The impact of new digital business models on IT services
Suddenly, on-shoring is becoming more in vogue. Like many U.S. CIOs and their C-suite colleagues, you may be actively exploring how to duplicate or offset the loss of cost benefits from offshore/labor-arbitrage services. I have good news for you, along with a crucial tip.
Four primary factors are driving U.S. companies to make the move to onshore service delivery:
- Uncertainty associated with the potential of changing tax laws and border taxes, which could introduce a tax of 20 to 30 percent on services done offshore.
- Potential changing regulations and increasing regulatory pressures to relocate work from offshore resources to the U.S.
- Potential of reputation damage of companies called out publicly in the news media for use of offshore workforces.
- Uncertainty around rising costs due to changing immigration laws and use of H-1B visas, which could make offshoring more expensive for service providers and increase barriers.
Although these factors vary by industry and company, the net result is companies are looking even more closely at digital technologies and digital business models to offset the cost benefits of offshoring.
Let’s look at how these digital models apply to IT.
Many firms support their legacy infrastructure offshore and have significant teams in what is called Remote Infrastructure Management Outsourcing (RIMO) done offshore. A digital model applies to this in two ways:
- Cloud. It will accelerate the move to private and public cloud models. When you move to the cloud, you move into a highly automated environment, thus dramatically lowering the number of people to support the infrastructure. You can use that savings, and potentially the necessary support people can be more easily afforded onshore.
- Automation. By applying automation tools to the legacy IT infrastructure, you can dramatically reduce the number of people needed to support the legacy environment, once again making it more affordable to have the remaining people operate out of the U.S. instead of offshore. For example, you can eliminate 40 percent of the FTEs by using tools such as IPSoft’s Autonomics (featuring virtual engineers and toolset for all components of IT service management) or TCS’s Ignio (a cognitive system for enterprise IT operations). These digital models and technologies change the economics, making it much more affordable to do this work onshore rather than offshore.
Applying the DevOps set of tools (self-provisioning, automated testing, agile methodologies) in an IT shared services organization creates up to a 30 percent productivity benefit. A 30 percent increase in productivity goes a long way to offsetting some of the offshore/onshore cost issues.
In truth, these productivity gains can be captured using an offshore model. So the argument is a little more complicated because the opportunity to apply DevOps tools and techniques to shared services is independent of location. But if you adopt them, it will lessen the impact of moving work back onshore.
In a DevOps model, it’s necessary to move to cross-functional teams in pods aligned to the business that operate from app development through IT infrastructure. Designed to be highly productive teams, these IT employees naturally want to be close to the business users – therefore onshore. Using this model, we find companies enjoying substantial productivity gains well over 100 percent, which more than offset labor arbitrage/offshoring losses.
Automated Testing. The advancements in automated testing (a DevOps tool) enable companies to isolate testing as a separate discipline and automate 60 percent or more of the work. The smaller, more productive footprint of automated testing environments reduces the dependency on low-cost locations for testing, giving companies the freedom to stand up automated tests onshore.
Necessity of changing your business model
There is a caveat to achieving the cost and productivity benefits I described: To get the biggest benefits or breakthrough performance through digital tech and models, your company must fundamentally change its business model.
What does this involve? Digital business models accompanying digital technologies require an end-to-end approach.
Three elements comprise the business model:
- Delivery elements. For product companies, delivery factors affect how their products are made and include such elements as the manufacturing factory, supply chain and logistics. For services companies, delivery factors are how a company delivers services to customers. For example, in an insurance company, the delivery elements affect how the company processes claims.
- Customer-facing elements. These aspects of the business model affect how you touch, reach, or access customers and the value proposition for customers. It includes such components as sales channels, pricing model and customer segments.
- Support elements. These service elements undergird the delivery and customer-facing elements. They include IT infrastructure and operational technologies along with business processes. These elements of your business model affect how you do application development and innovation, the components of your IT infrastructure, your partnering ecosystem and what technologies you implement.
Changing your company’s business model doesn’t just change how the company operates. It is the key to changing the value the company delivers.
If you want to achieve an incremental outcome from digital technology initiatives, it is fine to maintain your current business model. But if you change various elements of your business model, you will achieve big cost and productivity benefits that offset the cost differences between IT services delivered onshore vs. offshore.