Pricing Pressures and Protectionist Policies Bring New Pain to Mid-Tier Players

By Patrick Heffernan and Geoff Woollacott

TBR research has recently found evidence to suggest rapidly accelerating pricing pressures are seriously impacting professional services firms lacking global scale. Specifically, global delivery models that includes the labor categories of onshore resource, landed onshore resource, and remote or offshore resource will undergo a fundamental shift, as countries that were early offshore hubs transform into local services arms delivering in-country expertise around IT transformation and implementation deals.

The immediate implications are:

1. Consulting Bench: Firms such as Accenture, IBM and Capgemini have made concerted efforts to add higher-skilled employees in remote delivery hubs, establishing stronger links between those hubs and major-market clients, improving cost take-out and project management.
2. Local Presence:TBR expects technology services commoditization to lead to increased industry consolidation and job loss. Sharing that expectation, numerous regions, such as the European Union states and Latin America, show signs of enacting public policy legislation to protect high wage technology positions. This rising sentiment will force a shift in global deployment of the traditional three categories of services functions colloquially defined as “Finders, Minders and Grinders.”
   1. Finders, or seller/managers, will remain in-country as face-to-face interaction drives sales success.
   2. Minders, or project managers on the career path to becoming seller/managers, have traditionally been deployed in-country. The effort to build this bench depth will allow this function to be handled more remotely and accelerate the scaling ability of this higher-value position across multiple geographies.
   3. Grinders, or entry-level/task-driven functions, will be pushed more to onshore locations as nationalist sentiment results in public-policy initiatives restricting labor movement.

The emerging trend TBR sees will essentially flip the deployment strategy of Minders and Grinders. Project management will be managed increasingly from central hubs, with entry-level personnel located more on the ground, while management oversight will come from offshore hubs.The cost take-out advantage comes from shifting the mix between the three categories, as illustrated in the table below. The graph below illustrates this, looking at the toggles of onshore and offshore labor rates without factoring in landed rates to over-complicate the example.

The cost implications remain acute for second-tier vendors with gaps in their global delivery capabilities, such as niche boutique firms or regional leaders seeking to diversify beyond their core geography. Similarly, cost leaders with India-centric firms often cited as best-in-class will face challenges, as global titans such as IBM and Accenture continue building out flexible benches capable of moving between geographic hubs and customer locations.

Outside factors also contribute to companies’ decisions to transition to this model. The tax and audit implications of the countries of origin and the countries receiving the services will drive many of the staff deployment decisions. Rising protectionist sentiment will require nimble action on the part of global services firms, and the sentiment and how to ameliorate its impact on business translates extremely well for the management consulting firms already advising their non-IT clients on such issues from their tax and audit arms, such as PwC and Deloitte.

Governments and Policy Changes

Global services firms — IT-centric, India-based and/or Big Four — can impact country- and regionwide policies. Governments look to maximize tax revenues and jobs, jobs to run operations, provide security and stay elected. Governments enact policies with those goals in mind, but are usually slow to adjust as the economic environment changes (a slowness often aided by interests entrenched with enacted policies). Companies looking for the best business environment — a mix of policies and investments in education, infrastructure and rule of law —should select the right country and city now and start working for long-term changes to make the economic environment better. Governments will not change on their own, so companies need to pick clear, definitive policies and tackle them; educate governments on the real costs; and make suggested changes that do not introduce new risks or result in fewer net jobs. Businesses that see that work as something for trade groups or lobbying firms underestimate the value of sustained commitments. Government officials truly understand “longterm” when a business says, “Here is a specific small change you can make that will have a larger impact on the economy. This is how you will grow tax receipts and jobs.”

TBR sees price pressures and protectionist policies as potential springboards for global professional services firms to expand their footprints and revenues in emerging markets in the near term. Sustained growth, for the firms’ and the countries’ economies, depends on a mix of informed policies and investments in relationships.

Patrick Heffernan analyzes the competitive landscape for management consulting firms, tracks global delivery issues, and applies the lessons from a career in diplomacy and competitive intelligence to a wide range of TBR’s research activities. Geoff Woollacott oversees a number of the large-scale custom consulting projects that TBR’s Professional Services Practice executes. Woollacott also content reviews pieces of the syndicated research stream,witha particular focus on IBM and EMC.