It takes a village, but a distant one
For years, IT services vendors — and now increasingly consultancies — have been building business models around supporting enterprises’ IT and business processes, largely by leveraging the human arbitrage model and price-competitive offshore centers. While in recent years many vendors have begun to build on-site and/or nearshore facilities offering higher-value services, COVID-19 is now challenging these vendors to shift to remote support. For vendors that largely rely on using offshore hubs in locations such as India and the Philippines, the struggles will be even greater as these countries typically lack well-established infrastructure, iNet connectivity and electricity. But even vendors that rely on a high-touch consulting model and house the majority of their workforce in more developed countries with reliable infrastructure could be pressured in the short term due to an absence of personalization and face-to-face interaction. In addition to these hurdles, all vendors face the challenge of skill shortages, particularly in emerging areas such as AI, blockchain and data science, further hindering vendors’ ability to deliver on their DT programs’ promises.
According to TBR’s December 2019 Digital Transformation Insights Report: Voice of the Customer, improving HR operations, employee efficiency and effectiveness ranked in the middle (No. 5 out of 10) as a DT objective among surveyed enterprise buyers, not only currently but also within the next two years. We believe, however, that COVID-19 will likely force buyers to reorder their DT objective priorities and place HR transformation at the forefront. Vendors that are able to weather the storm by successfully navigating their own internal HR transformation, addressing remote working challenges and executing on business continuity plans with minimal disruption will likely emerge as the winners when the COVID-19 crisis abates.
The two largest opportunities within HR transformation will be centered on: 1) change management, which is typically a consulting discussion, especially for buyers that have yet to embrace the remote working culture; and 2) digital workplace solutions, as the need for implementation and management of platforms like Zoom (Nasdaq: ZM) and Microsoft Teams (Nasdaq: MSFT) at the enterprise level is already positively impacting vendors’ top line.
While digital transformation (DT) began to permeate both the lexicon and the minds of enterprise buyers and third-party providers about five years ago, the current global pandemic has brought a dose of sobering reality, raising questions around not simply when to embrace DT programs but also which processes are most critical to weather the storm. We see employee management, aka HR operations, and cybersecurity as two areas enterprise buyers will race to invest in as the COVID-19 outbreak disrupts operational cadences and highlights security risks associated with remote working. Supplying those services will not be enough; IT services vendors and consultancies must bring their clients reliable scale, making partnering even more critical for digital transformation.