The Bullwhip Effect in IT Service Industry

Most business students would have studied the bullwhip effect, which first appeared n Jay Forrester’s Industrial Dynamics (1961). It is a supply chain concept explaining how fluctuations in demand at the consumer or retail level can cause very high fluctuations in demand in the whole value chain, be it wholesalers, distributors, manufacturers, and raw material suppliers. (More on Wikipedia here)

 Is Bullwhip Effect applicable to the IT Service industry?

Let’s see the IT Services value chain of Customers, Orders, Delivery, Resource Management, and Recruitment. The slight uptick in orders will create high demand variability at Resource Management and Recruitment.

This is what happened last year. The demand uptake after covid caught delivery, resource management, and recruitment people unaware. This resulted in high attrition. Many service providers mentioned in their last quarterly earning calls that if attrition was better, they would have grown higher. 

 To prevent this from happening again, delivery, resource management, and recruitment got into hyper action and started recruiting heavily, anticipating high demand. Finding any high-quality talent with in-demand skills just in time in the right salary bands is very tough.

 This bullwhip effect in the IT service industry is further accelerated by: 

• A few large (billion dollars plus) deals give the impression of an uptick in demand at a high rate, and with the bullwhip effect, it can give the impression of planning for massive growth, but in reality, there were a handful of large deals only.
• A healthy pipeline also gives confidence in higher demand. In reality, the pipeline may not convert at the expected rate because of competition and also change in the business environment,
• ·High attrition also keeps nerves high for operation folks. If a service provider wins a large deal or even a mid-size but critical deal and is not able to fulfill it because of attrition, it creates tensions in the account and delivery team. To avoid this, folk in operations, resource management recruitment plan aggressively sometimes.

Why is it important now?

 In talks of recession, there will be an uncertainty of demand and orders now. Though the pipeline continues to be strong, there may be a delay in client decision-making. This will make all delivery and hiring plans topsy turvy. 

 People cost is a tricky thing in IT services. Though it is variable in theory, service providers can’t adjust their people’s costs according to demand instantly. It is not humane and ethical to do large hiring and then to fire. Also, large-scale firing creates a bad employment brand. If the service provider decides to wait it out, it creates pressure on its margin, which in turn will impact stocks further in the bearish market.

 In these uncertain times, it is essential to align people planning and hiring closely with demand trends and ensure the bullwhip effect is minimized in the value chain.

Bottom Line: The frequency of abnormal changes in the business environment has made planning very difficult. In these scenarios bullwhip kind of situation is unavoidable. Service providers can reduce the impact with better planning alignment across the value chain.