Second of new-year posts I am running this week. Earlier I wrote about enterprise software trends.
To me 2015 was about how three A’s – Amazon, Analog, and Automation – are changing the outsourcing landscape, and looking forward, how these drivers will likely accelerate changes in the coming years
Amazon – With Amazon now more open about economics in its AWS business, every outsourcing executive should accept three realities. Firstly, the old business model cannot survive. Customers now expect more continuous price and performance improvements. Ok may be not 3-4 times a year like AWS has delivered, but certainly not once every 5 years that most outsourcers got used to. Secondly, they will have to rethink capex. Most outsourcers invest heavily in recruiting and staff training, not in data centers or automation. That game has changed. Finally, they need to expect more “left-field” competitors. If they only focus on competitors they see at software conferences or NASSCOM events, they will be in for more surprises. Amazon is just the first “outsider” they have seen from what I can tell from my industry conversations. Let’s not forget AWS targeted a narrow sliver of the infrastructure outsourcing market, but it outclassed the incumbents with their outdated data centers and contracting models. Plenty of application, BPO, systems integration areas offer similar opportunities for more efficient outsourcing.
Analog – or its antonym, Digital, has become a buzzword for most outsourcers. Most sophisticated customers I have followed (since writing The Digital Enterprise couple of years ago) find their digital edge comes from making previously analog products, services and business models “smarter” with embedded or enabling technology. Since those projects are so competitively strategic, most of them only selectively use outsourcers, and tend to use boutique design and contract manufacturing shops. So, most outsourcing “digital” experience I find tends to be in the back office or in some cases around social marketing, but not much around digital product engineering or manufacturing. If this does not change shortly, many outsourcer digital practices will essentially be spray painted ERP practices and will struggle to differentiate.
Automation – this is becoming the new buzzword for the industry with analysts like Frank Casale and Phil Fersht talking about “robotic process automation”. As I continue research for my next book about automation and impact on jobs, I am finding, outsourcers are offering to consult or even reengineer customer processes with an automation angle. But most are talking “machine learning” when automation means wearables, robotics, drones, 3D printing and other emerging technologies for many customers. Few outsourcers have such operational automation depth. And when it comes to machine learning, their skillset is puny compared to what is going on at consumer tech giants like Google and Microsoft. Also, from a credibility point of view, outsourcers need to showcase what they are doing to automate their own labor intensive, especially younger staffed, operations. As an executive told me “I would feel much better about IBM’s Watson if it did not come strapped to a 50,000 person outsourcing business”. It’s not just an IBM issue – it is a much broader industry issue, and a tricky one as it balances pressures from various countries to continue to grow youth employment opportunities.
The three items may sound daunting but the industry has repeatedly shown the ability to morph with the times. Plenty of morphing on the cards in the next couple of years.
(Cross-posted @ Deal Architect)