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How Global Labor Cost Increase Impacts IT Managed Services

29.01.24 01:20 AM By heather.zhang

How Global Labor Cost Increase Impacts IT Managed Services

IT managed services are the practice of outsourcing the responsibility for maintaining, and anticipating the need for, a range of processes and functions in order to improve operations and cut expenses. IT managed services can include network management, security, cloud computing, data analytics, software development, and more.

The global labor market has undergone significant changes in the past few years, due to the combined effects of the COVID-19 pandemic, the Fourth Industrial Revolution, the green and energy transition, and the geopolitical volatility. These changes have resulted in diverging labor-market outcomes between low-, middle- and high-income countries, as well as among workers within the same country. One of the key trends that has emerged is the increase in labor costs, especially in the IT sector.

Labor costs are the total amount of money paid to employees, including wages, salaries, benefits, taxes, and other expenses. Labor costs affect the demand for labor, as well as the profitability and competitiveness of businesses. Higher labor costs can make workers better off, but they can also reduce companies’ profits, the number of jobs, and the hours each person works.

The increase in labor costs in the IT sector can be attributed to several factors, such as:

  • The rising demand for IT skills and talent, driven by the digital transformation of various industries and sectors, as well as the emergence of new technologies such as generative AI, IoT, blockchain, and others.
  • The shortage of IT workers, especially in high-income countries, due to the mismatch between the supply and demand of IT skills, the aging of the workforce, the immigration restrictions, and the low participation of women and minorities in STEM fields.
  • The increasing bargaining power of IT workers, due to their high mobility, flexibility, and productivity, as well as their ability to work remotely and across borders.
  • The growing pressure from workers, consumers, and regulators for better working conditions, higher wages, and more social and environmental responsibility from IT companies.

The increase in labor costs in the IT sector has significant implications for IT managed services, both for the providers and the clients. Some of the possible impacts are:

  • IT managed service providers may face higher operational costs, lower profit margins, and reduced competitiveness in the global market. They may also struggle to attract and retain qualified IT workers, as well as to meet the quality and service standards of their clients.
  • IT managed service clients may benefit from lower capital expenditures, higher operational efficiency, and access to specialized IT skills and solutions. However, they may also face higher service fees, lower service quality, and increased dependency and vulnerability to their providers.
  • IT managed service providers and clients may need to adopt new strategies and practices to cope with the rising labor costs, such as:
    • Investing in automation, digitalization, and innovation to reduce the reliance on human labor and increase the productivity and quality of IT services.
    • Leveraging cloud computing, data analytics, and AI to optimize the allocation and utilization of IT resources and capabilities.
    • Outsourcing more IT functions and processes to low- and lower-middle-income countries, where labor costs are relatively lower and IT talent is abundant and growing.
    • Developing new business models and partnerships to share the risks and rewards of IT managed services, such as outcome-based contracts, co-creation, and co-innovation.
    • Enhancing the skills and competencies of IT workers, both in-house and outsourced, to adapt to the changing IT landscape and the evolving needs of IT managed services.
    • Improving the working conditions, wages, and benefits of IT workers, both in-house and outsourced, to attract and retain them, as well as to meet the social and environmental expectations of workers, consumers, and regulators.

The global labor cost increase is a complex and dynamic phenomenon that affects the IT managed services in various ways. IT managed service providers and clients need to understand the causes and consequences of this trend, and to adopt appropriate strategies and practices to leverage the opportunities and overcome the challenges that it poses.