TechRepublic’s Dan Patterson spoke with SenecaGlobal CEO Ed Szofer to discuss why more companies are outsourcing IT jobs and what trends to watch out for in 2018. Below is a transcript of the interview.

Patterson: According to a new report from Deloitte, as well as reporting by our sibling site Tech Pro Research, more than 31% of IT services were outsourced last year. For TechRepublic and ZDNet, my name is Dan Patterson and it’s a pleasure today to speak with Seneca Global CEO, Ed Szofer. Ed, I know that you tracked some of the top 10 IT outsourcing trends. Can you bring us inside and help us understand first what’s driving these outsourcing trends?

Szofer: The reason for outsourcing originally was one of cost savings and creating people back 20 years even in the Y2K days. There was a lot of need for bodies, coding, and stuff. Certainly that’s transformed a lot in the last few years, specifically regarding the lack of IT talent in the US. Companies who use technology or produce technology in the IT world are clearly at a disadvantage because there’s simply not enough resources out there. So I think that drives it a lot, but because of that and IT outsourcing has been around for a while, the paradigm has changed in our opinion to some degree because of the needs of the company today, the advancement of technology, et cetera. Today’s outsourcing company needs to be a lot different than your father’s outsourcing company, for lack of a better term.

Patterson: As we look into 2018 and beyond, there is this massive technology skills gap that exists in the marketplace. Can you help us understand some of the specific jobs that are needed by technology and by every firm.

Szofer: It goes all over the gamut. If you look even in academia, the focus from secondary schools to universities on STEM—the science, technology, engineering and math— is increasing because we’re just not producing in this country enough of those skilled candidates. So as it relates to the IT world, and there’s simply not enough developers, or young individuals who chose not to go into those fields for whatever reasons. And I have adult kids. None of my kids followed in my footstep. They all wanted to do something else. IT or technology scared them, or they weren’t interested in it for whatever reason. That being said, if you look at the advance of the technology we use today, from your smartwatch to your phone to every device that might be in your kitchen, anything that’s IoT enabled—all that requires software. And we’re not in the Star Trek days yet, so it’s not just writing itself quite yet, so we need people to develop those systems and test those systems. Testing in and of itself is a huge change. There’s a lot of automation testing out there, but when you think of these various software programs or platforms, and their need to run on multiple architectures, that complicates the world.

The bottom line is there’s this huge gap. There’s a need for billions and billions of lines of code, and there’s not enough people to write them or test them et cetera, and that’s the fundamental issue.

Patterson: So it turns out Steve Ballmer was correct. It is still developers, developers, developers as well as the entire support ecosystem.

Szofer: There’s no question. There’s a lot of kids today, anybody from six years old to in their twenties, that are computer literate, but there’s a big difference being able to write Ruby or deal with sophisticated testing scripts or what have you. So you’re right, there’s just an onslaught of need. And then as a result, simple supply and demand comes in. The markets we work in, every city I visit and know of our client base, they have the same issues. People are pilfering people from each other, salaries are going up, attrition levels are going up. Intellectual capital is moving around. It’s hard. Certainly there’s great pockets of that in a good way, but the same token you’ve got a lot of stress for these organizations who are trying to get a product to market or something.

Patterson: So this is as digital transformation marches on, this is certainly a buzz word that we hear all over the place, but it has real economic impacts based on these shifting technological and IT factors. So, I wonder if you could list some of the top outsourcing trends. Can you give me the top three trends?

Szofer: Yeah, I’ve thought about it, but in the top three I would argue that, number one, the traditional. There’s still a lot of work that you mentioned, 31 some percent of the companies use outsourcing. The problem you’ve seen lately because of the political changes and the focus on H1Bs, there’s not as much value as there was bringing people from, whether it’s India or eastern European countries, South American countries, on H1Bs here. So what’s happening is the old value crop isn’t as great. There’s still a salary arbitrage available to you, but what’s happening is the days of 500 person projects working for a large US multi-national aren’t quite as prevalent and the value isn’t there. So I would say the number one trend is today, IT outsourcing companies like ourselves are required by nature to bring more skill, more value. Not just about cost arbitrage, that is catching up. That is clearly a little bit not as great. Actually I’d argue that it’s probably just as great because the salary increases here have been dramatically higher. However, throwing 500 people at something, and only 50 of them are really any good is not going to work. So what you need to do is provide value.

So a company, not a lot of times a US company in this case, may not necessarily care about what it costs. What they want is somebody who can get it done. Quality is high. They can bring some innovation to the table. In the old days, it was “Hey, we’ll tell you what to do, just give it to us in good form.” That was always a struggle. But now it’s like “Hey, what can you tell us about bots or innovative programming or IoT or whatever.” So number one trend I would argue is bringing value to your equation, not just some just cost savings.

Number two, doing it in partnership. I’d argue that a lot of times you see a black box, so today’s companies in the US are much more sophisticated. Chances are anyone who’s been on an IT staff within these organizations have worked with an outsource provider in the past and chances are they’d have horror stories, so that they’re going to be much smarter shoppers, if you will. And add much greater demand and expectation, so I believe the trends of these five year, “Hey, give us everything, we’re going to do everything for you, we’re going to be great, we’re going to save you a lot of money.” I believe those days are coming to a wrap and end, simply because instead the companies that utilize IT require all this value and bang for their buck and speed to market type issues are important, so that’s a pretty important one.

The third thing is a trend that soft skills in the work force in the outsourcers hands, meaning companies like us, have to be strong. So technical skills are a given. You have to be good at the programming or the technology you know, but if you can’t communicate it, you can’t understand what the user, or the US company might have, and being able to articulate and work effectively in that industry perhaps as well, not just technology. So if you’re in a healthcare company, how the hell could you know what HIPAA is? Would help if you’re in a financial services environment and the IT guy you’re working with in India for instance, knows something about PCI compliance and they can communicate it to you. That’s always been in a gap and oftentimes that’s been a problem, where things are misinterpreted and things come back wrong. And then along that line I would say, the development of Agile programming trends, things of that nature, where people are interacting every day. Overlapping, using a 24-hour clock to their advantage, requires great soft skills, communication skills, because in our experience, projects, or engagements don’t fail for lack of technology skills—they lack of communication skills, governance quality, et cetera.

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