Outsourcing Faces Challenge from Cloud-based Automation

Business process as a service picks up steam, appeals to smaller companies.

Sending routine work to lower-cost offshore locations has been viewed as a threat to domestic jobs, but those low-cost offshoring destinations now face a challenge of their own from cloud-based automation.

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.

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.”

A.T. Kearney estimates the global market for BPaaS totaled $18 billion in 2014. While that is dwarfed by the outsourcing market’s $160 billion in business that year, BPaaS “is growing very fast,” Gott said, adding that “it’s happening faster among the small to medium-sized companies, and therefore it’s less recognized.”

India, China Top Offshoring Locations

The report included A.T. Kearney’s annual list of offshoring locations ranked by the country’s business environment and financial attractiveness, and its workers’ skills and availability. The countries at the top of the list were unchanged from last year, with India in first place, followed by China, Malaysia, and Brazil.

But going forward, the model of sending work overseas could come under pressure.

Arjun Sethi, A.T. Kearney“It is not necessary to be offshore per se to provide services that are repeatable and can be provided either through a BPaaS platform or bots,” said Arjun Sethi, a partner at A.T. Kearney and global leader of its strategic IT practice. “This could be a fairly disruptive force and could significantly impact or impede the offshore services industry.

“Having said that, if there is a particular location or part of the services industry that is particularly suited, it sits in heretofore leading locations like India,” said Sethi, pictured at left.

Traditional outsourcing providers “are not standing still,” he added. “Only they have to learn very fast, and in many cases cannibalize their traditional sources of revenue, based on low-cost labor sitting in offshore locations.”

It’s too soon to get a good sense of which outsourcing locations might do well with BPaaS, said Eric Simonson, managing partner of research at management consulting company Everest Group. But India “has both the volume of work to learn quickly, and the India work model tends to do a good job of focusing on details—their mindset is amenable to implementing and maintaining automation,” he said.

Simonson also cited near-shore Europe locations such as Poland and Ireland.

KPMG’s Justice sees many traditional outsourcing service providers shifting to the cloud.

“The big service providers are making that transition to those models,” he said. “The big Indian service providers have been migrating to more of a digital-as-a-service model. There’s companies that are going to do very well at this change.

“There are still labor-centric companies that rely on low-cost labor to do the work,” Justice added. “That model is going away.”

 

BPaaS Advantages over Outsourcing

Labor arbitrage has driven much offshoring, but the price tag for services performed via automation can undercut even low-cost locations.

Sethi estimated that a robot can handle a repeatable process for a third of the cost of a full-time employee in a low-cost offshore location. “If there is an accounting-type transaction or reconciliation-type transaction currently done by [a full-time employee] at anything from $22,000 to $26,000 per person per year, all of it could be done by a bot at about a third of that price, so $7,000 to $8,000 per year,” he said.

But Simonson argued that the key factor driving companies to automate is not cost but the potential for productivity gains.

“It’s not that current employee costs are too high, but the levers for productivity are decreasing,” he said. “They need a new trick. If you start implementing technology, it’s much easier to improve productivity. You get cost savings in that way, and it helps you mitigate other cost pressures.

Sethi said automation can also lower risk, in part because it makes processes more robust by eliminating manual data entry and the errors that manual entry can introduce. Automated processes are also “highly standardized,” and because they can be adjusted in response to regulatory changes, they are “very compliant” and “very auditable,” he said.

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