Powerful wave of digital services has a classic snarl for ROI

The world of business strategies is changing for U.S. businesses. All eyes are now on the bottom-line cost and productivity improvements achievable through digital technologies such as automation, analytics, robotic process automation (RPA), cognitive computing and cloud, along with their associated digital business models. The same is true with third-party service providers — all eyes are now on their bottom line with growth expectations pared back unless they offer digital services. As customers and providers try to find their footing in this new digital world, I believe customers must recognize a potential risk in their digital investment decisions.

The turn to providers offering digital services derives from a set of issues, as follows:

Mature labor arbitrage market. I pointed out in several blog posts in 2013 and 2014 that the labor arbitrage market was maturing, growth was slowing for providers and value propositions for services based predominantly on the labor arbitrage model were diminishing in effectiveness. That trajectory continued to the point of the market seeing only 0.1 percent last year for legacy business. In a maturing marketplace, customers pressure providers on price points.

Offshoring attitude shift. The decrease in new business labor arbitrage market — with work mostly performed by offshore providers — is now compounded by the attitude shift of American businesses regarding “acceptability” of where work is performed. As Congress discussed their goal of immigration and H-1B visa reform proposals in 2014, a segment of the services market in 2015 began shifting to the 80/20 rule, with those companies wanting 80 percent of their work to be located onshore so closely located teams with local knowledge being able to drive to functionality must faster.

The new Trump administration has proposed change in immigration and visa laws that potentially will significantly increase offshore service providers’ cost base, especially for those dependent on the H-1B visa model. Two GOP senators proposed a bill last week (“Reforming American Immigration for Strong Employment Act,” or the RAISE Act), which aims to cut legal immigration in half, eliminating mostly the low-skilled talent. This proposal is similar to one of two scenarios I suggested in a recent blog as options for immigration reform.

I don’t believe providers will pass the increased costs on to their customers. But with government entities, media and disgruntled employees becoming vocal about jobs not going outside the U.S., companies face rising concerns about reputational risk from offshoring. These concerns are motivating U.S. businesses to take a step back in globalization and look for ways to bring offshored work back onshore.

Cost benefits from digital technologies. I’ve observed and blogged numerous times over the past year about companies experiencing dramatic productivity gains in their workforce once they implement such digital tech and models as RPA. The results of such digital investments more than offset the loss of cost benefits previously achieved by offshoring.

The ROI snarl

As a result of the issues I described earlier, it’s no wonder that service providers now feel an urgency to pitch digital services and lock in their existing client base (and new customers, too) before their services business is disrupted further.

But buyer beware — don’t fall prey to urgent provider pitches. The risk for customers is that digital is different. It’s more than implementing digital technologies; the change affects functions organization-wide and necessitates changing the business model. Some digital technologies and models are not mature and still evolving, so growing pains are inevitable.

After initial experimentation, we’ve seen some companies find they want to manage their digital transformation without a service provider, and others find they want to switch to a different provider. This is a classic situation in services contracts for the past two decades, and digital services are no different in this regard.

My advice: don’t get locked into a digital service provider’s model with a multiple-year commitment before the new model (and impact on your company) is well understood.