the reorganizations that companies such as Cognizant, Infosys and Wipro now go though as they grapple with all these moving pieces and the new industry that is emerging from the cocoon of the old labor arbitrage market. They are moving down the path of implementing new operating models. And the implications will be significant in how companies provide and buy services as they move forward into this new future.

The reason I bring this to your attention is that many enterprises have yet to really understand and lean into the implications of the change happening. Companies are buffeted by some of the effects, but they have yet to understand the full benefits and then reorganize their internal and external supply chains to fully maximize the operating models, tech stacks and capabilities those organizations offer.

Finally, I believe these significant changes call for a rebalancing of the services industry. For those of us who have been in this industry (like I have, since the early 1980s), it feels a bit like déjà vu all over again. When I entered the industry in 1983, it focused on technology, operational excellence and perfecting the operating model. We seem to be revisiting this now – but with new technologies and new operating models.

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