Tag: robotics

KABOOM! Is an Implosion of the Services Market Coming? | Sherpas in Blue Shirts

There is rising concern among the Indian service providers that their arbitrage model is about to go through a significant and abrupt change – and not to their benefit. As I look at the various factors driving their concern, I see a set of challenges that will fundamentally reshape the industry and create new winners and losers. What remains to be seen is how quickly it will happen and exactly how it will affect the providers. Here is my analysis of the situation.

What is driving providers’ concern – even fears for their business?

Challenge to FTE model. Clients want automation, and the providers fear that automation will require far fewer people to deliver services. They now want to buy software-as-a-service rather than people. It’s basically a substitution of technology for labor, which manifests itself as robotics, SaaS and cloud. Growth of the Indian ISP businesses is slowing as the customer demand now is to have a different conversation around capabilities instead of just moving the work to India for labor arbitrage.

Challenge to factory model. We’re seeing increasing commoditization of services. The Indian providers recognize that they built factories that, at the core, break work into different constituent pieces and drive that work to be done with the most junior people possible. But that actually caused commoditization. The client mindset is: “If you can segment the work like that, why not go ahead and automate it?”

Clients today want domain industry knowledge, rare skills, more capabilities on site at the client location and more intimacy from their service providers – and all four of these demands are hard to deliver in the factory model.

Challenge to profit margins. The challenge to the FTE and factory models drive providers’ fear that they won’t be able to maintain profit margins like those in the past built on labor arbitrage.

We’ve known that arbitrage wouldn’t last forever and that providers couldn’t keep extending it indefinitely. It had natural limitations. Now we see the market moving in a new direction. At Everest Group, we believe this will fundamentally reshape the industry.

Kaboom

Important issues in heading in the new direction

I think there are important questions around the reshaping of the Indian ISPs’ businesses.

In what way will the change manifest itself? Will the change in business models result in growth, cannibalism, or both? And to what degree? Will the change, for the most part, only affect where the new growth opportunities are? Or will it cause providers to cannibalize their existing client work?

If it just affects where new work is, it’s much easier for challengers to capture those opportunities. But it’s more difficult for incumbents to transition. For example, in automation they would need to cannibalize the existing work by reducing the number of FTEs, which also will reduce revenue. It will be difficult for incumbents to react to their existing clients’ demands in the change in direction.

There are other questions:

  • How soon will the changes come?
  • How will the Indian providers react?

These are unanswered questions today, but they’re very important. How quickly it happens will affect how the incumbents react. And how they react will determine whether they will succeed or whether challengers will reap the benefits of the new direction the market takes.

What do you think? Are we going to watch the implosion of the services model where it clashes in on itself and technology cannibalizes the industry, shrinks the revenue, changes the FTE model to a transaction model and shifts the terms and conditions to favor new players over old players?

The Downside for Enterprises in Automating | Sherpas in Blue Shirts

Service delivery automation is obviously powerful. But there’s a downside and potential risk for enterprises in the shift to automation.

Benefits include reducing the number of FTEs in a process and therefore reducing the cost. And automation can be applied without changing the system of records. Plus the implementation cost is significantly less than traditional reengineering of ERPs, and it can be driven from a business unit or from the process owner instead of the IT department.

The challenge comes in the automation layers on top of and between an organization’s system of records. They are highly sensitive to changes in underlying systems, and most organizations will struggle to maintain the automation layers.

As an example, if a system of record or a government website, or a website from which the automation tool pulls data changes in any way, the tool or robot could make a mistake or could stop working. So these tools need to be carefully monitored and constantly adjusted or tuned to the changes in underlying systems. It’s not realistic to believe the underlying system of records will be static; like all systems, they change. And even small changes will require retuning the robots.

Lack of monitoring and adjusting the automation layers opens up risks. For example, it could turn type-1 errors (such as making a mistake in a manual process on one invoice, which is a problem but recoverable; you have a $10,000 or $20,000 or $100,000 problem) into type-2 errors (making a mistake on all your invoices, resulting in millions of dollars of problems).

The automation layers will be fragile and can even break. So it’s clear that service delivery automation requires constant attention and maintenance to deliver on its promise. Many IT organizations have the capability to implement the automation files; it’s the monitoring and adjustments that they will struggle with. The significant risks are a strong argument for using third-party providers.

The 40-40 Rule of Disruption in Global Services | Sherpas in Blue Shirts

Everest Group research has analyzed the impact that automation will have on the services industry. Our opinion, which we refer to as the 40-40 Rule, is that 40 percent of all outsourcing contracts are ready to be impacted by automation and the average impact in the amount of labor to do the work will be a drop of 40 percent. We believe the 40-40 Rule affects BPO, applications outsourcing, and infrastructure.

If we’re right, this is a very substantial disruption to the services industry.

Impact in the next 18 months

What makes a contract “ready” for automation (e.g., scripts and robotics)? The contract must be close to termination and/or the customer is open to or interested in driving an automation agenda. In saying that 40 percent of all outsourcing contracts are ready to be impacted by automation Everest Group believes that 40 percent of all contracts have the potential to be affected over the next 18 months. But it won’t stop there; this party will keep going.

40-40 Rule blog tweet

Headcount reduction

The average impact on the reduction of headcount for after automating the work per contract will be about 40 percent reduction of FTEs to perform the same functions or oversee the same amount of transaction processing. The headcount reduction will range from 20 percent at the low end to 80 percent at the high end. Individual experiences will vary; but as an impact on the entire industry, we think that it could be as high as 40 percent.

The good news hidden in the bad

This is a huge impact, but it’s not all bad news for service providers. In the early situations where we’re seeing service providers take the initiative, they are able to capture — particularly in their existing accounts — higher margins by participating in some of the benefit of the reduced headcount. They can participate in two ways:

  • Charge a premium for projects
  • Often an automated structure allows moving to a more consumption-based model and providers can capture some of the benefit in premium pricing in that model

This is exhilarating in that it has the opportunity for potentially higher margins to offset the ongoing drumbeat of the demand for lower cost.

Margin uplift is all very well. But if the provider has a labor-based business and takes a 40 percent hit to its revenue, that’s a very difficult gap to overcome. And it’s even more difficult in today’s world where growth is slowing across the industry and it’s becoming harder to find new work that hasn’t been outsourced.

Everest Group sees the services industry into a brownfield in which service providers must take work from other providers rather than take work from the customer’s in-house functions.

Investment implications

Any kind of automation strategy enabling a provider to capture part of the benefits of the automation requires that the provider make up-front investments. Of course if the client is pays for the automation, it is not reasonable to expect that the provider participate in the uplift in margins. But if the provider funds or partially funds the investment, it’s more reasonable to assume that the provider will capture some of those benefits for itself, at least in the short run. So we believe there will be a significant uptick in investment intensity.

However, such investment carry a negative implication: it will cause an uptake in risk held by the provider because it will have a stranded asset that needs to be paid for even if customers’ needs or desires change over time. If the customer moves away from that automated platform, the provider may find itself straddled with an unamortized investment.

Bottom line

If we are right about the 40-40 Rule and that automation will be this powerful, we’re looking at a very substantial impact on the service industry. And I think the acceleration will be quite fast. We’ve found in the past that any disruption that changes the cost equation by over 20 percent for a specific client achieves rapid adoption. Therefore, we think customers will very aggressively seek the 40 percent reduction of labor, in which case the industry is in for a significant change and challenge.

Robotic Process Automation and Anti-incumbency in Business Process Services (BPS) – Opportunity or Threat? | Sherpas in Blue Shirts

While robotic process automation (RPA) is creating opportunities for the newer breed of service providers, their more established competitors are feeling the pressure of change. RPA would cannibalize the established service providers’ labor arbitrage business which they have invested in for decades. At an initial estimate, we see a phenomenon of 40-40 emerging which means 40% of existing BPS work is likely to get impacted by RPA with a 40% lower cost impact. Free of this legacy, newer service providers can ride the wave of automation to gain market share quickly. Cannibalization is not the only threat to established vendors. The RPA disruption has coincided and in part fuelled the current trend for anti-incumbency. In 2013, for example, Everest Group research shows that over half of Finance and Accounting Outsourcing (FAO) contracts were taken away from the incumbent provider when they came up for renewal. In this market the newer breed of service providers could be seen as agile and unencumbered by legacy investments in labor arbitrage. However, established providers are also upping their game and this means it will likely be a buyers’ market in the mature BPS segments.
40-40 Phenomenon: 40% of existing #BPS work likely to get impacted by #RPA wtih 40% lower cost impact

The Newer Breed of Service Providers

The newer breed of service providers are those which have either focused strategically on RPA as a growth engine (and have limited legacy non-voice BPS business), or which have been newly established as pure-play RPA-based service providers. Let’s look at the one illustrative provider in each of these two categories respectively – Sutherland Global Services and Genfour.

Sutherland Global Services

Sutherland Global Services (SGS), a leading contact center player, is arguably one of the first service providers to strategically focus on RPA as well as actively market it for the non-voice BPS space. It has made automation a key part of its proposition and is leveraging it to differentiate itself from other service providers that either rely heavily on offshore resources or global majors that can implement automation through major transformation and system integration projects. This strategic focus has led it to develop partnerships with RPA technology providers such as Blue Prism. It has also seen the company develop its own RPA software layer which links to and supports third party automation technologies. Another key capability that SGS has developed is a 24×7 control tower, which maintains existing automations to ensure continuous operations.

SGS refers to a recent contract win as a sign that its focus on RPA is paying off. As part of the RPA-led BPO deal with an European travel company, it is taking over two operational centers in Scandinavia and Estonia.  It already has circa 400 people in Sophia delivering transactional and front-office services. The largely U.S. based service provider will leverage the additional delivery centers to grow in Europe. That growth, according to SGS, is going strongly with annual targets reached and exceeded part way through its financial year. Other RPA-led deals are in the pipeline.

We believe, as a relatively newer service provider in the non-voice BPS space, SGS is transitioning to a mostly automation-enabled provider in the back- and middle- office. We estimate that automation currently accounts for 10%-15% of its FAO & middle-office services but is rising fast. 

Genfour

Genfour was founded in 2012 to offer a different way of providing back-office services. Today it offers Robotics as a Service, on a cloud-based infrastructure on-demand. The proposition to lower costs is strong given the benefits of automation combined with a cloud infrastructure. Its challenge is to win over skeptics that do not yet believe that robots can do as good a job as people in delivering business processes.

Genfour also offers consultancy, development and on-going run operations. It has gained six clients since it was established and these include organizations such as NHS Scotland, IFDS, Coral and RAC.

Genfour is building an annuity-based business model where, not only does it generate revenue from the reselling of robotic software but also from managing every robot that it operates on behalf of its clients. It is already achieving a high operating margin for a business process service provider at 22% in H1 2014. This is set to stay at 20% to 21% full year.

Both SGS and Genfour see the use of automation as a good fit to the increasing buy-side appetite for transaction or outcome-based pricing instead of the input/FTE-based model.  Genfour started out with its “as a service” model while SGS is in a transition state. It is offering banded pricing using virtual FTEs and some blended pricing where people and robots are mixed.

Anti-incumbency

Anti-incumbency provides opportunities for the newer breed of service providers which could be seen by potential clients as agile an unencumbered by legacy investments. However, these service providers will have to have the ability to scale services and offer slick switching processes if they target contract renewals.  Competition is intense in the market with established service providers making investments to optimize and streamline the switching process. For example, multiple service providers have developed specialized transition management solutions to streamline switching and subsequent transition.

Established Service Providers

There has been a great deal of buzz about RPA in the market recently. This is making established service providers increasingly highlight their own automation capabilities and make new strategic alliances with third party automation software vendors. Examples include EXL, Infosys and Steria which have been largely using their own automation tools. In addition, some such as Steria and Genpact, have also set up partnerships with third party software vendors (e.g. Blue Prism & Automic). These and others will be looking to narrow the gap in mindshare between themselves and the new generation of service providers which have gained market share through strong messaging and strategic use of RPA.

Buyers are increasingly becoming focused on higher-end value proposition. They are willing to switch to a new provider, in case the incumbent is unable to deliver value beyond just labor arbitrage and basic process efficiency. Established service providers that are building on their RPA capabilities will be looking to make up for cannibalization of revenue by opening up new higher value opportunities such as analytics services. RPA can help them reduce internal costs too. Apart from helping the bottom line, given anti-incumbency, this would enable them to more easily absorb the cost involved in clients switching.

Everest Group will be publishing a report on Service Delivery Automation (SDA) shortly. It will be discussing the findings of the report at its half-day Robotic Process Automation event for buy-side clients in Dallas on October 22nd. Review the agenda and request an invitation

Watch out for forthcoming research reports from Everest Group on anti-incumbency, analytics, and technology / automation in the BPS space for a deeper-dive into these dynamics.

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