How Generative AI will change the tech services model

We thought that your research on the fundamental shift from Labor Arbitrage to Technology Arbitrage and ecosystem orchestration was absolutely stellar. Will you share a bit more with our readers on this outlook on the industry? 

The IT business services industry is two to three decades old. It started in the mid-nineties when the global 2000 enterprises realized that India had a pool of very talented people and that it was possible to get the same high quality talent at a lower cost. This Labor Arbitrage model saw “hockey sticks” exponential growth almost immediately. “Labor arbitrage” might not be a sexy sounding term, but it was a very viable and cutting edge model. Since then, we’ve seen incremental improvements on this model, but the basic value proposition has remained the same. You get an upfront arbitrage and instead of the pool of talent you had in the U.S, you have a pool of talent in a global location, same quality, lower cost. We’ve added more bells and whistles to it, everybody’s got proprietary tools and accelerators to make this model faster and cheaper, but it’s still a really people heavy model. How well you deliver is still based on the number of people that you have.

For the last five to seven years, enterprises and mature services providers have been trying to figure out what the next “hockey sticks” growth model is. It started with Robotic Process Automation (RPA). In our first blog for HFS research we said “Robotistan” was the cheapest offshore destination. That was picked up by the Economist and others and suddenly RPA became a buzzword. But RPA ultimately didn’t lead to exponential growth. There were other technology innovations touted as the next big thing, intelligent document capture, process mining, among others. I believe that the promise of Generative AI to transform this industry is real. It isn't just a trend, Gen AI can move this labor arbitrage to a new value creation dimension. The number one reason behind that is because consumers are using it. Whether it’s my ten year old daughter trying to find math problems or a PhD student training an LLM model to crunch data faster, when these consumers join the workforce, they will demand the Generative AI tools they’ve become accustomed to. They won’t work in a place that doesn't have these tools. Businesses will have to adopt. The faster our tech services industry can enable the clients to do that the faster they'll be equipped to grow themselves. Generative AI presents a huge opportunity for this industry.

Why is this a pivotal moment with Gen AI? Was this shift not happening with cloud adoption already? 

Generative AI is getting into the hands of consumers and has made a huge impact. RPAs have been around for ten or twelve years now and our research estimates that there are now about 15-20 million RPA users. Even if our research is wrong and the real number of users is 50 million, it still pales in comparison to Generative AI. ChatGPT, in six months, has generated 170 million users. ChatGPT isn’t even the only GenAI solution, there are many others. In six months this technology has created six to ten times more users than other technologies have generated in a decade. At the end of the day, if consumers are seeing value, there is no alternative for businesses, they will have to adopt. That’s why this is different. It’s not that there isn’t value in other technologies, my personal favorite is blockchain but I’ve been researching blockchain for the past six years and I still haven’t found someone who can explain blockchain in an easy way or demo it. Technology needs to be easy to use and easy to adopt. That has already happened with GenAI. It’s giving users more creative license, helping with everyday productivity and changing the way work is being done.

This shift has a big implication on the talent strategy of Services players. This is an industry that has struggled with attracting the best talent in the last decade or so, losing talent to software and startups. What will the talent strategy of the winners in this new era look like?

I’m a product of this industry, my first job was as a software engineer. When I joined a tech services company, my parents were really happy, as was I. But if I think of my nieces and nephews today I don’t think it carries the same cachet as before to becoming a software engineer in one of these IT services firms. They want to join or found a startup or join Google or Microsoft. This industry has lost some “cool” for the younger generation and that’s an issue. If you’re not able to attract the best talent, your business will suffer. To attract cutting edge talent you have to do cutting edge work. You can’t just keep doing the same work you were doing in 1999. 

From a skills perspective, while technical skills remain important, the work is no longer just about coding. The work is about business problem solving, communication skills, collaboration skills. You need to add the A to STEM, it has to become STEAM. And that A becomes very important, the philosophical side of it, the arts, the literature, the empathy, using the creative side of your brain. Nobody knows what the future will be and you need people who can adapt. This industry has never really focused on hiring well-rounded talent, the workforce has been very engineer-heavy. I think that is changing. 

You talk about the need for better business acumen to succeed. If you were a mid to senior professional in the industry right now, what would you be doing to get ready for this new era? New skills, new competencies? What would you prioritize?

You need to be able to ask smart, intelligent questions and not just provide answers. For years, our industry has been providing simple answers. The customer says “I have this problem, here’s how I’m thinking of fixing it, can you do it?” and our industry says “Yes”. But the industry has matured, there are a lot of really intelligent, strategic leaders here and I think we need to move on from this model. Can you ask your customers questions that they aren’t thinking about? Customers will be in the same boat as this industry in their Generative AI journey, whether it’s financial services, healthcare, or retail, they don't know what the future holds. What will a financial services firm need to look like in ten years? Can you start to ask those questions of them and jointly develop solutions? If I was a mid-senior level person working at one of these firms, I think having those tough conversations might be more challenging but more interesting. 

In a time of declining growth, how should CEOs and CROs of these companies think about go-to-market and relationship management? What kind of talent should they be looking for to fill these roles?

I think people should hire out of their comfort zone. Every job description in this industry looks the same, engineering degree, four years or relevant work in X, it’s almost become a prescription and anyone who fits it will be hired. We’re missing out on other people who might bring really good ideas. They might not have an engineering background or have twenty years of experience, they might be younger or older than our talent. We need to hire people who can think outside the box and not just hire in these constrained zones that we’ve created for ourselves. I also think that location boundaries also need to go away. We should take advantage of the hybrid world that we’re living in rather than trying to go back to 2019. Can I get someone really great in a place I might not have an office? We need to hire people from different backgrounds, industries, and career journeys to help us adapt to the changing world.

This industry has had little diversity at senior levels even though their customer base is becoming more diverse and the clients they serve are prioritizing diversity in their own talent pools. What is your perspective on this issue and do you see much change in hiring strategies? 

Diversity in this industry is sometimes defined in such a narrow way that the only thing people will look at is the number of men versus number of women. What about race, what about religion, what about background and diversity of thought? 

I’m a big believer that what this industry needs is diversity of thought. Why should all people in tech services be engineers? How do you come up with innovative solutions if everyone is from the same background? You need some PhDs but you also need some high school students. Creating diversity of thought means embracing people of different backgrounds, it takes men, women, young, old, Black, white, Asian, Latino, all kinds of people. If you work with consumers, you need diversity. It’s not controversial, it’s good for business.

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