Why areas of enterprise services spend will increase in 2022
When looking at the market outlook for services spend in 2022, I see several areas that will change dramatically. It is clear there are two primary drivers for the changes: the post-COVID-19 situation and the need to be more strategic in a digital world. Both drivers will change the way companies need to operate next year, and both will increase the cost to operate. Here is my overview of the coming changes.
Prediction #1: The talent shortage crisis will get worse
The acute global talent shortage, which I predicted a year ago would break budgets and would likely last at least five years, will still be a crisis in 2022. However, it will get worse. The talent crisis will require companies to make major changes in the areas of procurement, managed services, legacy services, and digital platforms.
Offshoring will continue and, in fact, increase. US companies will engage even more with third-party service providers in efforts to address the acute talent shortage. Historically, offshore outsourcing was a remedy for talent shortages; and pre-COVID, there was still a surplus of global talent pools in places such as India, the Philippines, and Eastern Europe. Now, the demand overwhelms that global supply, and it will continue to be in a deficit for the foreseeable future.
Yes, companies will need to do more offshore outsourcing, but it will not be enough to resolve the issues. Why? Because digital transformation and platforms are now strategically driving businesses, and this will continue to accelerate despite a shortage of talent resources.
Prediction #2: Managed services will increase and evolve
2022 will bring a rise in managed services contracts as companies struggle with the reality of the sustained imbalance between supply and demand for engineering, IT, and other skilled talents. Companies will look to managed service contracts over a bespoke project contract because they perceive managed services are more secure, and they also can lock in the supply of talent.
Yet, there will be a problem: companies will still come up woefully short of the resources necessary to support their dynamic environment and platform strategy. As companies accelerate their building of digital platforms and continually evolve them, the need for more and more engineering and IT talent will grow. (I will discuss more about this evolving need later in this blog.)
Companies will hire all the talent they can, but they will still need highly capable strategic partners that can permanently make up the difference in talent demand to successfully complete their platform strategy. Managed services will need to evolve to meet the new conditions of platform operations.
In addition, managed services will need to grow to meet the needs of legacy and traditional work.
Prediction #3: Legacy infrastructure and applications will move to third parties
In 2022, we will see a rise in the use of outsourcing for legacy services. Over the past few years, companies moved many legacy functions and applications into the cloud and transformed them. But there remained a “rump” of legacy functions that did not transition to the cloud because it was not cost-effective or carried too much risk.
That rump of legacy estates is like the polar ice cap – shrinking over time. In 2022, we will see a raft of movement of rump components moving to third-party service providers. Outsourcing legacy infrastructure and applications will grow as companies face a scarcity of talent resources at the same time as they need to accelerate their progress in digital transformation and need to retire their deep, longstanding technical debt.
Prediction #4: Procurement will become more strategic
The strong demand for talent (especially engineering and IT skills) far exceeds the supply. Moreover, the so-called Great Resignation – where employees are switching to jobs that pay dramatically more in this hot labor market or are retiring – further diminishes companies’ ability to find and hire the necessary talent for new business needs as well as replacing employees that exit.
One aspect of business operations that will be different in 2022 is procurement. Companies will need to move from their 20-year traditional focus on ways to cut the unit cost of labor. That practice worked in a world where there was a surplus of supply to meet demand. Now, and for the foreseeable future, this is not the case. Instead, procurement now needs to move towards newer, different operating models that result in a lower cost to serve.
Instead of focusing on what is a fair price, procurement teams must become more strategic and focus on capturing and sustaining talent at any price. Today’s platform-driven business world aggravates this procurement challenge.
In the pre-COVID world, companies could easily move their talent resources to new projects or tasks when they completed a project or task. This practice will not succeed in platform-driven businesses. Platforms require persistent teams that stay in place to continually evolve a platform and drive it forward to ever-more strategic value. As I blogged before, persistent teams reduce a team’s learning curve and thus are key to productivity and agility.
The need to build and sustain persistent teams adds to the procurement challenge in the acute talent shortage in which companies are now bogged down. Not only must procurement teams stop swapping out talent resources for cheaper resources, but now they must keep the teams and will continue needing even more talent.
Prediction #5: Cloud will undergo a rebalancing
The coming year will bring a shift back towards private cloud from public cloud. Of course, I am not saying public cloud will go away. But as I blogged before, it is getting too expensive for many big functions, and we'll see workloads in some companies shifting into private cloud.
The earlier cloud-enticing promise of lower costs in scalable public cloud environments recently changed, as the costs became untenable for heavy users of cloud services.
The good news is the marketplace now has on-premises or private cloud solutions (from companies such as Dell) that are significantly cheaper to operate in than the hyperscale providers’ cloud platforms. And these new solutions have the same or similar ease-of-use capabilities as the public cloud.
Prediction #6: Digital platforms will drive an explosive need for talent resources
Digital platforms cause a much more intimate relationship between a business and its technology enablers. I blogged several times during the past year about the fact that companies now use platforms to compete in the marketplace; thus, platforms are a strategic component of operations, and they continuously evolve.
Platforms behave differently from a traditional IT stack. Because they continually evolve and are not like typical technology products that incur a much lower cost to maintain after building them, platform costs increase over time. Also, because they are so effective in delivering value for all stakeholders, the use of platforms will only accelerate, not diminish.
Consequently, the resource demands for platforms become very dynamic. For example, if a company added 100 engineers in 2021 to build new platforms, it will still need another 100 engineers in 2022 – in addition to the first 100 engineers – and this will continue to occur.
Platform resource demands compound and build. As companies use platforms to compete, they continually need to evolve the platforms and add functionalities. Because they are strategic in competing in the market, investing in evolving platforms is much more compelling than investing in other technology products. Consequently, the demands metastasize in a dynamic way.
Technical debt in platforms is another factor in the dynamics. The integrated nature of a platform requires companies to retire their technical data at a much higher rate than they do with traditional technologies.
Combine the evolving nature of platforms, the need to retire technical debt earlier, and the fact that most companies use their platforms to compete and for end-to-end operations, and you can understand that the need for engineering and IT talent for platforms will explode in 2022. Project that accelerating demand against the ability of the world to supply that talent, and you can see the challenging world that companies will face for the foreseeable future.
Prediction #7: ESG agendas will be the start of new competition in the marketplace
Simply put, Environmental, Social, and Governance (ESG) agendas will become a strategic business component in the coming year. Companies must respond to pressure from employees, investors, the public, and regulatory agencies and commit to sustainability agendas to reduce environmental impact. Leading companies recognize ESG agendas will be core to the way they compete in the marketplace and are already taking steps to shape their competitive position.
ESG is far more important than it was just three to five years ago, especially to younger workers. The focus on sustainability is expanding and becoming disruptive – to the point where companies must now move to implement their agendas. Implementation will necessitate developing a new set of clear metrics and mandates – even for a company’s third-party service providers. Companies face substantial reputational risk if their supply chain (service partners) only do lip service and do not deliver real ESG benefits. It will require rigorous governance and constant monitoring.
Issues range from how a company drives diversity inclusion, drives work to minority and disadvantaged workers, including in its supply chain partners. How do they reduce their carbon footprint? How do they invest in worthwhile causes that better the world’s environment?
In the coming year, as companies look to compete on ESG factors, they can no longer just acknowledge that they have ESG agendas; they must demonstrate their results. They also must demonstrate that they choose trusted service partners that truly achieve the benefits the company mandates.
We are certainly still in the early years for ESG agenda implementation and mandates to service provider partners. But I believe that this will become an interesting dimension of competition moving forward. Evidence exists already that companies look for a difference in ESG capabilities as they consider which service providers to choose.
Prediction #8: Travel, offices, and weather will increase enterprise spend in 2022
Business Travel. Companies mostly eliminated business travel during the height of COVID-19. As vaccines make business travel less risky now, companies are considering changing their travel policies. Despite the abilities of virtual communications tools, companies now face pent-up demand for a return to travel for conferences and travel to meetings where in-person contact is more helpful for sales or from a collaboration perspective.
Certainly, it is easier to develop new relationships or deepen relationships in person. Business lunches and dinners matter. I believe 2022 will bring an increase in business travel, especially for purposes of relationship building, but it is unlikely to achieve pre-pandemic levels.
The implication of this return to some level of business travel is companies’ margins will be affected because costs to operate will increase.
Company Offices. A similar situation exists with the situation around company facilities. In our current post-pandemic world, some employees want to return to the office instead of working from home. Others want to remain at home. And some companies are considering a hybrid work environment. No matter which route a company takes in 2022 regarding its facilities, its operational costs will increase.
In addition, some companies will open new offices in new locations to access new talent pools because of the acute talent shortage. I believe this trend of investing in new avenues to find talent resources will accelerate.
Weather Impacts. Finally, we can expect that even weather glitches will cause an increase in enterprise spend in 2022. The past few years are replete with stories of travel and business delays caused by weather events. The weather will continue to be unpredictable, frustrating business travel and likely causing power outages.
Consequently, companies can expect volatility in their infrastructure and their travel plans as the weather becomes more intense. Leaders need to factor this volatility into their business spend planning for 2022.
This article was written by Peter Bendor-Samuel from Forbes and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to legal@industrydive.com.
