Changing Dynamics In The IT And Engineering Services Market
Looking at the market for IT and engineering services right now reveals that companies are in a spending dilemma. They face high demand for these services, yet they look to cut back on spending because they are concerned about a possible recession. The strategies large companies are already putting in place to address this dilemma are changing the marketplace dynamics. Here is an overview of what your company needs to understand about these strategies.
The Changing Perspective On Hiring
A common remedy now in play for cost-cutting at most tech companies is to pull back on hiring. The tech sector has basically gone into layoffs of their employees. In addition, some tech businesses associated with industries such as retail have trimmed their sales. For the most part, companies have reduced their hiring plans. If their plans were to hire 1,000 engineers and IT people this year, they are now hiring only 250.
Despite the fact that we still have a tight labor market, reducing hiring is typically the first step in cost-cutting.
The second strategy we see companies using now is switching to offshore and nearshore IT and engineering services as a way to cut costs. At Everest Group, we see a big spike in the number of companies building new Global Business Service (GBS) centers or offshore centers. We also observe a spike in the number of companies expanding their existing centers.
This big spike seems to be happening across the board. Mature companies that already have captives or offshore locations are increasing their employment in those locations. Companies that did not have offshore locations or GBS centers or captives are building startups. So the market has both new starts and increases.
We also see an increase in outsourcing to service providers in nearshore lower-cost locations in Central America, the Caribbean, and Eastern Europe. This strategy takes two flavors. Mature North American companies recognize that as technology becomes more intimate and dynamic, the proximity of where the tech workers reside is more of an issue. In other words, being in a close time zone in a closer proximity allows for more intimacy and facilitates a deeper knowledge and deeper collaboration between tech workers and their operations teams.
The driver for both strategies – reducing hiring plans and increasing work in offshore locations – is the need to reduce cost. With the huge shortage of labor both onshore and offshore, the issue used to be how much more to pay existing employees and how much more to pay the new people yet, at the same time, save money. We still have a tight labor market, so it's difficult or unwise to pay talent less. Instead, companies switch to offshore or nearshore operations to reduce cost by outsourcing.
Some companies choose to do it themselves; others choose to go through third-party service providers. Many companies do both because it is difficult to scale their own offshore operations quickly. It's often easier in a six-month to one-year time frame to use third parties.
The Perspective For New IT And Engineering Projects
Somewhat surprisingly, there is not at this point a curtailment of new projects. There is a deceleration in the number of new projects that companies initiate now because they are more cautious; yet the digital transformation marketplace continues to expand.
There are several reasons for this. One reason is that companies allocated substantial capital in the last two years for digital transformation and modernization. A meaningful part of that capital still is on the sidelines and has not been spent.
Monies were made available, and the CIO and engineering teams were given large budgets. But there is a limit to the number of projects they could run because there is a limited amount of change an organization can absorb at any one time. They also faced a highly constrained labor market, which made them unable to spend all that money.
Consequently, many companies have money to spend now that was left over from previous years.
Although budgets for IT, for the most part, now are flat, there is still capacity to increase spending because of their inability or unwillingness to spend it last year. Thus, growth is now present in the market.
The long arc of digital transformation has landed us in a state where the tech stack and operations are far more intimate and far more dependent on one another. In order for operations to change, a company needs to change its tech stack; and every time it changes the tech stack, it must also change operations. This ongoing cycle of change now drives the tech project market.
In addition, the velocity of change is increasing. Even companies that look to reduce their operations end up spending money reconfiguring their tech stacks so they can conduct operations more efficiently. Consequently, their cost-cutting efforts often result in more IT projects.
Industries are in different stages in this market. For example, there is a lot of activity in the manufacturing, retail, transportation, hospitality, and energy sectors. Companies in these industries are pushing forward on big technology project agendas.
Changing Perspective On IT and Engineering Initiatives
Another significant change in an aspect of demand for services is a shift to a more pragmatic view of IT and engineering initiatives. After the COVID pandemic, companies rushed to modernize their legacy stack and therefore pushed further into digital transformation.
A desire to anchor new initiatives in direct business value is now emerging. The modernization movement that drove cloud growth is running into headwinds. I want to be clear: I am not saying that companies have finished modernizing and no longer want to modernize their legacy tech stacks. It's just that new monies are not available to push broadly into modernization.
Companies must now anchor their IT and engineering investments to delivering business results. They can still achieve modernization if it supports the desire to continue to move into the cloud to modernize the tech stack. Businesses' willingness to fund and sponsor that investment is shifting to the need to show demonstrated business results as a result of the investment, rather than a broad belief that they just need to get on with modernization.
The Changing Focus On Productization And Digital Pragmatism
That results in several consequences that I discussed in previous blogs. One is that many companies are rethinking how they manage their IT stacks and are reconceiving them into a series of products. Typically, this starts with any tech stack that deals directly with clients, but it quickly evolves into a movement to package their existing set of products.
This allows the CIO and the tech organization to better communicate with the business and to make their investments align more closely to delivering business value.
Hence, the movement to product management and productization of the tech stack is a very strong movement in IT today. Reinforcing it is digital pragmatism, which we can characterize as: “We will spend money if we can see a quick path to value, but we are less interested in spending money on long-term or big projects with less concrete results.”
I believe that moving to productization of the tech stack and moving to digital pragmatism will accelerate as the prospect of recession increases. Both factors will change the marketplace.
Changing Impact In The Contingent Labor Market
Another factor in the changing dynamics in the IT and engineering services marketplace is a growth in the contingent labor market. To deal with the temporary imbalance between demand and supply, third-party service providers are stepping up to provide managed services that are more flexible than their outsourcing cousins.
Companies do not want to commit to more hiring or to long-term contracts for supply since they need to cut costs. But they want high flexibility to meet their immediate demands. Therefore, they look for short-term contracts and contingent labor solutions.
In my next blog, I’ll discuss the changing marketplace for business process outsourcing (BPS) services.
