Is There Anything Providers Can Do to Change the Growth Trajectory of the Labor Arbitrage Industry?

There is an inconvenient truth in the global services industry: The growth rates in labor-arbitrage-based businesses are diminishing.

Tied to that fact is an even more inconvenient truth: Service providers have overreached in moving to outcome-based platform models to compensate for the drop in arbitrage growth rates.

Labor arbitrage is not going away. But it’s so well established that much of the work that would go into a labor arbitrage model has already moved, so the growth rates are dropping in this business. This has caused the provider community to run helter-skelter for new growth ventures. Many have developed IP and deliver multi-tenant or multi-use software in “outcome-based” or “non-linear platforms” — only to discover two more inconvenient truths:

  • Although these models sound great and there are signs that the market seeks to adopt them, the unpleasant fact is that the size of the market for these types of offerings is small compared to the labor arbitrage market.
  • Providers have invested in these platforms and cloud offerings for future growth, but the hoped-for growth kick is slow in coming.

The net result is we now see them focusing back on the labor arbitrage talent-based space. The good news is that, although the growth rates here are slowing, the market is huge. Furthermore, providers in this market have a differentiated or compelling position.

Why isn’t the hoped-for growth kicking in?

The providers’ strategy is troubled in several dimensions. A prime reason why their strategy based on the new models has not been successful is that they don’t understand the new models. They try to scale them, assuming a move from experimentation to hyper-growth, before they thoroughly think through how to work with the different sales model and adoption trends. They also tend to use their existing pricing structures for new models. As a result, they struggle with wide-scale customer adoption.

These are small markets, and the offerings in these new models tend to be focused by industry or by function. Therefore, for each offering the market is much smaller than the arbitrage-based market. So even when providers succeed in gaining new business, they only succeed in small numbers.

So that’s the problem.

What’s the solution to this dilemma?

Is there anything we can do to change the growth trajectory of the arbitrage industry? The simple fact is no, there isn’t anything we can do. The truth is the arbitrage-based market will continue to slow. The new models and markets are nascent and immature and not large enough to offset the declining growth in traditional, bigger arbitrage businesses.

When the industry has slowing growth rates in a market, it becomes more and more difficult for providers to grow fast in that space. In the short run, I think the answer is the providers must stay focused on their arbitrage base, as this market is large and they have secure, robust positions. I think it is a mistake to run too fast after the new models while patiently nurturing the new offerings in hopes that someday they will mature into the high-growth business they so desperately want. Our observation is that overly strong focus on the new offerings results in distracting the organizations from their core businesses.

Today the arbitrage-based market is really the only game in town for the providers that built their business on this model, and for at least the foreseeable future, they must reconcile themselves to the slowing growth rates. Even so, there is good news: It’s a huge market that still presents growth possibilities for the providers that focus on capturing it.