Digital transformation, automation, artificial intelligence (AI), cognitive, robotics, cyber, cloud and other buzzwords are swirling across stakeholders within enterprises and IT services providers.
The effort to keep up with using, integrating or just talking about the coolest and most innovative gadgets and applications has forced many providers to sideline the true purpose of their businesses.
We don’t think automation or any of the other aforementioned trends will likely abate anytime soon, but we believe vendors that look in the mirror first before heading out the door and try to sell stuff, outcomes, value, etc., are the ones that can survive in the long run.
Processes and technology are great, but company culture trumps them both as the one prerequisite that leadership must ensure is aligned with market demand and the broader stakeholder community.
Zooming in on customer zero
Enterprise demand for cost savings has been, and continues to be, the key driver behind the IT services market evolution.
From the dawn of outsourcing to robo-sourcing today, IT services vendors have constantly been striving to address that demand, applying levers such as labour arbitrage, consolidating software engines, and now utilising adaptive and prescriptive tools — all in the name of making clients happy, winning RFPs and let’s just say it: improving shareholder value.
However, the speed and scale of competition is forcing vendors to juggle even more complex tasks, expanding capabilities in unchartered territories (e.g., creative services) while ensuring they have the right size and smart-skilled workforce bench.
Technology Business Research (TBR) sees this chaos in the IT services cosmos compelling vendors to take a historical look at other industries that have gone through similar transformation changes.
In the dawn of the internet, the newspaper industry saw the new technology as a channel to promote content. All was great until declining newspaper sales and market consolidation forced some publications to go out of business while others asked readers to pay for subscriptions.
The IT services market is at a similar crossroads, where vendors invest in automation tools to improve, standardise and speed up service delivery to pass cost savings to clients to remain competitive.
One may argue that IBM is The New York Times and Amazon Web Services is BuzzFeed. As a result, vendors’ bottom lines are pressured especially as they struggle to ramp up “digitally” infused awards.
We do not think progress will stall, but we believe vendors’ approach to embrace being digital first and doing digital second enhances their value proposition.
Additionally, not monetising intellectual property effectively will constrain ongoing investments in services automation and put firms at a competitive disadvantage in the market.
While it is easier said than done, we believe vendors that start transforming their cultures and adopt KPIs that resonate with both software and services companies have a better chance of executing on their promises around digital transformation without facing a race-to-the-bottom scenario.
Putting products into services requires vendors to restructure their operating cost structures. For example, while robotic process automation (RPA) cuts cost of services, agile development adds integration and test expense.
SG&A rises as deal sizes shrink, making knowledge management critical to efficiency. Lastly, R&D spend expands to industrialise custom-built IP into services.
Transition not transformation
Marketing messaging creates a hype that vendors and buyers must live by. Filtering through the noise and appealing to the right buyers requires suppliers know which offerings to market and how to position their offerings without overselling and underdelivering.
For example, the CIO always wants to know what cost-saving KPIs look like, regardless if vendors use labour arbitrage or automation tools.
The CFO, however, sees applying automation in service delivery as becoming the guiding principle for establishing the enterprise of the future, where all tasks and processes are executed at a 100% compliance rate without human intervention.
Adjusting to these requirements is not an easy task for IT services vendors that historically have been using low-cost leverage and utilisation as core metrics to productivity and tying them to the impact on profitability.
New benchmarking metrics around the use of automation can help suppliers and buyers compete better and capture the most value on their investments, including:
- Innovation spend
- Percentage of FTEs automated
- Employee development and certifications
- Total RPA cost
- Speed: start versus stop time of a process before and after automation deployment
- Productivity: length of time a human spends on a task compared to a robot
- Quality: output accuracy before and after automation tools deployment
- Compliance: compliance percentage before and after automation tools deployment
TBR sees these metrics as some of the fundamentals that can help IT services vendors ease their transition toward adopting automation-enabled cost structure and fine-tune their go-to-market messaging addressing key buyers’ core beliefs.
The degree of success around each of these KPIs will depend on multiple factors, including automation market maturity level; vendors’ automation tools development strategies; vendors’ packaging, bundling and service delivery strategies as well as vendors’ ability to re-skill, up-skill and certify resources in new areas.
Patents will likely emerge as a differentiator, at least initially, as vendors try to fill gaps in portfolio offerings to address industry pain points.
As the market matures, establishing certifications in automation-enabled service delivery similar to Capability Maturity Model Integration (CMMI) levels has enabled outsourcing organisations to showcase their commitment to buyers’ performance, quality and profitability across IT and business process services, filtering the noise around transformation and providing visibility for the “What’s next?” question in the professional services market.
Standards around technology development and connectivity will become must-haves as today not every connection in the services technology ecosystem creates value and a use case for each client.
From scale to skills
Just like the use of automation results in the need for new technologies to be integrated with existing systems, grooming the right skilled bench will remain a key challenge and an opportunity for IT services vendors, which for many years have relied on an army of people to develop, deploy and manage what today can be seen as low-level tasks.
Educating and developing technical experts who can create differentiating business applications and processes in the era of AI will guide suppliers in their resource management strategies.