Coming of RPA and the newer technologies
A recent KPMG report argues that the rising cost of labor is causing BPO to become an non-viable option and that technologies, such as RPA, AI, and other cognitive and automation platforms, are advancing to create more sustainable options. According to this report, more and more companies are turning to "machines with rapidly advancing capabilities for understanding, learning, communicating, and problem-solving. Robotic process automation (RPA)—this convergence of low-cost, easy-to-implement process automation, coupled with machine learning, data analytics, and cognitive innovations—is creating a new class of digital labor." The same report suggests this trend will cause companies to turn to more advanced machines rather than relying on BPOs for the work they need to complete, thus eventually eliminating the need for human workers and BPOs.
Recently, great numbers of business process outsourcers have turned to robotic software to automate back office processes, such as FAO, HR management, and procurement - processes that normally require a human employee to accomplish. It has been estimated that one half to 70% of the work done by shared service, captive, or outsourced operations can be automated using robotic software. This technology not only drastically reduces the cost of labor for business process outsourcers, but it produces better quality work and allows employees to focus on tasks that are much more meaningful. Here are some hard facts that suggest a decrease in the use of BPO is possible. Although it is still a hotspot for outsourcing, India is experiencing a decline in outsourcing. Between 2011 and 2014, the number of deals worldwide declined by 61% and value of these deals shrunk from $206.8 billion to $120.4 billion.
Ever since Trump’s inaugural speech emphasizing an America-first message future for outsourcing is uncertain in America, where global labor markets are being disrupted by various flavors of travel bans to the United States, the specter of a wall being built at the US-Mexico border that costs more than the entire Space-X program, a reform of H1B visas that could likely dismantle the traditional outsourcing model, and a curious thing called Brexit that could change the global trade landscape forever, one might be forgiven for feeling slightly disoriented.
But here are three scenarios that I am seeing for 2017: [Phil Fersht, 2017]
RPA will remain undefined. Over the next 12 months, the perception of RPA will remain blurred. RPA capabilities will fold into broad propositions such as Digital Workforces or Cognitive Automation. This is adding to the continuing confusion around RDA. Extending on that, in 18 months we won’t talk about RPA anymore. Most of the leading technology providers will have been acquired and RPA is a reality in the back-office.
M&A through ISVs. Buyers will have to do scenario planning for acquisitions. While this might bring broader capabilities, licensing costs are likely to increase as well. Pega’s acquisition of OpenSpan is the template for such developments. Beyond the tool providers, the automation pure plays such as Symphony and GenFour are likely to be equally absorbed by larger consultancies.
The emergence of an Automation Ecosystem: We already have seen the impact of Watson, as it is starting to evolve into an ecosystem. Suffice it to say, IBM could be the driving force to extend those capabilities, as we have argued some time ago. But it could equally be one of the tool providers significantly expanding its reach. As stated, we are seeing the providers in the Winner’s Circle moving toward the notion of orchestrating much broader automation capabilities. At the same time, we are seeing providers like Blue Prism and UiPath being deployed in IT-centric scenarios such as IT Help Desk and Application Management, pointing to a convergence of scenarios and tool sets.
Cloud based Business Process
Outsourcing providers have long employed automation. But a recent report from management consulting firm A.T. Kearney highlights the growth in business process as a service (BPaaS), which lets companies hand off routine chores via the cloud to software systems that perform those chores without human intervention. Any activity that is repeatable and rules-based is a good candidate for such automation, said Cliff Justice, a partner for innovation and enterprise solutions at KPMG. "Payroll, AP, order entry—all of those activities follow a set of rules and parameters and workflows." Johan Gott, a principal in the private equity practice at A.T. Kearney, said that while technology enables BPaaS, it is at heart a new business model. "Even though it’s not core technology, it’s the more disruptive trend that we’re seeing," he said. Spending on BPaaS, in fact, is expected to reach $13.7 billion in 2016, up from $12.95 billion in 2015 (Gartner, Forecast Analysis: Public Cloud Services, Worldwide, 1Q16 Update, May 2016).
While automating processes would involve considerable effort and IT resources for an individual company, achieving automation by using BPaaS via the cloud is a much simpler and less expensive option."BPaaS can unlock an enormous potential for growth in BPO services by dramatically expanding the customer pool to smaller and midsized customers," according to the A.T. Kearney report. "The standardized offerings of BPaaS are particularly well suited to smaller companies, which have neither the volume to enter into large contracts, nor the need to outsource more than a few relatively simple processes."
Disruption of BPO
The election of Mr Trump to the Oval pretty much just hammered in the final nail in the coffin for the traditional IT outsourcing market as we know it. The Republicans control the House, the Senate and Trump has a huge mandate to impose his will, not dissimilar from Obama and his healthcare reforms. Change is going to happen and it will likely have a very significant impact on global IT and BPO service delivery. The bad news for the offshore industry is that Trump's protectionist policies are going to accelerate reality and actions will be direct in the form of raising the H1B minimum salary to $100,000 per year, encouraging cloud-based standardized service providers,and intelligent automation of the existing business process. [Phil Fersht, 2017] The attacks are reverberating at companies with production and IT operations in countries like India, China and the Philippines, outsourcing executives say. Some companies are looking for U.S.-based alternatives, while vendors that provide outsourced services are pushing automation as a cost-effective way to re-shore work—but not necessarily jobs.
The Offshore industry has been living with single-digit revenue growth for some time now and is unable to kick-start growth in a big way amid the global macroeconomic and political uncertainties. These companies in India especially are already feeling the pinch financially, and are making blatant attempt to appease the Trump administration by announcing local hiring in USA in a big way. Infosys said following the release of its March quarter results that it would hire about 10,000 people in the U.S. over the next two years. The company plans to open four innovation center hubs in the U.S. Even as this announcement from Infosys created a furor over its potential implication for jobs in India, Cognizant said recently it will rationalize its cost structure by bringing the employee base in line with demand. The company said on the earnings call it intends to ramp up hiring in the U.S., while at the same time reduce dependence on the H-1B visas. For the top offshore companies, there was a steep drop in H-1B visas filing for the year 2017.
Indian IT outsourcing firms are also exploring other options, including setting up near-shore centers or facilities closer to the U.S, with Mexico being the most-sought-after center. Apart from the option helping to face the challenges of a protectionists environment in the U.S., the cost of doing business also comes down by roughly 50 percent. Nasscom says that India's IT industry contributes to over $2 billion in annual taxes in the US, with a cumulative of $20 billion over 10 years, while generating 4,11,000 jobs in the US as in 2015. The industry says that US companies benefit from outsourcing as they can allocate resources to critical work locally."Indian IT sector must now brace for further troubled times ahead. The sector was already battling both cyclical challenges (due to changes and shifts in financial services, healthcare verticals) as well as secular challenges (i.e., cloud shift, automation, pricing pressure, insourcing) impacting revenue growth. A sub 10% growth for FY17 is certain," Arup Roy, Research Director, Gartner said in a statement on November 9.
However the companies that don't diversify their portfolios away from pure body-shopping and process competencies to a technology-driven advantages and that have a big bunch of complacent employees are going to face music in near term from the disruptive wave of automation. While many Asian countries are gearing up to this challenge, the IT sector in India is facing existential crisis largely of its own making because it became complacent and overconfident even as technologies and markets changed.
References
- On the Eve of Disruption, https://www.atkearney.com/documents/10192/7094247/On+the+Eve+of+Disruption.pdf/49fa89fa-7677-4ab8-8854-5003af40fc8e, A.T. Kearney, 2016
- RPA and BPO minor changes or real disruption, https://www.uipath.com/blog/rpa-and-bpo-minor-changes-or-real-disruption, UIPATH, 2016
- RPA 2017 report, http://www.horsesforsources.com/RPA-provider-blueprint-snapshot_022217, Phil Fersht, 2017
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