Tech Disruption: How has the As-A-Service Business Model Impacted the Labour Market?

One of the greatest economic processes occurring in the last century affecting both firms and workers is globalization, bringing about rapid technological growth, faster dissemination of information, and opportunities to enter new markets[1]. However, a caveat of globalization by many businesses is increased competition. As a result, many businesses now face the pressure to lower operating costs whilst simultaneously up-scaling to meet the ever-increasing demand of a global marketplace.

To meet these new competitive demands, the inception of the ‘anything-as-a-service’ business model or ‘XaaS’ for short has become an attractive option for many businesses, replacing augmented organisational functions and allowing firms to allocate a greater proportion of human and capital resources towards their core services.

So what exactly constitutes the XaaS business model? According to Founder and CEO of HfS Research Phil Fersht, the model represents ‘plug and play’ which are end-to-end services that can be flexibly utilized by a business[2]. With multiple adoptions not limited to transport, cloud computing, and storage, the usage of such models is predicted to grow across multiple industries at a compounded annual growth rate of nearly 40% between 2016 to 2020[3]. The IT industry is one of the industries which is responsible for the growth in XaaS adoption – serving as both the incubator of XaaS, and an industry that has experienced significant disruption due to its presence.

The underlying conditions that have enabled the growth of the XaaS model in the IT services industry are the aggressive pace of change intrinsic to IT products and the relatively high costs of product maintenance. From the perspective of a firm seeking to maximize profits, the frequent introduction of new technology to the industry engenders a significant depreciation cost for any technological investment. Furthermore, maintaining an industry-leading IT department necessitates high operating costs for staff to develop, update, and implement new software platforms.

Therefore, it may not come as a surprise that many core functions of the IT department in modern businesses are being substituted with XaaS solutions. Software-as-a-service (SaaS), Platform-as-a-service (PaaS), and Infrastructure-as-a-service (IaaS), are all cloud computing XaaS solutions designed to replace the core functions of an in-house IT department. However, they are developed, maintained, and operated by third party technology companies. Google, Amazon, Microsoft, Salesforce and Box are a selection of the most notable XaaS cloud-computing technology companies. One of the most prominent commercial adopters of these services is Deutsche Bank which recently implemented a SaaS solution from BCSG to automate their source-to-pay process. In a similar vein, Rio Tinto also hired external consultants from Accenture to switch over their core enterprise information systems to Microsoft’s IaaS solution Azure[4].

The widespread adoption of more scalable, productive and less labour-intensive XaaS solutions cannot occur without a negative externality reverberating into the labour market. This adoption feeds in to a greater underlying trend of “dematerialization”[5] which is characterised specifically by a reduction in demand for in-house system administrators and back-end maintenance staff in the IT services industry.

The effect of this externality on the labour market is captured fittingly by Christopher Pissarides matching function framework[6]. The framework itself provides an explanation of the flows between employment and unemployment at any given point in time. In the case of this disruption, the destruction of core IT jobs caused by this rapid technological adoption suggests we are likely to witness a marginal increase in the job separation rate. This is because large numbers of staff within a certain organisational function are made redundant which causes an adverse shock in unemployment. The magnitude of this shock, whilst only concentrated in one industry, is still worth considering, as the technological services accounted for 8.5% of total employment in Australia in 2016[7].

However, the XaaS business model is unlikely to lead to long term structural unemployment for IT workers. When analysed through the lens of Pissaride’s matching function framework, the high level of technical skill development and knowledge are assets that will enhance the now-unemployed IT services workers’ productivity. The additional productivity means that they are more likely to be matched with new job vacancies created in-line with the XaaS model. Moreover, as more organisations make the transition to XaaS, such skills will be needed to “navigate the complexity of the existing systems [and] migrate to cloud-based platforms without disruptions of service”[8]. The new job vacancies created by the widespread adoption of XaaS cloud-based solutions can already be observed. For example, IBM’s On-Demand XaaS Consulting[9] addresses issues of migration, licensing, security and integration of XaaS. In addition, many cloud-based XaaS organisations are likely to create additional roles in sales and technical support as their core business expands.

When considering the global mobility of labour and the fact that XaaS can be remotely delivered over the internet, unemployed IT services workers may be subject to reduced friction in the domestic labour market. Due to global mobility, workers are now able to compete in multiple labour markets around the world. Combined with the immaterial nature of XaaS cloud-computing service delivery, this eliminates the geographic boundaries of traditional employment.

Ironically, it appears to be the case that globalization underpins both the disruption and the solution to the IT services labour market equilibrium in wake of the XaaS business model.

References

[1] Daniels, J. D., Radebaugh, L. H., Sullivan, D. P., & Daniels, J. D. (2002). Globalization and business. Upper Saddle River, N.J.: Prentice Hall, 2002.

[2] Fersht, P. (2014, October). The Ten Tenets Driing the As-a-Service Economy [Blog post]. Retrieved from https://www.horsesforsources.com/as-a-service-economy_100614

[3] Lynch, C.G. (2008, October). What SaaS Means to the future of the IT Department, CIO Online Magazine, Retrieved from https://www.cio.com/article/2432230/enterprise-software/what-saas-means-to-the-future-of-the-it-department.html

[4] Corcoran, M. (2015, Nov). The As-A-Service Economy is Untapped. Retrieved from https://www.forbes.com/sites/ciocentral/2015/11/30/the-as-a-service-economy-is-untapped/#60509d981eec

[5] Doogan, K. (2009). New capitalism: the transformation of work. Cambridge, UK; Malden, MA : Polity, 2009.

[6] Christopher A. Pissarides, a. (1985). Short-Run Equilibrium Dynamics of Unemployment, Vacancies, and Real Wages. The American Economic Review, (4), 676.

[7] IBISWorld. (2016, August). Australia’s Growth Industries Report 2016. Retrieved from IBISWorld Database.

[8] Pedulla, F. (2014, August). How is cloud computing affecting employment? [Blog post]. Retrieved from https://www.ibm.com/blogs/cloud-computing/2014/08/cloud-computing-affecting-employment/

[9] Pedulla, F. (2014, August). How is cloud computing affecting employment? [Blog post]. Retrieved from https://www.ibm.com/blogs/cloud-computing/2014/08/cloud-computing-affecting-employment/