REMOTE WORKING TESTS THE LIMITS OF THE OFFSHORE MODEL
The war for talent that we saw last year continues unabated as we had predicted. It remains difficult to source new talent particularly on new technologies and cloud skills.
Attrition levels at offshore while having reduced from the 40-50% last year, still remain unsustainably high at 20-30%. Remote working that was introduced during COVID times refuses to go away. While several client organizations in Belgium have returned to 3 days per week in the office, service providers are finding it more difficult to get their offshore staff to follow.
Ability to work from home and the shortage of skills often led service providers to staff teams from cities and towns far away from their delivery center locations. Now in post-COVID times, it is difficult to convince those employees to relocate. Also, as commute times in major delivery center locations can be several hours a day, it used to be a major factor in selecting a job. No more. The ability to work from anywhere means that the potential job pool is much larger. This has driven the high attrition and resulting wage inflation. While wages and attrition will stabilize over time, a bigger problem remains.
The offshore model is intrinsically pyramid based. Over the last 20 years mid and top-level salaries at offshore have risen rapidly, reducing the gap with onsite salaries. At junior levels however the gap remains huge. Starting level salaries for IT employees in India have remained quite low and have changed relatively little in the last 20 years. The difference in cost to the company between India and Western Europe for starting level employees can be x10 or more. In order for the IT service companies to make the offshore model still attractive and make their 50%+ margins on the offshore resources, it is imperative for them to have 25-30% new joiner ratio.
This model worked as long as the new entrants were working side by side with their more experienced colleagues, as they were often literally trained on the job. Physical proximity and working together meant that a senior colleague could always look over your shoulder and help you with some code, explain where you can find the right training material, or generally point you out in the right direction. It was also much easier to ask for help. Now with everyone working from home, this is much more difficult to achieve. The lack of shared time and shared experiences (e.g. over lunch or during the coffee break) result in lower engagement and feeling of belonging.
All of these factors contribute to severe performance issues as indicated by several clients last year. Skill levels particularly at junior levels seem to have fallen and it is challenging to get multiple team members knowledgeable on the client context and have the right skills in a short time. Even more frustrating if they leave 6 months later. Client teams are repeatedly having to step in for the service providers for normal tasks that should have been part of a managed service.
For now, clients have no recourse, as without the IT service partners they do not have access to the needed skills. However, if the high attrition continues it will put further pressure on the offshore model the limits of which are already being tested. We already see several clients considering in-sourcing part of the activities or looking at alternate nearshore locations. At the minimum, everyone should consider programs to engage their employees and strengthen knowledge management and knowledge transfer processes.
NO PLACE LIKE CLOUD
2022 saw a continued move to the Cloud. More and more organizations (outside of financial services) made strong progress in moving a majority of their workloads into the Cloud. This shift is very evident in the infrastructure services contracts that we see in the market. Large datacenter contracts (50mn+) signed 5 years ago – are now a fraction of that value for the IT service providers (10-15mn), while rest of the revenues flow to the cloud providers. As Azure, AWS and Google cloud grow 20-30%, traditional datacenter management providers like Kyndryl, Atos, Fujitsu and DXC are faced with declining revenues. This has forced a shift in the industry with carve outs like IBM/Kyndryl and Atos/Evidian, and a re-focus from Datacenter services to Applications services / DevSecOps for companies like DXC and Evidian.
While there is a strong momentum towards the cloud, the cloud journey is not without its perils. A lot of the organizations who migrated to the cloud faced several challenges:
Lack of cloud specialist skills at both client side and service providers, made worse by large attrition figures at offshore centers. While all service providers talk cloud, we see a persistent lack of cloud skills. Often there are only a few cloud specialists supported by traditional infrastructure engineers.
Exploding cloud costs in the absence FinOps capabilities and lack of clearly identified responsibility for cost control.
Challenging integration of on-prem and cloud components – applications, network, etc., often with different teams working on each component creating support gaps.
Relative immaturity of DevOps/DevSecOps processes and ways of working across the industry, exacerbated by the lack of skills leading to operational instability and risk.
These challenges are clearly evident by a quick look at our two squares. The difference in level of satisfaction between the mature application services (average client satisfaction score of 3.5) and challenging cloud/infrastructure services (average client satisfaction score of 3.0) is huge. Also, while there are several applications service providers that have an overall satisfaction score close to or higher than 4, there is no cloud/datacenter provider with an average score of 4 or higher (Stefanini's success is driven by EUC services).
Our recommendations to clients embarking on a cloud journey are the following:
Do not underestimate the change and new skills required for your internal organization. Make sure to develop a strong internal capability (or Cloud CoE) for cloud strategy, cloud architecture, cloud governance and FinOps.
Perform a strong due diligence on the service providers' cloud capabilities and setup up clear operating principles, roles and responsibilities, and governance for the future operations.
THE CLOUD MANIFESTO
Now for some fun.
Question to ChatGPT:
Hello, can you provide me a list of challenges for companies moving their IT to the public cloud in the style of Karl Marx?
Certainly, here is a list of challenges that companies may face when moving their IT to the public cloud in the style of Karl Marx:
"The capitalist system imposes great challenges for companies moving their IT to the public cloud. The cloud represents a new form of technological infrastructure that replaces traditional forms of private ownership and control over the means of production. However, this shift to the cloud comes with its own set of contradictions and challenges.
Firstly, the reliance on cloud technology creates a new dependency on third-party providers who control and manage the cloud infrastructure. This dependency on a capitalist enterprise presents risks of exploitation and alienation of the workers involved in the production process.
Secondly, the implementation of the public cloud creates a new form of competition between companies, where the larger and more powerful corporations are able to monopolize the cloud infrastructure and dictate the terms of access and use to smaller and less powerful companies. This results in an unequal distribution of resources and opportunities, leading to greater economic inequality and class struggle.
Thirdly, the use of the public cloud creates new challenges for data privacy and security, as the control and management of data is transferred to third-party providers who may not prioritize the interests of the workers or users who generate and rely on that data.
Lastly, the implementation of the public cloud creates new challenges for the workers who are involved in the production process. The shift to the cloud may result in job losses or changes in job roles, as companies seek to automate and streamline their operations. This creates a new form of exploitation and alienation of labor, as workers become mere cogs in the machine of the cloud infrastructure, with little control or agency over the means of production.
In summary, the challenges presented by the implementation of the public cloud are rooted in the capitalist system of private ownership and control over the means of production. To overcome these challenges, a new socialist system must be established, where the means of production are collectively owned and democratically controlled by the workers themselves."