Sending routine work to lower-cost offshore locations hasbeen viewed as a threat to domestic jobs, but those low-costoffshoring destinations now face a challenge of their own fromcloud-based automation.

Outsourcing providers have long employed automation. But arecent report from management consulting firm A.T. Kearneyhighlights the growth in business process as a service (BPaaS),which lets companies hand off routine chores via the cloud tosoftware systems that perform those chores without humanintervention.

Any activity that is repeatable and rules-based is a goodcandidate for such automation, said Cliff Justice, a partner forinnovation and enterprise solutions at KPMG. “Payroll, AP, orderentry—all of those activities follow a set of rules and parametersand workflows.”

Johan Gott, a principal in the private equity practice at A.T.Kearney, said that while technology enables BPaaS, “it is at hearta new business model.

“Even though it's not core technology, it's the more disruptivetrend that we're seeing,” he said.

While automating processes would involve considerable effort andIT resources for an individual company, achieving automation byusing BPaaS via the cloud is a much simpler and less expensiveoption.

“BPaaS can unlock an enormous potential for growth in BPOservices by dramatically expanding the customer pool to smaller andmidsized customers,” according to the A.T. Kearney report. “Thestandardized offerings of BPaaS are particularly well suited tosmaller companies, which have neither the volume to enter intolarge contracts, nor the need to outsource more than a fewrelatively simple processes.”

A.T. Kearney estimates the global market for BPaaS totaled $18billion 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 tomedium-sized companies, and therefore it's less recognized.”

India, China Top Offshoring Locations

The report included A.T. Kearney's annual list of offshoringlocations ranked by the country's business environment andfinancial 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, andBrazil.

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

“It is not necessary to beoffshore per se to provide services that are repeatableand can be provided either through a BPaaS platform or bots,” saidArjun Sethi, a partner at A.T. Kearney and global leader of itsstrategic IT practice. “This could be a fairly disruptive force andcould significantly impact or impede the offshore servicesindustry.

“Having said that, if there is a particular location or part ofthe services industry that is particularly suited, it sits inheretofore leading locations like India,” said Sethi, pictured atleft.

Traditional outsourcing providers “are not standing still,” headded. “Only they have to learn very fast, and in many casescannibalize their traditional sources of revenue, based on low-costlabor sitting in offshore locations.”

It's too soon to get a good sense of whichoutsourcing locations might do well with BPaaS, said Eric Simonson,managing partner of research at management consulting companyEverest Group. But India “has both the volume of work to learnquickly, and the India work model tends to do a good job offocusing on details—their mindset is amenable to implementing andmaintaining automation,” he said.

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

KPMG's Justice sees many traditional outsourcing serviceproviders shifting to the cloud.

“The big service providers are making that transition to thosemodels,” he said. “The big Indian service providers have beenmigrating to more of a digital-as-a-service model. There'scompanies that are going to do very well at this change.

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

BPaaS Advantages over Outsourcing

Labor arbitrage has driven much offshoring, but the price tagfor services performed via automation can undercut even low-costlocations.

Sethi estimated that a robot can handle a repeatable process fora third of the cost of a full-time employee in a low-cost offshorelocation. “If there is an accounting-type transaction orreconciliation-type transaction currently done by [a full-timeemployee] 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 toautomate is not cost but the potential for productivity gains.

“It's not that current employee costs are too high, but thelevers for productivity are decreasing,” he said. “They need a newtrick. If you start implementing technology, it's much easier toimprove productivity. You get cost savings in that way, and ithelps you mitigate other cost pressures.

Sethi said automation can also lower risk, in part because itmakes processes more robust by eliminating manual data entry andthe errors that manual entry can introduce. Automated processes arealso “highly standardized,” and because they can be adjusted inresponse to regulatory changes, they are “very compliant” and “veryauditable,” he said.