DARK MODE
Research Themes
Apr 2021

The Digital Transformation in IT and Business Process Outsourcing Services

In their recent deep-dive report, Citi’s Ashwin Shirvaikar and the global IT Services Research team explore the digital transformation mega-trend within IT and Business Process Outsourcing (BPO) Services. The team hosted or participated in 20+ events to discuss this trend with companies, industry experts, consultants, and private equity investors. We summarize their key findings – focusing on talent-related risks, the work-from-home trend, and ESG.
Citi Global Insights

Digital transformation is the new secular mega-trend within IT Business Process Outsourcing (BPO) Services, according to Citi’s Ashwin Shirvaikar and the global IT Services Research team. To help investors to navigate this trend, in their recent deep-dive report, the team highlights several topics, gleaned from their meetings and events, that they believe encapsulate the market opportunity and risks as well as investor concerns. We focus on three here: supply-side (or talent-related) risks, the work-from-home trend, and ESG issues.

Talent-Related Risks

The pick-up in demand for digital services is increasing the likelihood of supply-side (talent-related) challenges. Citi’s research team highlights the following takeaways related to this topic from its recent global checks and events.

  • Multiple companies have noted increasing attrition. In some cases, the trend of limited attrition during the height of the pandemic has already reversed to almost the pre-pandemic norm.
  • Many companies have implemented compensation incentives and wage hikes to retain employees.
  • Some companies have pursued hiring aggressively in anticipation of an expected uptick in attrition.

The team notes that given the strong demand build-up, hiring needs to pick up significantly. Utilization is at peak levels for many companies, and therefore, it is unlikely to be “a lever” that is available to help companies meet demand. As Citi’s team highlights, complicating this situation is that digital skills were already in short supply before the pandemic, and the situation is not much better now. Although “reskilling and upskilling” are options, they can be only part of the solution. Ashwin and team believe that this set-up heightens supply-side risks in 2021.

Work-from-Home Evolution

Almost every industry was initially negatively affected by the COVID-19 pandemic. However, the adoption of collaborative tools and security solutions helped clients manage their remote work more effectively. The pandemic led to considerable initial uncertainty for IT and BPO Services companies (generally more so for the latter). However, it eventually also provided these companies with an opportunity to test work from home (WFH) concepts on a large scale (with well over 90% on a WFH model) as well as innovate services and delivery.

  • IT Services companies are seeing a higher percentage of employees working from home than previously without much impact on productivity levels. As the team notes, however, other factors – such as team work, social capital, employee morale, client approvals post pandemic – are important as well.
  • Business Process Outsourcing companies, unlike other IT companies, have not traditionally used the WFH model to the extent that they have had to do so during the pandemic. Given the considerable potential for cost cuts, lower capex, and other efficiencies from using WFH on a larger scale, many BPOs are now considering WFH and remote working as an option beyond the pandemic.

Ashwin and team believe that work is unlikely to return to the pre-pandemic norm and note that this view is echoed by many IT and BPO Services companies. Broader acceptance and use of WFH and remote work is likely here to stay, at least to some extent.

Environment, Social, and Governance (ESG) Issues

Sustainability and a company’s societal impact are increasingly important factors in investing given broadening interest and awareness of ESG-related concepts. ESG’s relevance has increased for the IT and BPO Services companies as well. As Ashwin and team note, the nature of the business (handling of data, headcount-centric business models, etc.) means that the “S” (social) part of ESG is likely the most relevant of the three topics for this sector.

They highlight the top sustainability and societal issues for IT and BPO Services companies as follows:

  • Data Privacy and Security — The increase in regulations related to data privacy around the world has meant that IT and BPO Services companies have had to intensify their focus on data security, not only by building robust systems for clients but also ensuring that their own handling of clients’ sensitive data is secure. The companies also have increased their focus on cybersecurity; however, the team warns that it does not believe that this risk is as high a priority for companies as it should be.
  • Good Workforce Practices — Being headcount centric and having good workforce practices are important for these companies and are key to retaining and attracting talent, according to Ashwin and team. Such practices include promotion of diversity, employment of differently abled workers, respect for human rights, and reform of workplace practices as well as wage parity among employees in the same jurisdiction and a non-biased approach across nationalities and regions.
  • Worker Displacement — Worker displacement has been the focus of significant investor and public attention. It includes replacing local citizen workers with foreign nationals using work visas, offshoring work to low-cost countries, and using automation to eliminate human jobs. As the team notes, the shortage of skilled talent and the benefits of automation and offshoring have resulted in a continuation of this trend for now.
  • Research & Development and “STEM” Education — Ashwin and team note that IT and BPO Services companies continue to invest in research & development to stay abreast of new technologies and create new offerings in emerging areas. In addition, given the shortage of Science, Technology, Engineering, and Math (STEM)-based talent (particularly in developed markets), the companies continue to be involved in activities to shore up supply and local hiring, such as creating foundations and collaborating with universities and other organizations.

Citi’s research team also notes the increasing importance of environmental issues to the sector. The heightened awareness of the environmental impact of their business has resulted in IT and BPO Services companies not only focusing on reducing their own carbon footprints but also helping their customers to achieve their environmental goals. Most of the companies have targeted initiatives on areas such as green buildings, efficient operations, green IT, and the use of renewable energy. Some of the companies also have highlighted the revenue opportunities from decarbonization and have invested in building their capabilities in this regard.

In addition, Ashwin and team highlight that IT Services and BPO companies have had sector-leading governance scores. In their analysis of global tech companies based on five key governance considerations (management, shareholders, compensations, ownership, and behavior), they found that IT and BPO Services companies in their coverage universe generally screen quite well in these areas.

In summary, as outlined by Ashwin and team in their recent deep-dive report, the IT and BPO Services sector is undergoing a “digital transformation,” with clients wanting quick results, especially given the pandemic. Robust demand for cloud services, mobility services, analytics, cyber security, and emerging tech is coinciding with rising employee attrition and talent shortages as supply-side risks. Amid this mega-trend, the sector also is transforming as a result of the work-from-home trend necessitated by the pandemic and the broadening global focus on ESG-related issues.

For more information on this subject, please see Global Payments/Processors/IT Services: Citi’s Evolving IT/BPO Views – Rising Tide and Underwater Rocks.

Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation.It is not investment research. The comments expressed herein are summaries and/or views on selected thematic content from a Citi Research report. For the full CGI disclosure, click here.

 

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