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Bonus Episode: Blurring Lines - Saurabh Gupta, President of Research and Advisory Services at HFS Research
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In this Season 2 Bonus Episode of From the Horse’s Mouth, host Phil Fersht sits down with HFS President of Research and Advisory Services Saurabh Gupta for an in-depth discussion on the state of the services industry and the forces shaping its future. Reflecting on 2024’s economic turbulence, they explore the dual pressures of innovation demand and constrained budgets, as well as the evolving role of global capability centers and emerging technologies like blockchain and AI. Gupta emphasizes the industry’s need to shift from traditional people management to building competencies in product and ecosystem management to stay competitive. The episode serves as a thought-provoking analysis of how the services industry can adapt to a rapidly changing world, offering insights for 2025 and beyond.
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Transcript
Introduction & Guest Introduction
00:00:12
Speaker
You're listening to From the Horse's Mouth, intrepid conversations with Phil First, ready to meet the disruptors who are guiding us to the new great utopia by reshaping our world and pushing past corporate spin for honest conversations about the future impact of current and emerging technologies. Tune in now.
00:00:36
Speaker
So welcome to the latest episode of A Horse's Mouth, and today I'm happy to be joined by um actually one of my colleagues, Sarab Gupta, who is our president for research and advisory, oversees a lot of our commercials as well at HFS Research, someone that I've worked with for um getting on for be getting on for a second decade soon.
2024 Industry Challenges: Demand & Recession
00:01:01
Speaker
I wanted to talk with Saurabh a little bit about ah the industry that we've been living through, what we experienced last year and what are our big expectations for 2025 and beyond. So welcome Saurabh, how are you doing? Thanks for having me so on your esteemed podcast as was the first Asia Press guest.
00:01:20
Speaker
Yeah, first of many, I hope. but So let's just dive into this. 2024 was a pretty, I'd say turbulent year for the services industry that we we cover a lot at HFS. What do you think was the big cause of maybe some of the slowing demand and and some of the pressures that are impacting the the big service providers? So i think I think there are two opposite forces ah that are that we have going on right now, which which is why we are not seeing the sort of double digit explosive growth that we've been used to in
Innovation vs. Budget Constraints
00:01:59
Speaker
the services industry. industry And those two opposite forces are, on one hand, there everybody is operating as if we are in a recession, even though we are not. But every CEO is operating as if we are in a recession.
00:02:15
Speaker
So IT budgets are flat to declining. Operational budgets are flat to declining. There's a talent crunch going on. ah you know There are, what, three wars to wars going on in the world. It's is just so much of macroeconomic uncertainty that we just don't have the money to spend. On the other hand, everybody's in a big hurry to innovate. you know They want to digitally transform as of yesterday.
00:02:44
Speaker
ah you know, industry lines are blurring, new business models are coming up. So how do you marry these two things where you want to innovate, but you don't have the money to invest in ah innovation? And I think the services industry is stuck in between that but because the value proposition of the services industry has been more on the cost savings, cost arbitrage, labor arbitrage, what whatever you call it.
00:03:11
Speaker
ah and not driving innovation in a cost-effective way at scale. And I think that's why 2025 might be a very interesting year or the next decade will be a very interesting year is how our industry sort of, you know, becomes becomes more of a butterfly from the startup that it has been for a very, very long time.
Cost-Cutting vs. Innovation: Enterprise Decisions
00:03:39
Speaker
And do you think it also might be because um services is very much focused on the implementation of getting things done and too many enterprises are still going around in circles trying to figure out where they go next? Do you think that's part of the problem? Yeah, that's because of those two opposite forces, failed enterprises are not clear on where to go next.
00:04:06
Speaker
you know and there is a in every client that we have or I have worked with over the last couple of years there are two camps there's one camp which says you know let's delay spending let's save money let's you know ah and and that's generally the CFO camp.
00:04:25
Speaker
And then there is the R and&D or the research or the innovation camp which says, hey, we need to transform as of yesterday. We need a new business model. We need to invest in X, Y, and Z. And both camps are unfortunately or fortunately right. So then decision making becomes a very, very hard ah in in that kind of a scenario. And most service providers are looking for the client to tell them what to do.
00:04:52
Speaker
versus telling the client what they can do. ah you know And that that that that's one of the reasons why you know we're just waiting ah for the plans to make the decisions versus helping them make those decisions. Yeah. And you know our industry has been very excitable around.
From SaaS to 'Services as Software'
00:05:13
Speaker
We've called it a gen tech AI and then the shift to services as software.
00:05:18
Speaker
um Is this something that clients are looking at? Is this something they're asking for? Or is this ask looking at the future and thinking, here's a smarter way to deliver services in a more productive, scalable, smart manner? I mean, how do you think that is starting to manifest itself? Yeah, I think if I look at the last decade, the last decade was ruled by SaaS, right? Software as a service.
00:05:47
Speaker
I think the next decade will be ruled by the other SaaS services as software, the reverse of software as a service. And I think these lines are blurring together as we speak. you know I don't know you know, every software company is getting into professional services. Every services company is building their proprietary tools and technologies. And I think the clients actually, enterprise leaders don't care on what name we give to these things. ah Whether we call them sass or apples or oranges, honestly, it doesn't really matter. For them, they have these business problems and who can solve them. And I think often those business problems require a combination of software and services. And we have sort of
00:06:38
Speaker
We have bought and sold these services and in a way ah that it's very hard to amalgamate or integrate software and services together because we've sold them on number of people, butts on seats kind of ah a consumption model. ah I think that's going to be the fundamental difference. If we can change that, then I think services as a software can become a really, really big thing.
00:07:11
Speaker
I mean, do you think that services is reaching like the telecom moment of 20 years ago when voice over IP, internet completely changed how people accessed telecom and the internet, all these types of things. And we saw a whole bunch of the traditional telecom providers just just fell away because they couldn't they couldn't change the model. they couldn't change the way they sold, the way they're organized, the technologies. Are we facing something similar in services or do you think today's services firms are more sophisticated and ready for the big shift that's coming?
00:07:52
Speaker
I think there are some very smart people in the services industry and I'm hoping and counting on them to realize that this is sort of the entire moment to change how they operate, how they organize themselves, how they sell to customers, what's the commercial model and all those kinds of things.
Adapting Product Management & Ecosystem
00:08:16
Speaker
And and in in my mind, say the services industry has been has has become very, very strong at people management. you know they are They are the sort of north star when it comes to people management. They know they know to the nth degree how what is the utilization, what is the productivity, et cetera, for every person. The hiring, recruitment, these these companies are fantastic at it.
00:08:42
Speaker
But I think if they have to succeed in the future, they have to build two more competencies. They actually suck at product management. And if we are thinking of services and software coming together, then they need to build these product management capabilities.
00:09:00
Speaker
ah and you look at you look at any of the software firms, they have fantastic product management teams. You know, version control, product documentation, selling one to many, etc. Services firms don't have that competency. And the and third competency that they'll need is ecosystem orchestration or ecosystem management because gone are the days when one company can be everything to anyone. You know, they will need to build these ecosystems together.
00:09:28
Speaker
You look at software firms, they've been great at managing their partners. They have their partnership structures, they have market development funds, they have all those kinds of things. I've not seen a services firm which is which has gone to that extent.
00:09:44
Speaker
so i think I think if the services firms realize that these are two additional competencies that they have to build, that it's I'm not saying people management is not important. I think people management is still going to be very, very important. But if they can build product management and ecosystem management competencies, and that's not a flick of a switch, right? They have to invest and build those things right now if they have to be successful.
00:10:14
Speaker
If they keep doing the same things again on and again, then I think we're in for a very interesting 2025.
00:10:24
Speaker
okay and Honestly, as you look at maybe the top 20 tech services firms that we cover, how many do you think, just as a gut fill, are going to successfully make this like this shift?
00:10:42
Speaker
I think it depends on how we define success. If you are saying whether they survive or not, I think i think in granny hi that I think there will be a few that will not survive. ah In terms of truly being successful, again, I think there'll be only 10 to 15% that will be really successful in transitioning to service to other software. And those are the firms that will become the leaders for tomorrow. right And I think the rest will then start to copy them, and then slowly they'll start to see others
00:11:17
Speaker
So I think there'll be a bell curve. There'll be there would be about 10% to 15% of three, four firms that will really pull this trigger, start to make the right smart investments, and will start to get ahead of the curve. The vast majority of the services firm will quickly copy that DNA and and start to approach that, and they'll be the fast followers. And then a few will just not change, and they'll they'll probably die or get acquired on or something like that.
Demand Change & Talent Attraction
00:11:51
Speaker
Yeah. Well, I ah said many years ago, and I still believe this, the services firms don't die. They just get smaller. And if you if you're providing
00:12:05
Speaker
Lots of people to provide services, whether they're low value or not, in a commodity manner to a number of companies. You'll keep doing that. You just won't be able to grow your business because no one wants to buy more of what you're you're selling. So I think you're right about that. I think this has to bottom out. The ones who are smart will look at what do we need to do to actually grow our businesses again.
00:12:30
Speaker
And then there'll be a natural evolution back the other way. on Some will just rehire, retrain, rethink how they go to market. Others will just shrink away and fade away. So think you yeah I think you're right. um yeah phil and i i don't think there I don't think this is just a demand issue either. right It's not just being driven from from what enterprises are thinking. I think this is a supply issue as well. this is If you look at the employee base of these services firms, you take my own example. right when When I graduated out of out of engineering, I worked as a software engineer in one of these firms. That was my first job. And I was i was actually quite happy about it. And my parents were proud of me. Maybe they had no expectations about whatever they were.
00:13:17
Speaker
They were proud of me. I look at my nieces and nephews today. This is not their number one industry that they want to join. you know They either want to join a startup or a tech provider.
00:13:29
Speaker
they maybe they're not disappointed, but they're not jumping up and down with joy but on joining a services industry. So i think I think that's a supply issue right that we are facing as well. How do you attract the best of the best talent ah to the services industry is also going to be a very important and dimension to this. So it's not just enterprises are frustrated with the services model and they want to move to a different thing. But I think even the evenly employees, they want something more challenging, more, you know, ah at least you won't be able to attract the theme of the talent if they keep doing the same world, same world. Yeah.
00:14:14
Speaker
And are we generally seeing a shift to enterprises wanting to do more of themselves? um A lot of this is theyll obviously the drive to AI, the guardrails that are needed to manage this in a more private, compliant way, and and also the fact that a lot of enterprises are tired of spending lots of money on ah services that don't add a lot of value. So we talk a lot about global capability centers, particularly in India, that have sprung up.
00:14:43
Speaker
Is this something that is a long-term trend where more enterprises are going to start to just do more themselves and rely less on service providers?
In-House Services vs. Third-Party Growth
00:14:54
Speaker
I i think so. I think if you look at if you look at what has happened over the last three years in global capability centers, GCCs, which is sort of a more sexy name to what we used to call capitals and GICs,
00:15:11
Speaker
it's It's almost like a tale of two cities. so you know If you look at the growth of GCC, that's going to be a hockey stick moment. And if you look at the growth of third-party services, that's flat to declining. So what's what's behind that? And I think part of it is ah companies feel that well doing it in-house, it's compliant, they have more control, ah and and all those kind of things. But also, it's become easier to do it in-house. If you look take a country like India, it was very hard to set up a new GCC five to seven years back, ah largely because you could hire a lot of junior people.
00:16:01
Speaker
you know ah in India and that continues to be the case. But it was hard to get senior talent. How do you get managers and center heads and all those kind of people. Now, um countries like India are so evolved that it's not that hard, you know, to find senior management to manage these JCCs.
00:16:22
Speaker
and so And then there are you know other platforms of infrastructure, telecom, and all those kind of things. So setting up a GCC is no no longer such a hard task that you have to get a third party to do it. That's why we're seeing more DOTs and other kind of arrangements.
00:16:41
Speaker
And if there is no entry barrier, and then it becomes a very viable a viable strategy ah for for sure. right and why not So i think I think if you look at it in the long run, it it I think we have to get out of this mindset of in-house versus outsourced. I think in the long run, it will be a hybrid of both.
00:17:07
Speaker
and yeah um that that is it's it's it's It's very easy to talk about these are the advantages of GICs or GCCs. These are the advantages of third-party. This is desk-costly. This and that.
00:17:22
Speaker
But I think both modules have their own pros and cons. And I think the mature enterprises will realize that it's going to be a hybrid of hybrid of both models. um And mature service providers will also need to realize that when they think of GCC, the only opportunity is not build, operate, transfer. There can be many different ways of where a GCC can be a good client for a service provider.
00:17:50
Speaker
Yeah, and maybe what we're seeing here answers the first conversation we had around this feature of services is if enterprises are just getting more sophisticated to how they're managing global resources and they're doing a lot more of the general day-to-day stuff themselves, it's forcing the service providers to deliver high-value capability and it's forcing them to deliver the services that the GCC is st struggling and with.
Convergence of Software, Services, Consulting
00:18:21
Speaker
So maybe we're just seeing a natural reshaping of how enterprises work with third parties and and it's just happening already and it's just um starting to manifest itself in that way. I completely agree. I think add think all this
00:18:38
Speaker
there is a There is a blurring of lines that's happening between software and services, between consulting and outsourcing. you know between ITO and BPO, all of these things are coming together at the same time. um Because you you look at look at any big consulting firm, all of them are are building managed services. ah You look at any BPO or ITO firm, they're all investing in building consulting capabilities. So I think all of these things are coming together. i believe And it's it's
00:19:15
Speaker
we We talk a lot about AI, but I think the bigger question will be go-to-market strategy and how do they develop competencies of, you know, I think the technology is there, but how do you use it and what's your what what's your sort of go-to-market strategy is going to be the real key here.
00:19:34
Speaker
Yeah. So let's get to what we see happening um on the innovation side this year, and maybe a little bit on that.
Blockchain & AI: Trust & Data Management
00:19:44
Speaker
um you know You mentioned you know you've been covering blockchain for over a decade, I seem to remember, and you've been pretty big on the fact that um investments in AI and areas like that are revitalizing companies' appetite for emerging tech.
00:20:01
Speaker
ah Why do you think blockchain is making a it's going to make a bigger stand? and i think I think the hype around blockchain is dead, but blockchain itself is not dead. So I think while it's no longer you know if you look into a Google search and Google Analytics, blockchain is not the most searched term.
00:20:22
Speaker
But if you dig deeper, there are still a lot of very good use cases of the technology, especially when you require trust and transparency in any solution. Blockchain becomes the answer. And I think the reason why I feel bullish about blockchain with the emergence of AI is that AI struggles with trust.
00:20:47
Speaker
You know, a lot of people think of AI as this black box. I don't know where it comes from. You know, why should I trust this machine and, you know, how can it, but where is the audit trail and all those kinds of things.
00:21:02
Speaker
and And blockchain, at its core, builds trust in our technology. So I think that is where AI and blockchain have a very synergistic relationship because AI lacks trust that blockchain can provide. And honestly, blockchain has so much data that you need AI to to manage the blockchain data. So I think it's sort of each other, both these technologies are scratching each other's backs.
00:21:29
Speaker
ah in a way a and that that I feel is is very synergistic. I think the the issue with blockchain is it's just too hard to understand technology. you know it's it's very AI is so easy. you know We have chat GPT and all these things. We all can play with it. Whether it's your twelve year old it's my 12-year-old daughter or you know my mom, they can all play with it.
00:21:55
Speaker
Like blockchain takes three screens to explain ah cool what is happening. And and I think that that's the problem with it. But it doesn't mean that it's a complicated technology. It doesn't mean it's a useless technology. but um um And I feel like AI and blockchain have ah can be good paths if flow big if we figure it out.
00:22:21
Speaker
OK. And um anything else we should be focused on as we look at merging changes in and around the tech and services industry? Do you think we're going to have a resurgence in growth with a new administration? Anything that you think we can start to predict at this point, or is it still too early?
Impact of Tariffs & Regulation on Costs
00:22:49
Speaker
I think it's still too early.
00:22:51
Speaker
ah ah But i do think the I think the tariffs are going to be something to watch out for. um you know the The tariffs will not only increase the cost of of enterprise goods and services, but it will also increase the cost of IT service. A lot of hypers tailors, et cetera, have there and their data centers and what what's gonna happen to those tariffs and what's gonna be the impact on that. I'm not saying one way or the other, ah but I think it's something to watch out for. It's the biggest thing that every supply chain consultant is is watching out for right now and nobody seems to have the right answer.
00:23:35
Speaker
ah And imagine if tariffs are not only on goods, but tariffs are on services as well, on all services, exports or imports. And then that is that is potentially a duty scenario for or our industry.
00:23:51
Speaker
um But I think on the on the positive side, I think blockchain might see a resurgence in the new administration. ah I think there will be some good movement about ah more liberalization and less regulations, which would be helpful for development of AI.
00:24:11
Speaker
ah So i think I think the jury is still out there. um so i i'm I'm sort of closely watching this tariff situation, to be honest, um and and see where that lands. Maybe it was just a political rhetoric and it won't be ah core b as as as as has big, or maybe it is. I don't know.
00:24:35
Speaker
We'll have to see. Wall Street likes inertia. Wall Street's happier when nothing gets done. ah So we'll have to wait and see. yous to it's um I've never known a more unpredictable time where we could either have a huge resurgence and ah investments in in technology and AI.
AI in Business Amidst Uncertainty
00:24:57
Speaker
I'm also looking at some of the political change happening in Europe, where France and Germany are lurching to the right. And, you know, Elon Musk is now meddling in the British politics. And there's all sorts of stuff going on. It's hard. It's hard to predict how this impacts our world. um But ultimately, I think technology is deep at the core of everything we do. And and I can't see that going away. I can't see that shrinking. I can only see that increasing in attention and focus. So yeah, I'm telling you, it's a great time to be an analyst. I
00:25:36
Speaker
ah yeah As long as you don't have to keep writing about um AI all the time.
00:25:45
Speaker
Good, excellent. Well, it's great getting a time to catch up after the holidays and getting your views on the services industry and blockchain. And we look forward to getting together in Bangalore next month for our big summit in India to celebrate the industry out there and meet with some great people. So thanks for your time today, Sarab, and there we'll talk soon. Yeah, thanks for having me, Phil.
00:26:14
Speaker
Thanks for tuning in to From the Horse's Mouth. Intrepid conversations with Phil first. Remember to follow Phil on LinkedIn and subscribe and like on YouTube, Apple Podcasts, Spotify, or your favourite platform for no-nonsense takes on the intricate dance between technology, business and ideological systems. Got something to add to the discussion? Let's have it. Drop us a line at fromthehorsesmouth.com or connect with Phil on LinkedIn.