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How to integrate disruptive technologies into IT outsourcing …

In the era of digital disruption, the ability to successfully implement new technologies such as mobility, big data and analytics systems, cloud computing options, or robotics for competitive advantage is critical. In some cases, going to an existing IT service provider may not be the best way to do so. However, in many cases, there are advantages to working with incumbent supplier. Doing so may enable IT outsourcing customers to leverage existing contractual commitments and terms to accelerate the contracting process.

Business and IT leaders may want a trusted partner to manage their entire technology environment. By expanding the scope of an existing deal, the customer can retain integrated performance standards and service levels for the entire environment and maintain streamlined governance processes. It also may be a way to minimize any transition or termination costs.

[ Related: The secret of digital disruption in one tweet ]

The challenges of integrating disruptive tech into an existing contract

However, the integration of disruptive technologies into an existing sourcing arrangement can present a number of new challenges, says Linda Rhodes, partner in the Washington, D.C. office of law firm Mayer Brown. “The contractual rights and protections available to the client in important areas — such as control rights, approval rights, audit rights, intellectual property ownership rights and post-termination rights—are likely to be different in many respects,” Rhodes says.

Process robotics: The economics of digital labor shakes up …

The economics of process robotics promises to shake up the outsourcing sector, creating a new dialog among vendors, business executives and CIOs.Process robotics, also known as robotic process automation (RPA), aims to take over the manual effort involved in carrying out a range of IT and business process activities. With this technology, software robots can be configured to handle tasks traditionally assigned to humans. Repetitive, rules-based business processes, such as payroll processing, fall into this category. On the IT side, RPA can automate help desk requests, such as password resets. RPA’s envisioned reach extends beyond high-volume, transactional activities to judgment-based processes that have previously demanded human discernment. So-called cognitive RPA systems, built upon artificial intelligence, seek to take on the latter process type.

RPA’s potential to replace human labor has put the technology on a collision course with offshore outsourcing, a practice based on labor arbitrage. While the actual labor savings stemming from RPA depends on the nature of a given process, the technology is thought to deliver greater cost reduction than outsourcing.

“For the majority of processes, especially transactional ITO/BPO [IT outsourcing/business process outsourcing] processes, it is significantly less expensive,” said Dave Kuder, principal, business model transformation at Deloitte Consulting LLP.

Marc Mancher, principal, federal business model transformation at Deloitte Consulting, said offshoring outsourcing, at first glance, offers cost savings of 50% to 60% or more. But costs must be factored into the equation. Infrastructure expenses such as networking and the cost of the retained IT organization (the group that manages the outsourcing vendor) dial back the labor arbitrage savings by 20% to 30%.

RPA software, however, presents “a little different equation,” he noted.

Mancher provided the following example: An outsourcing vendor can handle a transaction-based process with each employee on the task costing $50,000, including benefits, etc. An RPA deployment dedicated to that process might cost $50,000. If the software robot can do the work of three to eight people, the savings would range from 60% to 80% after costs are accounted for. Those costs include RPA software licensing fees and break/fix maintenance, which could, depending on the circumstances of a given process, degrade the savings by 10% to 15%, Mancher noted.

That said, RPA still comes out ahead.

Sarah Burnett

“There are ongoing costs, but the arbitrage is greater than offshoring,” Mancher said. “And the steady-state costs are less than the retained organization.”

Sarah Burnett, vice president of research at Everest Group, agreed that RPA can be less expensive than outsourcing.

“We have estimates that show, in specific scenarios, if you deploy RPA in finance and accounting, you can save 60% to 67% on onshore costs and 20% on offshore costs,” she explained.

A new outsourcing conversation

Despite the savings it offers, Burnett contended that RPA is not a direct replacement for offshoring.

“Often it is used to automate processes partially and outsourcers can use it in offshore locations to reduce the cost of service delivery further,” she said.

But while offshore outsourcers may not end up a dying breed, the arrival of RPA is changing the outsourcing discussions between vendors and customers.

“The automation paradigm is really changing the outsourcing equation,” Burnett said. “With automation, organizations can deliver services in-house cheaper, and so change the mix of in-house and outsourced services.”

In addition, customers can demand more variable pricing — pricing based on transaction volume-based models, for instance — as opposed to the input-based pricing characteristic of outsourcing deals.

With input-based pricing, customers are charged on the basis of the number of full-time equivalent (FTE) units the outsourcing vendor provides, noted Amardeep Modi, senior analyst at Everest Group.

Amardeep Modi

Businesses, in general, are moving away from labor-only contracts and toward transaction-based pricing and pricing models built around business benefits, noted Cathy Tornbohm, a research vice president at Gartner. Those arrangements are more open to automation. At present, about 60% to 70% of back-office finance and accounting BPO contracts are labor-only contracts, while payroll BPO contracts are already typically conducted on a per-transaction basis, she added.

Labor cost reduction has been the traditional driver behind finance and accounting BPO deals, while businesses have tended to view payroll BPO as purchasing a business service as opposed to buying access to a particular number of FTEs, according to industry executives.

Meanwhile, contracts in sectors such as banking, insurance and healthcare offer up a mix of pricing models, Tornbohm noted.

Cathy Tornbohm

Mancher, who doesn’t see offshore outsourcing vanishing entirely, agreed that economics of RPA will open new conversations between outsourcing providers and their customers. Political pressure, as well as cost savings, will contribute to the discussion. He said the business case becomes leaner for offshoring if there is growing political pressure to keep work in the U.S.

“The political pressure may sway the business case to bringing the work onshore, because the financial benefit [of offshoring] to the company isn’t there,” he said.

Outsourcing vendors to feel RPA impact

As pricing philosophies shift and customers become more aware of automation’s benefits, outsourcing vendors will need to adopt RPA.

“What we are seeing is that most of the vendors are internally implementing process robotics or RPA software products to take cost out of their environments to be more competitive,” Mancher said.

Xchanging, a CSC company, is one vendor that has adopted RPA. The business processing, technology and procurement services provider has found that a software robot that replaces at least three FTEs in an offshore operation, or one FTE onshore, to be “a far more economical proposition” than assigning a highly skilled and experienced worker to repetitive or mundane tasks, said Rajesh Nair, group head of Xchanging’s Robotic Process Automation Practice.

Rajesh Nair

“In Xchanging’s case, RPA has been proven and continues to prove beneficial for both onshore and offshore operations,” he said.

Nair said Xchanging’s return on investment (ROI) has been upward of 200% in the first year and continues along that path, with more RPA deployments being delivered this year and expected in the future.

“Service providers have to invest and modernize their offerings and be prepared to offer new pricing models,” Burnett said.

Some outsourcing firms, however, may feel they have cause to avoid RPA. They fear that RPA, because it is less expensive than human labor, will compel them to bill less for their services.

“We have already heard a lot about automation leading to ITO/BPO service providers’ revenue cannibalization,” Burnett said.

But Nair suggested vendors that wait too long on RPA will end up in far worse shape.

“ITO/BPO firms who are holding back right now because they see RPA as a threat to their existing revenues would find it difficult to win more clients in future — even if they build their RPA capability overtime,” Nair said.

That’s because the BPO RPA market will have matured in the next 18 months. At that point, “the big BPO players, with their might of existing clientele and experience, would’ve already swept away most of the big-ticket opportunities that exist.”

A business-led initiative

While vendors may exhibit some RPA hesitancy, the corporate IT department may also balk at the emerging technology.

“IT, as a profession, has not been an early adopter of this,” Mancher said of process robotics. “It is not from the CIO; it has been business-driven.”

The business side has brought process robotics to the attention of IT, but IT has been skeptical of implementing the technology, he said. But RPA could help IT departments integrate systems that they would otherwise not have the time or resources to accommodate. For example, if one company merges with another, there will be a need to move data between different systems. Some systems could take years to integrate, but, with RPA, an organization can take on the work much faster.

Indeed, RPA makes integration more economically feasible than previous methods, industry executives said.

Tornbohm said that’s because RPA uses a system’s existing user interface pathways, so the approach “doesn’t always require complex integration, complex IT projects or major business change.”

RPA’s integration dimension brings up another point: The technology is not all about labor cost savings.

Deloitte Consulting has built nine process robotics prototypes for five U.S. government agencies. Mancher said the conversation with federal agencies doesn’t revolve around labor arbitrage.

“There is no desire to impact the employment of one federal worker,” he said.

The key drivers in the government sector boil down to unfunded mandates and human resource constraints. The Administration or Congress may require agencies to pursue new initiatives, but those agencies must do so with existing resources — or perhaps fewer resources in light of attrition due to retirements, Mancher said. Process robotics can help agencies handle unfunded mandates and seasonal spikes in demand.

In addition, personnel who were diverted from the core agency mission to take on a back-office role in support of unfunded mandate can be returned to the front lines and perform critical government services.

“It’s a different value proposition,” Mancher said.

 

Shawn Wiora

Shawn Wiora, CIO of Creative Solutions in Healthcare Inc., a company that operates skilled nursing and assisted living facilities, said he sees RPA playing a role in such fields as healthcare claims processing, which he described as a highly manual activity, and cybersecurity.

As for the latter, Wiora said a business’ cybersecurity organization tries to keep tabs on the alerts and alarms generated by multiple IT security systems, few of which talk to one another. Process robotics, however, has the potential to automate the task of screening a multitude of alerts to zero in on the ones that security personnel need to spend time pursuing. Wiora pointed to the example of Maxxsure, a company that helps organizations score the risks associated with various cyber threats. Wiora is on the Maxxsure board of directors.

The growing number, increasing sophistication and mounting cost of cyber attacks compel companies to push more resources at security. Wiora noted that the IT security department has become one of the fastest-growing, and highest-payroll, areas of a corporation.

“Human intervention is not sustainable,” he said.

Article source: http://searchcio.techtarget.com/feature/Process-robotics-The-economics-of-digital-labor-shakes-up-outsourcing

Automation, not cheap labor, is reshaping outsourcing

automationThe offshore outsourcing of IT grew because of the cost of offshore labor. A software engineer in India is paid but a fraction of what a U.S. worker earns. Payscale puts the median salary for a senior software engineer in India at $10,000.

When IT services firms bring in H-1B visa workers, these workers earn substantially more than their overseas counterparts, but often significantly less than American IT employees.

This labor cost advantage has been a powerful lure for U.S. customers, but analysts see labor costs diminishing in importance. Customers want more automation, whether it’s infrastructure management or business process outsourcing. IT services firms can no longer complete exclusively on lower cost labor.

“The search for just cheaper people is a thing of the past,” said Frances Karamouzis, an analyst at Gartner. What customers now want is to buy more “thinking” and automation for the “doing,” she said.

One process that has taken off is called “Robotic Process Automation (RPA),” a term given to a virtual machine that takes over some of the applications and workflows managed by workers. These systems don’t directly replace humans, but take structured tasks and automate them, with users saving as much as much as 15%, said Karamouzis.

But Karamouzis sees RPA as a gateway to more sophisticated tools. Once IT services customers realize savings using this tool, their next question often is: What else can we automate?

Automation tools are coming, and quickly. IBM, which is a major employer in India and has shifted much of its work overseas, is focusing a large part of its future on its cognitive engine, Watson.

Gartner believes that by 2020 Microsoft will center its strategy around Cortana, its intelligent personal assistant, instead of Windows.

The overseas firms — Infosys, Tata Consultancy Services and Wipro, in particular — are also focusing on artificial intelligence tools to take over tasks. Infosys, in a recent annual report, said it was able to move nearly 4,000 full-time employees from projects to other tasks as a result of the automation of underlying services.

“Is offshore dead? No, but it’s no longer going to be used for competitive advantage,” said Karamouzis.

Offshore outsourcing may be one of the more controversial issues in the political landscape, but the industry has grown despite it.

Among the large offshore providers, Everest Group said that HCL, for instance, had 450 clients in 2014 providing $1 million plus in revenue; last year, it had 495. Infosys had 950 active clients in March 2015. This past March, that number had grown to 1,092, with repeat business accounting for 97%, said Salil Dani a vice president at Everest. Other firms showed gains as well.

IT services firms are shifting to automation, cloud, the Internet of Things and to “next generation services contracts that have pushed the traditional outsourcing services to the backseat,” said Dani.

More broadly, the arrival of intelligent automation is spreading through all industries, not just IT services.

“Intelligent Automation is one of the most disruptive trends the industry has seen,” said Tom Reuner, an analyst at HFS Research. The approaches are “about decoupling routine service delivery from labor arbitrage. However, the direction of travel is toward human augmentation, and not substitution.”

In some ways, it is hard to imagine the labor advantage disappearing anytime soon.

The cost advantage of using offshore workers in the U.S. remain substantial. Outsourcers must pay visa workers the prevailing wage, but about half of these workers are paid Level 1, or entry level, salaries in a four-tier system, according to a report by the U.S. Government Accountability Office. (The prevailing wage Level 3 represents the median.)

Presumptive Republican presidential nominee Donald Trump has offered up an immigration reform plan to raise H-1B wages that strongly implies using Level 3 as the new wage floor.

Ron Hira, a public policy professor at Howard University, looked at the wages paid at one firm, Southern California Edison, which cut some 500 jobs last year after signing outsourcing deals, and compared it to data paid to H-1B workers. What he found was that the offshore contractors were saving as much as 41% on labor cost by using visa workers. His research, which was published by the Economic Policy Institute.

The idea of raising the wages of H-1B workers is championed by reformers in Congress. But what analysts are saying is that wage advantages won’t be as important as automation capabilities in the years ahead.

Article source: http://www.computerworld.com/article/3083264/it-careers/automation-not-cheap-labor-is-reshaping-outsourcing.html