In a video discussion, General Electric\u2019s CEO Jeff Immelt discussed digital transformation and stated that companies must \u201ceither embrace the future or you\u2019ll find yourself not able to satisfy your customers.\u201d Third-party IT and business service providers also face a changing market and are taking steps to align themselves with the new business realities and new market opportunities \u2014 which is what brings me to the discussion in this blog post. You need to understand the current debate in the service industry and how the providers\u2019 decisions can affect your company.\n\n\nEvery major company now has an established dependency on offshore vendors in their portfolio mix of services delivery. Noisy public debates are taking place among some providers\u2019 founders, boards and activist investors\/shareholders as to which strategy is right for driving their future growth. I recently blogged about this dilemma at Infosys and how it is evolving at Cognizant. The dilemma I described in these posts faces all providers in the Indian services industry.\n\n\nAs I explained in the Infosys and Cognizant posts, the discussion revolves around whether an arbitrage-first vision or a digital-first vision is the best growth strategy. Here is a high-level view of both visions:\n\n\nArbitrage-First Vision. In this strategy, a provider would seek to maintain the robust margins it has enjoyed from labor arbitrage services. Despite the arbitrage market\u2019s maturity, slowed growth and declining margins, such a provider would try to become a leading player by consolidating the market.\nDigital-First Vision. In this strategy, a provider would transform into a digital company to create a new source of value for its customers. The new digital business models would involve a new talent base less dependent on labor arbitrage.\n\n\nHybrid Strategy. You should keep in mind that most service providers will choose a third option: a hybrid strategy, espousing a focus on both arbitrage and digital. They may tell you they are executing on both while they really execute with a focus on labor arbitrage. I believe firms that try to execute both are likely to fail and then will revert to an arbitrage-first strategy.\n\nImplications for your company\n\nIt\u2019s important that your company understand the arbitrage-first and digital-first visions boil down to a choice between current profits versus transformation. It\u2019s clear that all Indian service providers will face increasing pressure to return cash to shareholders, and the firms will need to balance this pressure against their strategy for investing in acquisitions and technology.\n\n\nAs the industry players consider their profitability options, their decisions will shape their investment strategies that affect their customers\u2019 businesses. Therefore, I believe you should thoughtfully evaluate your existing and future service providers against the following framework:\n\n\nIf you work with a provider taking a hybrid or arbitrage-first approach, the provider chooses to focus on its profitability. You can expect the following factors to affect your services:\n\nThe focus will be on protecting its margins and gaining more share of the arbitrage market. The provider will attempt to achieve similar margins in the\u00a0digital area of its \u201chybrid\u201d approach as it enjoyed in its arbitrage-based business.\nYour services will be delivered from an offshore rather than onshore location.\n\n\nThis type of provider might not be your best choice as a digital partner but would continue being a great labor arbitrage partner.\n\n\nIf you work with a provider taking a digital-first approach, the provider chooses to focus on its transformation. You can expect:\n\nThe firm will be more aggressive on pricing for digital services.\nPricing will align with digital models, which are more outcome-based and results focused rather than focusing on FTEs.\nYour services will have a higher onshore component.\nThe firm is likely to deploy its cash into investing in technologies, acquiring new digital businesses, transforming its culture and mastering the new digital business models, which will allow the provider to bring you a different kind of team than you currently have in your arbitrage-first team.\n\n\nAs you think about your company\u2019s services delivery portfolio and making provider selections, you will benefit by using the framework above to ensure you use the right services approach for your company\u2019s needs.