Four trends emerged in 2018 in digital investments by third-party service providers, which I believe will affect enterprise spending decisions in 2019.\nTrend #1: Automation in BPO\/BPS\nNew digital models and Robotic Process Automation (RPA) are changing the outsourcing services landscape. This is especially evident in voice-based business process services (BPS). Digital technologies are revitalizing mature services, such as voice\/call center services. Somewhat counterintuitively, the voice services segment is moving from a commodity to a differentiated offering as it embraces digital technologies, analytics and Artificial Intelligence (AI).\nDigital models and technologies require new skills, causing service providers to upskill their talent pools, adding analytics and domain skills. Labor pool talent in the voice area needs the capability to handle more sophisticated inquiries and take more independent actions based on a customer request. Analytics, chat bots and AI deliver these capabilities.\nThese changes are just starting to take effect, but the direction is clear. Indian service providers, historically disadvantaged in many BPS areas because of voice quality issues and proximity to clients, now look to have a bright future in BPS. Their voice quality and proximity challenges are somewhat offset by technological prowess, and there is a need for tech-savvy talent in the new digital models and technologies.\nDigital is providing growth opportunities for the sophisticated call center service providers, and smaller providers are consolidating to meet the more sophisticated needs in digital and capture significant new addressable market spaces. Moreover, this pattern seems to be repeating itself in almost all the high-value business processes, such as F&A and purchasing, where services providers can apply digital technologies. In fact, the BPS segment\u2019s growth rate now looks to outperform the IT services segment for the foreseeable future.\u00a0\nTrend #2: Innovation ecosystems\nAs the services industry changes from favoring labor arbitrage to now meeting clients\u2019 demands for disruptive digital technologies that create new value, they face a significant threat from start-up firms. As I\u2019ve blogged previously, firms in 2018 showed a strong preference to engage with start-ups as their go-to partner for digital transformation, rather than incumbent service providers. They view start-ups as the source of technology innovation for creating new value that can reshape their competitive positioning.\nThis shift in relevance is a potential existential threat to the incumbent service provider, which are desperately trying to become the go-to-partner for digital transformation. They at first attempted to fight the start-ups but increasingly recognized they were losing that battle and now choose to join them and leverage start-ups\u2019 strengths instead. Infosys, TCS, Tech Mahindra, Wipro and others are now creating innovation ecosystems that invest in start-ups and bring their services and products to the incumbents\u2019 clients.\nThis is a good strategy that benefits clients too. Digital start-ups tend to focus on building and selling technology but lack adequate implementation resources. Additionally, it is very difficult for well-established incumbent service companies to incubate disruptive technology and build a new software business model inside of a successful services company. For every dollar a client company spends on new digital technology, it spends $10-$20 implementing it and changing its operating model. Incumbent service providers want to participate in the $10-$20 part of the spend by being good implementation and ecosystem partners with the start-ups.\nIncumbent service providers also hope their investments in start-ups will position them well for (a) buying the start-up if successful together, (b) influence the start-up to select the incumbent as a privileged partner or (c) at the very least, make money if they are successful as partners. The strategy to join start-ups rather than fight them and create innovation ecosystems appears to be working well for the Indian firms as the strategy is a significant factor in their accelerating growth in the digital markets. It also works well for clients, which benefit from the partnering approach to digital transformation to get the best of both worlds.\nTrend #3: Communications sector growth\nThanks to digital technologies, the communications services segment is poised for strong growth over the next few years. I believe it will likely emerge as a strategic segment for third-party service providers. At the heart of this growth are several mega trends:\n\nHuge wave of work necessitated by 5G technologies \u2013 initially in implementation services but, over the long term, in strategic importance such as in Internet of Things programs and self-driving cars.\nConvergence of media and telecom, moving these client businesses into a richer service model for their customers, which requires significant third-party assistance.\nEmergence of digital marketing, a high-impact area for all companies, and its growing links to communications firms.\n\nAs a result of the potential high-value, strategic business in the communications segment, some service providers are restructuring this business segment to provide better customer relationships, sales investment and management oversight. Infosys, for example, recently carved out Communication, Telecom OEM and Media as part of its Energy and Utilities segment and created it as a separate business segment. By breaking it out, Infosys can better monitor results and make more focused investments in this critical segment. \u00a0\nit is no surprise to see Infosys and other services firms prioritizing the communications segment, especially to better compete with Accenture and others that already have a strong base of business in this space. I believe market leadership in services for communications clients will necessitate also building out skills in IoT, media and digital marketing.\nTrend #4: Increased pricing pressure\nFinally, firms\u2019 demand for digital technologies and business models is increasing the pricing wars already affecting the services industry. As companies implement digital platforms, the total cost to operate (TCO) comes down significantly because the technology eliminates 30-40% of the people previously doing the work. In most cases, TCO drops by between 30-40% and, in some cases, by over 80%.\nFirms are becoming aware of this change in TCO and are becoming more aggressive in using benchmarking and recompetes to capture this gain for themselves. Some clients do not want to go through the pain and expense of changing service providers, so I believe the potential of lower TCO will drive many clients in 2019 to a big recompete to put pressure on incumbent providers to lower their margins and increase automation.