IT, BPO firms face slowdown as labor arbitrage model stalls
MASSACHUSETTS, UNITED STATES — Global information technology (IT) and Business Process Outsourcing (BPO) services firms are seeing a major slowdown in growth as the labor arbitrage model that has fueled expansion for 25 years appears to have run its course.
According to a new report from HFS Research, major India-based service providers like Tata Consultancy Services (TCS), Infosys, Wipro, and HCL Technologies saw their revenue growth slide to single digits in 2023, down from double-digit growth in prior years.
Labor arbitrage, which involves offshoring work to regions with lower labor costs, was already slowing before the pandemic. However, the report said that the rush to cloud computing and digital transformation during COVID provided a temporary boost that has now ended.
With most large enterprises having already offshored between 30-70% of IT and back office work over the past two decades, the report concludes there is little basic work left to offshore and cost reduction through labor arbitrage has become a “blunt instrument.”
However, the report notes enterprise spending on emerging technologies like artificial intelligence (AI), automation, internet of things (IoT), and blockchain continues to grow at around 9% annually.
To restart growth, HFS argues services firms must pivot to “technology arbitrage” – leveraging these new technologies to drive innovation and business value for clients rather than just cost reduction.
HFS CEO Phil Fersht and President Saurabh Gupta said this will require new capabilities like ecosystem orchestration and developing solutions focused on high-value use cases. Engaging with business leaders outside IT organizations will also require evolving sales messaging beyond labor arbitrage.
For new technology arbitrage models to succeed, the analysts say pioneering enterprises must also be willing to partner with providers to implement emerging technologies, just as early adopters originally helped offshore outsourcing take off.
