Thursday, February 14, 2013

Why Traditional IT Services Engagement Models are Failing

IT Industry has come a long way since the late eighties. It has almost changed the face of India. We are perhaps the only country in the world that has a good visibility of moving from a developing nation to a developed nation with the backing of a strong services economy. Every other developed nation did this on the basis of manufacturing. Unlike manufacturing, that deals largely with machines, services industry deals with people on both sides of the value chain. IT services, in particular, relies largely on adding new workforce to increase revenues. This industry has grown from less than 100,000 employees in 1995 to over 3.5M employees today. We are already witnessing traditional HR paradigms being challenged as knowledge workers demand individuality whereas at such a scale only a cookie-cutter approach can work !

How relevant are the existing engagement models today and what are the challenges being faced ?

a) Most of the innovation in this industry in the last 2 decades has taken place in improving productivity & margins so it is not surprising that there is very little juice left for productivity improvements. How do you become more profitable in an environment where inputs costs continue to rise ? Linear models leave very little scope for increasing productivity or margins as most gains have already been achieved.

b) Business environment has changed. Companies are looking to focus more on core businesses and trying to variable-ize spending on non-core areas. Even the definition of non-core continues to change. Technology, once considered as core to an Investment Bank, is now being seen as a commodity. BFO is therefore emerging as the new need for managing non-core pieces of the business. Traditional models have no answer to this new need.

c) Industry has matured in the last 2 decades. Factors once considered as differentiators like scale, infrastructure, execution capability & quality of people are no longer considered as differentiators because the gap between the average & the best player in the industry has substantially reduced. How can one create differentiation in T&M & FP models if scale, infrastructure, execution capability & people are found to be alike in almost every organization?

d) As discussed earlier, there is a direct correlation between revenue growth and employee count. As the industry grew there was a higher need for qualified talent and that has already put lot of pressure on both the size as well as quality of the talent pool. Though the number of engineering graduates has become 10 times from 50,000 to 500,000 in the last 15 years, Academia & government continues to be very stressed to meet the ever growing demand . This imbalance in demand & supply has also resulted in increase of labor costs. Somewhere this linear cycle needs to be broken.

So as you can see linear models are falling flat to the changing business environment. Various nonlinear models like Gain sharing, SaaS & Platform based outsourcing rely heavily on IP and institutionalized domain knowledge rather than on individuals or on operational efficiency.

Our future depends on how quickly we are able to make a shift towards building IP & foster an environment of innovation else the industry will die within the next decade.

I also suggest you read critical analysis on the IT industry and Business Function Outsourcing


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