Turmoil in IT services: Talent, org charts and acquisitions

Gimme 3 — Insight Interview with TBR’s Subject-matter Experts

In TBR’s new blog series, “Gimme 3 — Insight Interview with TBR’s Subject-matter Experts,” Principal Analyst Patrick M. Heffernan discusses our latest and most popular research with our analyst team.

This month Patrick chats with Senior Analyst Elitsa Bakalova about the IT services market, including how vendors take on talent challenges and internal organizational change.

Patrick: Talent in the IT services space seems to be a top-of-mind problem, and in the IT Services Vendor Benchmark you report that attrition expanded again in the first half of this year. Even with vendors hiring more and increasing pay, will talent remain a headache for the remainder of 2022 and into next year?

Elitsa: People are the key resource for IT service delivery, so talent has been and will remain the No. 1 priority for IT services providers during the coming years. Finding the right skills to deliver digital transformation services increases vendors’ chances to fulfill demand and accelerate revenue growth. But attracting and keeping skilled talent are particularly difficult when there is a shortage of skills and those skills come at a higher price that not all vendors can pay. Employee attrition has been on the rise since the beginning of 2021, with two forces driving it: increasing demand for digital transformation and employees’ pursuit of their own happiness.

Enterprises that planned to start digital transformation activities or were in the early stages of transformation in 2020 slowed down their initiatives due to the uncertainty caused by COVID-19. Those enterprises, along with new ones, are now accelerating their digital transformation initiatives and looking for support from IT services providers. Vendors need talent to address the pent-up demand, and some are hiring in bulk, adding thousands of people across the pyramid, often heavily weighted on freshers. Naturally there is rising competition between IT services providers to attract as many resources as possible from universities and poach talent from peers to reach their hiring goals for the year. The jobs supply is high, and I think it will remain that way in the near term.

Turning to employees’ need to be happy and satisfied with life, career and family, when pandemic pressures began to ease in early 2021 some employees started looking for a career change that would likely lead to an increase in pay and job satisfaction. At the same time, vendors began offering new jobs that employees already trained and certified on new skills saw as a great opportunity for career progression with another IT services provider.

Patrick: In one of the benchmark’s quarterly focus sections, you highlighted internal reorganizations: IBM Services splitting into IBM Consulting and Kyndryl, Atos working on splitting into two separate entities, and NTT DATA splitting off the domestic Japanese business. Which vendor will be next?

Elitsa: It is hard to say which vendor will be next, but we can speculate based on our analysis of vendors’ performance and position among peers with similar business models that have undertaken internal reorganizations. Revenue growth and profitability improvement drive IT services vendors and when the two are not in concert, vendors begin to look for ways to adjust portfolios and change internally to reverse the negative effects. Both IBM and Atos were experiencing revenue growth and profitability challenges due to commoditization and low profitability of traditional IT services activities while other parts of their businesses such as digital, cloud, cybersecurity, consulting and application modernization services were growing profitably. Those two vendors sought to improve performance by restructuring declining and less-profitable business units, giving them the flexibility to align strategies and investments with specific markets in which they operate.

In our IT Services Vendor Benchmark we see some vendors in the same position. DXC Technology, T-Systems and Unisys have been repeatedly going through internal reorganizations so they can be less reliant on traditional IT services and improve operational efficiency through cost optimization, changes in global service delivery models, and increased use of automation. Despite these efforts, we have yet to see material changes from the reorganizations because those three vendors continue to see declining revenues and razor-thin profitability. Maybe at some point instead of divesting noncore assets, as DXC Technology has been doing, these vendors will split themselves into separate entities — one around traditional IT services and one around services tied to next-generation solutions — similar to IBM Services and Atos.

Patrick: Looking at go-to-market trends, you mentioned six of the 31 benchmarked vendors made notable acquisitions in the first half of 2022. Do you think acquisition activity will pick up in the next few quarters?

Elitsa: Near-term, we don’t see a major change in acquisition activity. While a global economic slowdown may cause pockets of tight spending on acquisitions for some less financially stable IT services providers overall, the overall acquisition pace will remain unchanged. Uncertainty typically makes for a good spending environment for consultancies, and the financial services industry continues to face technology disruption, which service vendors aim to capitalize on by investing in industry and technology expertise to drive planning and strategy discussions. Acquisitions are a way to quickly build expertise, and I think vendors will be willing to pay a premium to gain skills.

As we see from this month’s blog, it’s been a challenging time for IT services vendors. We’ll be keeping an eye on the market over the next few months to see if macroeconomic factors force any changes in these trends or the IT services vendors’ strategies. Additionally, each quarter we’ll examine the strategies, performance and relative positioning of 31 of the largest IT services vendors as part of our Professional Services research stream. The research also covers go-to-market trends and breakdowns by service line and geography, and an exhaustive set of financial metrics.