By Paddy Padmanabhan, healthcare growth strategist, Damo Consulting, and the author of The Big Unlock: Harnessing Data and Growing Digital Health Businesses in a Value-Based Care Era.
Global IT consulting firms, especially those with an India heritage, have had a long run at high growth rates, fueled by one idea: Outsourcing information technology (IT) operations to countries with low labor costs and a skilled engineering talent pool with a strong English language proficiency offered a huge arbitrage opportunity. The Indian IT services industry monetized this idea with a single-minded focus over the past 25 years and is now estimated to be more than $150 billion. Over the past decade or so, many western multi-national firms, including end-user clients for these companies, have jumped on the labor arbitrage model.
My firm has been focusing on how global technology consulting firms have been doing in the healthcare markets, and reviewing their financial and operating performance since 2015. Our latest mid-year review of 11 publicly held global technology consulting firms indicates that organic growth from the healthcare vertical is trailing overall company growth for most consulting firms, and is slowing down relative to previous quarters. Three of the 11 firms we cover in our report have seen leadership exits for the healthcare business, and the Board of Directors of one high-profile firm is looking to replace its CEO. No major contract signing in healthcare has been reported by any of the firms.
Where is the whole sector headed next? No one knows for sure, but the labor arbitrage model is now surely past its sell-by date. The question therefore is: what’s the next killer app for global IT consulting firms ?
If one were to go by the term most-often used by these firms in earnings calls, annual reports, and marketing messages, it would seem that the new killer app goes by the all-encompassing name of “digital.”
However, unlike a clear concept like low cost labor, digital is much harder to understand. In much the same way as that other overused term – artificial intelligence or AI — the technology vendor market has whipped itself up into a frenzy of “digital” offerings, with each firm defining “digital” in its own way.
However, the global IT consulting firms, and in particular the India heritage firms, seem to discuss a common theme when referring to digital. They are mostly referring to automation when they say digital. These firms are betting on intelligent automation (IA) as the killer app for the future of their business model.
Consulting firm KPMG has released a report declaring that IA is fueling the next generation of outsourcing. As IT operations move to the cloud, automation targets the same IT operations that substituted high-cost labor pools a generation ago, and is eliminating the low-cost pools with even lower cost robots a.k.a robotic process automation or RPA. The implications are like a double-edged sword: Automation is a new revenue opportunity, but it is one that necessarily cannibalizes a current revenue opportunity. The implications reach far beyond the board rooms of multi-billion dollar tech firms, and raise questions about a low-cost labor-pool based model of IT services.
In other words, the killer app of tomorrow is killing the jobs of yesterday, a fact that the KPMG report delicately refers to as a “negative though not significant (at least in the near term) impact on the use of traditional outsourcing and shared services.” However, the Schumpeterian principle of creative destruction may be at play here, with an entirely new class of jobs and entirely new revenue opportunities on the horizon arising from the increasing savings and efficiencies brought about by automation.