Wall Street is driving business model changes for IT consulting, outsourcing, and professional services companies. Profit margins are shrinking for companies whose value is only providing cheaper labor rates. Listen to Phil Fersht discuss where the industry needs to go.
Video Transcript: Drivers of Transformation in the IT Consulting Industry
It’s all about Wall St, it’s about corporate revenue declines; how do they keep the growth curve and the margins high.
Right now we’re starting to see depressing quarterly results coming in right across the board pretty much in the service provider industry. Questions are now being raised, it’s how do we keep driving the growth. There needs to be better communication with Wall Street on, “guys, the labor arbitrage model is running out of steam. There needs to be a period of reinvestment to find that next wave of growth.”
So, a deal that might have been running at $10 million at 20% profit margin today. It needs to be running at $7 million and maybe 50% profit margin in the future. So I think we’re going to see the shift away from revenue growth to profitability. That has to take place. And to that, that means we need to change the way we work and we need to improve the efficiency and automation of processes and we need to look at bringing together the right skill sets across the board.
I think the big reaction is going to be a new wave of consolidation. We just saw a big merger between Capgemini and iGATE. That took place just this week and I expect to see more of those happening this year and next year.