As the outsourcing industry approaches the quarter-century mark, a new wave
of outsourcing is beginning to emerge. Businesses are increasingly deploying
tools, platforms and software to automate tasks and functions. As a result,
while traditional outsourcing derived cost efficiencies through labor arbitrage
and moving jobs to low-cost labor centers, today’s emerging model employs labor
automation to largely remove wages from the equation.
The automation of
functions and processes – which today is in early stages –will ultimately
generate savings of 40 percent to 60 percent 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 http://sig.org/images
offshore to be read by Indian doctors who conduct a preliminary evaluation 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, as software tools are being deployed that evaluate
x-rays and automatically generate reports. The result: higher productivity
(the automated tools read x-rays much faster than the Indian doctor) at lower
cost (after the initial investment, the tools don’t have to be paid).
In addition to dramatically increasing cost savings, automation can mitigate
risk by diversifying exposure to foreign markets. Today, for example,
banks spread their offshored operations across India, China, and Southeast Asia
to avoid exposing any one area to a natural disaster or political event. With
automation, you are much more secure because you can operate software platforms
Process innovation also becomes more feasible with
automation, as it’s generally difficult and expensive to get people to change
the way they do things. 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 can answer questions at home and submit information prior to a
doctor’s appointment, and have automated tools provide the doctor with a
preliminary analysis, the experience of how patients and doctors interact can be
As the automation wave gains momentum, the
comparative advantage of low-cost, well-educated labor will become increasingly
obsolete, as the focus of business models will shift from people to technology.
The India heritage firms and other providers will need to adapt; several
providers I’ve spoken to are recognizing the potential risk and evaluating their
For client organizations, meanwhile, 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.
In 2013, we anticipate
that both client organizations and service providers will engage in focused
discussions to explore these issues and identify opportunities. Firms who
ignore this trend may find that the world around them changes faster than they
In addition to transforming the sourcing marketplace, the
prospect of labor automation raises some significant philosophical issues.
Specifically, what does the prospect of replacing flesh-and-blood people with
automated tools portend for the future? The utopian point of view holds
that labor automation will drive down the costs of delivering services and
create heretofore unseen value. Displaced workers will be retrained to
acquire new skills and migrate to new areas; the economic pie will grow to the
benefit of all.
From the dystopian perspective, wealth will increasingly
concentrate into the hands of a few providers and business owners. More workers
will chase fewer jobs in a losing competitive battle against low/no cost
software platforms. Income levels and living standards will decline
as income disparity expands.
The reality will likely be a mix of utopian
and dystopian outcomes. We’re familiar with the loss of manufacturing jobs
and the struggles of workers seeking to acquire new skills and find new
employment. At the same time, manufacturing automation has benefitted all
consumers by decreasing the cost and improving the quality of many products.
Will the same thing happen in the IT industry? Will this trend expand
to other knowledge work? It already is and we are seeing both positive and
The challenge the industry faces is to find
ways to embrace this inevitable progress and deploy it to maximize the utopian
impact and minimize the dystopian. The storm of labor automation is
coming. Prudent companies and workers are thinking about how to prepare to
capitalize on the trend, rather than waiting to become victims. Do that
and you can end up on the utopian side of the market.