Services Industry at Inflection Point in 2017

As I recently blogged, 2016 was a disappointing year for the services industry as discretionary spend was not robust and growth in labor arbitrage services is now flat. I see an industry desperate for growth in 2017. Here is what I believe will happen.

I think we’ll see more acceleration in adoption of the new business models associated with digital technologies – cloud and automation especially. We’re already starting to see this. The growth in the services industry will be entirely in this space. At the same time, I believe providers will experience revenue compression in their existing book of business. How much compression? Let’s do the math.

The length of most service contracts is three to five years, so 20 – 30 percent come up for renewal/competition every year. Let’s take the best case – 20 percent of revenue comes up for renewal in 2017. Half of it will be hit with a 30 percent pricing drop due to automation and other digital technologies creating greater efficiencies. That means providers can expect a three percent compression for their existing book of business. And that’s a conservative perspective. Put another way, providers will need to add three percent more business just to keep the same revenues they now have. When you combine this with a fast decelerating growth in new opportunities, the prospects for growth in 2017 become a lot more troubled.

This translates into an industry at an inflection point. The challenging prospects for growth translates into a hyper-competitive environment and intense pricing pressures as providers try to capture each other’s scope. To offset these growth issues, 2017 will find providers increasingly looking to acquisitions to replace organic growth.

On the organic front, providers will attempt to accelerate their move into segments with strong growth such as digital and cloud. Unfortunately, these moves will require increased investments and experimenting with new business models. Not all players will be equally successful, which will create further daylight between the haves and the have-nots, thus accelerating the pressures for further industry consolidation.

All in all, I believe 2017 will be an intense year for the services industry.