Impact of Demographic Change on IT

For a couple of decades now, we’ve received information about the demographic change impacting society, especially labor. Nonetheless, surprisingly little seems to have changed in day-to-day business since then.

However, we are currently facing substantial challenges as a result of the COVID-19 pandemic coupled with an energy crisis, with economic figures showing a lack of workforce in Europe and the U.S. due to high demand for skilled labor.

Looking further into the years to come, UN predictions[1] show little to no population growth beyond 2050. This prediction is on a global scale. The effects of an aging and shrinking population in highly developed countries such as the U.S. and Europe are immense.

At the same time, as populations age and human capital shrinks, the demand for smart, IT-based solutions is growing. All industries must prepare for various scenarios and have solutions in place to cope with this megatrend. In response to this, production-intensive industries look to Industry 4.0, while in the retail industry, we see more and more use of data-driven, online business models. In the service industry, such as public services, healthcare, and IT services, there is still a lot of labor-intensive work, which won’t be entirely replaced by automation.

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Impact 1: Rising IT Costs Due to Fewer IT Specialists

The IT industry, however, is not as highly impacted as other industries. The reasons for this are the current age structure, global service models, and attractive salaries in IT. Nevertheless, demographic change, plus a growing demand on IT experts, will force companies to adjust their IT strategies.

For IT departments, this means an increasing need to attract new IT talent (a growing cost), continuous training of in-house IT experts, and sustainable transfer of knowledge between new hires and retiring IT experts.

IT services are usually a mix of in-house and third party–delivered solutions. Over the past ten years we’ve seen growing numbers of outsourcing. However, this does not change the fact that two major junks in IT services are dominated by labor cost: system development and user support, both of which have labor costs of more than 70% of total IT cost. On average, IT departments have cost structures showing 40-70% labor cost of total IT cost.

Therefore, an IT strategy that supports companies coping with demographic change and the need for further digitalization must include elements that reduce labor-intensive service and thereby labor cost.

Any strategy that reduces labor-intensive implementations and support minimizes the risk of failure due to lack of IT resources. Such a strategy should include the following:

  • Purchase of standard software rather than in-house development
    • Preconfigured solutions, so there’s no need for in-house development resources
    • Widespread solution knowledge, which allows the purchase of third-party resources when needed
    • Lower risk of loss of know-how when developers retire or leave the company
    • Simplified outsourcing
  • Development of lean solutions on open platform technology to fill gaps rather than complex, fully customized solutions, when standard software fails to fulfill the requirements
    • More flexibility integrating new solutions
    • Less dependency on in-house resources
    • Widespread solution knowledge enabling the purchase of third-party resources when needed

The technology and the services that support such a strategy are already in place: software as a service (SaaS). SaaS offers the following benefits:

  • Low cost of infrastructure
  • Low cost of configuration
  • Accelerated implementation
  • Simplified, faster, service-level agreements
  • Open architecture to enhance the solution while keeping the core clean

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Impact 2: Further Digitalization Substituting Labor

Since demographic change will remarkably reduce the potential workforce, smart substitution is key. Digitalization and automation of repetitive work tasks of lower to middle complexity is a proven approach. When it comes to tasks that require high qualification and social interaction, however, the benefit of digitalization is not as clear. As long as we are not moving into science fiction–inspired scenarios, androids will not replace the human workforce, especially not in areas of high qualifications such as healthcare, engineering, business management, consulting, and so on. Some experts[2] recommend looking to higher education to fulfill the demand for a highly skilled workforce, while replacing lower-skilled tasks with automation. It is doubtful, however, that this will work for all tasks, for example, house construction, installations, human-to-human interactions in healthcare (or similar human interactions), and creative decision-making, to name just a few.

For these types of scenarios, the way forward is rather a synthesis of human labor and digital-process and task-supportive solutions. In healthcare, for example, diagnosis and monitoring of patients can be optimized by databases, AI assistants, and ambient computing. Remote monitoring and analysis solutions can replace labor-intensive tasks, such as heating installations or machine repair. Data-driven retailing can optimize supply chain issues, reducing labor-intensive work at warehouses.

Such digitalization scenarios require a digital backbone (or data hub) with core integration platforms for digital, user-friendly, and accessible user interfaces, and open models to develop and deploy smart solutions easily to rapidly adapt to changing needs. Such architectures must include the cloud (as this is currently the only option available to integrate ambient computing solutions); 24×7 global, remote access; and fast development and deployment of smart, AI-based solutions.

Classic value chains (procure-to-pay, order-to-cash, hire-to-retire, travel management, and so on) are still required. But they must become a commodity in order to focus the shrinking workforce on agile, result-driven rather than task-driven activities.

We cannot predict the future with certainty, but if you want to stay successful, becoming (and remaining) agile is key. At present, it’s not clear what technological changes will dominate in the future, but demographic change is happening, and IT can help in designing solutions to cope with it.

I’m not sure why the source information was deleted, but according to SAP writing and editing standards, full reference information has to be given in a footnote in the following format: First Name Last Name, “Title of Work,” <include embedded link for title if desired> Publisher, Date.

[1] United Nations Department of Economic and Social Affairs, Population Division (2022), “World Population Prospects 2022: Summary of Results,” UN DESA/POP/2022/TR/NO. 3.

[2] Conny Wunsch and Manuel Buchmann, “Demografischer Wandel verschärft Fachkräftemangel,” Die Volkswirtschaft, 2019