The IT services industry is undergoing a significant transformation driven by the advancement of artificial intelligence (AI). For three decades, the industry has relied heavily on labor arbitrage, offering lower-cost software engineering services from offshore and nearshore locations. However, the emergence of AI, particularly generative AI (GenAI), is poised to disrupt this fundamental value proposition.
Historically, offshore development centers have been the embodiment of this value proposition, mainly offering:
- Increased capacity of software engineering talent
- Reduced total cost of IT project and product delivery
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Competence in designing and maintaining software platforms
AI is already impacting all three. While cost considerations and capacity will remain important, they will no longer be sufficient for companies to remain competitive. This is especially true with the current three macrotrends impacting the tech industry driven by GenAI. Ranjit Tinaikar, CEO of Ness Digital Engineering, foresees the advent of a new “intelligent engineering center” to best enable companies in the tech industry.
A Shift from Talent as Capacity to Capability
Research conducted across 3,000 software engineers across various countries, industries, and programming environments by Ness Digital Engineering revealed a notable fact: GenAI tools like CodeWhisperer and Microsoft Copilot can significantly boost software engineer productivity. A more striking observation is the productivity differential between senior and junior software engineers, with the productivity gains for senior architects nearly double that of junior engineers.
As fewer software engineers, including fewer junior ones, are needed to perform the same work, the focus is shifting from providing capacity to delivering distinctive capability. Enterprises will need to strategically build intellectual property (IP) and core competencies that are more integral to the business. This shift is already underway as companies begin adapting legacy approaches to building offshore development centers, with some being run by Chief Product Officers or Chief Technology Officers to develop proprietary competence.
A Shift from Cost Arbitrage to Productivity
Cost arbitrage offers a one-time value capture. Continuous productivity improvement is key to increasing long-term value. Research data indicates that applying AI to software development life cycles can radically improve productivity. This goes beyond cost reduction by eliminating waste often encountered in the development process. One of the largest sources of waste is unclear or constantly changing requirements, which result in wasted coding or downtime for programmers. Copilots streamline the capture and management of requirements. GenAI can be used to identify root causes and chances to deploy automation and AI-based solutions to drive continuous productivity improvement. Intelligent engineering centers can provide a value proposition beyond one-time cost arbitrage by focusing on data-driven findings.
A Shift from Automation Solutions to Autonomous Solutions
The traditional software platform can be viewed as an automation solution for business workflows built on a two-layer wedding cake principle. Software is a set of business rules designed to capture, store, and create data. AI introduces a third layer that can modify the business rules. Microsoft CEO Satya Nadella reflected on a podcast that the SaaS era is fading. SaaS is, in reality, being reimagined thanks to the dawn of agentic AI architectures. This is causing shifts in talent, governance, methods, and tools.
With these changes, the historical status quo in the industry is gradually changing into the intelligent engineering center. The intelligent engineering center emphasizes:
- Talent that prioritizes expertise in specific areas
- Data-driven tracking and monitoring of software productivity
- Competencies that adapt to the new reality of AI.
Ranjit Tinaikar adds his vast experience to the evolution of the IT services sector and its ability to adapt.
