Spend Matters welcomes a guest post from Thomas Young, a Partner with ISG, a research, consulting and advisory services firm.
As the outsourcing industry approaches the quarter-century mark, a new wave of outsourcing is emerging. Businesses are increasingly deploying tools, platforms and software to automate tasks and functions. As a result, while traditional outsourcing derives cost efficiencies through labor arbitrage and by moving jobs to low-cost labor centers, today's emerging model employs labor automation mainly in order to remove wages from the equation.
The automation of functions and processes – which today is in early stages – will ultimately generate savings of 40- 60% for the affected functions over existing outsourcing models. The use of labor arbitrage in its current form sets the stage for automation: by breaking out the initial evaluation of a discrete work process, you can start to codify the inputs and outputs of that process and ultimately automate that process.
As an example, consider how x-rays are reviewed. Currently, U.S.-based radiologists ship digital x-ray images offshore to be read by Indian doctors who then conduct preliminary evaluations and send the results back. This division of labor produces savings in two ways – first by allowing the initial evaluation to be conducted by a lower-cost resource, and second by making the U.S.-based radiologist more productive. This model is changing, however, with the advent of software tools that evaluate x-rays and automatically generate reports. The result is higher productivity (the automated tools read x-rays much faster than the Indian doctor) at a lower cost (these tools only incur a one-time cost).
In addition to dramatically cutting costs, automation can mitigate risk by diversifying exposure to foreign markets. Today, for example, banks spread their off-shored operations across India, China and Southeast Asia to avoid exposing any one area to a natural disaster or political event. With automation, companies are much more secure because they can operate software platforms anywhere.
Process innovation also becomes more feasible with automation, as it is generally difficult and expensive to get people to change the way they work. Today, a visit to a doctor's office involves filling out forms and spending a good portion of the appointment answering basic questions. But if a patient answers these questions at home and submits information prior to a doctor's appointment, automated tools can provide the doctor with a preliminary analysis. This could fundamentally change the way patients and doctors interact.
As the automation wave gains momentum, the focus of business models will shift from people to technology and the comparative advantage of low-cost, well-educated labor will become increasingly obsolete. The Indian heritage firms and other providers will need to adapt. Several providers with whom I have spoken are already recognizing the potential risk and evaluating their options.
Meanwhile, for client organizations, existing multi-vendor arrangements will be replaced by new delivery models involving new players with new types of expertise. In this environment, effective service integration and governance will be essential. More specifically, while automation mitigates certain types of risk, it also increases the risk posed by technology failure, and businesses will need to address this shift.
We anticipate that in 2013 both client organizations and service providers will engage in focused discussions to explore these issues and identify opportunities. Firms that ignore this trend may find that the world around them is changing faster than they imagined.
- Thomas Young, Partner, ISG