Cumulative Benefits of Service Delivery Automation | Market Insights™
October 28, 2014
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Service Delivery Automation (SDA) and offshoring cost benefits accumulate over time to as much as 80%
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Service Delivery Automation (SDA) and offshoring cost benefits accumulate over time to as much as 80%
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Business Process Service Delivery Automation (BPSDA) has significant benefits beyond cost savings, including improved service delivery and management
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From getting started to running automations, a multi-step map through the Service Delivery Automation (SDA) deployment process
What is Service Delivery Automation (SDA), why do people use it, and where is it headed?
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.
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.
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.
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:
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.
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.
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.
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.
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 (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 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 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.
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.
As part of our efforts to profile the rapidly evolving service delivery automation (SDA) landscape, I am speaking with the leaders of many of the technology players who are helping stimulate innovation in this space. This second of a series of blogs on SDA technologies, is based on observations and learnings from a recent briefing with Hans Christian (Chris) Boos, CEO of Arago.
The company was founded in 1995 but its intelligent automation software for enterprise IT, in its current form, became generally available only 2-3 years ago. Arago has since experienced rapid growth, more than trebling revenue since 2011.
Arago’s flagship product is AutoPilot. This uses an inference engine with, what essentially sounds like, a neural network to speed up processing, although the term was not used by Boos during the briefing. Instead, he refers to human brain like activity to learn and apply learning (knowledge items) to new or changing environments to infer how to process requirements automatically. The machine gets more useful the more knowledge it gains but it also has to manage the knowledge, for example, deal with rules that contradict each other. It does this in a mathematical way and uses analytics. According to Boos, it can apply this approach to different areas such as database management, incident management and also to more architectural processes and business logic.
Arago figures show that AutoPilot processed nearly 2 million tickets (as produced by infrastructure management tools such as BMC) for clients in 2013. Circa 87% of these were fully automated. Processes automated at the middleware layer, AutoPilot’s sweet spot, had the highest level of automation at 98%.
Clients are typically large organizations or IT service providers. These include two major global IT service providers.
The software is available as a service, as well as on premise but interestingly the majority of clients want it on premise.
Two licensing models are available from Arago:
AutoPilot comes with built connectivity to infrastructure management tools such as BMC and IBM Tivoli and with APIs for integration with other packages.
Arago’s proposition comes with an estimated cost saving of between 30% and 50%.
If AutoPilot can successfully tap into its acquired knowledge to handle non-standard environments or changing conditions, then it could minimize the need for predefined scripts, to automate parts of IT that are more challenging to automate. I believe this can complement other automation tools that are highly scripted and which are used in other parts of IT infrastructure. The potential benefits in large and highly heterogeneous IT environments, could soon accumulate.
This is advanced technology and could also increase complexity, potentially leading to tickets itself, at least initially while the knowledge-base is being developed.
In terms of Arago’s target market, the company is selling to a converted crowd – IT service providers and IT departments of large organizations that have automated parts of their IT infrastructure already. Its challenge is its size which is not big enough for the demand that it is seeing. Arago is enhancing its partnership network. It is also expanding geographically. At the moment Arago operates out of Germany with all its 92 staff currently based there. It is looking to open an office in the United States soon but it has no physical presence in other countries such as India.
Other measures include creating a community where clients can share automations/knowledge items for free or buy or sell them.
These plans will start to pay off but for now demand is likely to remain choked by lack of scale, I believe, particularly, in initial consultancy and client training services.
AutoPilot is still a relatively new product and I expect some functionality enhancements to be on the cards. More work on the UI is already underway.
Growth opportunities include selling to smaller companies. Arago has released a community edition that can give smaller organizations a fully functioning AutoPilot that is only limited in the size of the IT that it can automate. This is a clever bit of marketing that prepares the ground for attracting large companies of the future.
Arago’s core technology is application agnostic. The company chose to apply it to IT first but the core product can also learn to handle business logic, potentially leaving Arago with opportunities to expand into business process automation in the future.
As a part of our efforts to profile the rapidly evolving service delivery automation landscape, I am speaking with the leaders of many of the technology players who are helping stimulate innovation in this space. It is an exciting time for automation and the following observations and learnings come from one of my recent conversations, a briefing with Andrew Anderson, founder and CEO of Celaton. Stay tuned to learn more as I speak with other leading players.
UK-based Celaton was born out of the management buyout of Redrock software from Netstore plc and the acquisition of DG Tech in 2004. Today it has revenue of circa £2.5m and the same amount of investment by Business Growth Fund to enhance its sales and marketing capabilities.
Celaton’s artificial intelligence software, inSTREAM is designed to handle labor intensive administrative tasks. It takes unstructured content, such as correspondence, complaints, letters, faxes, e-mails, and attachments, learns to understand the content and context and then processes the information. inSTREAM is a self-learning system. When it is first deployed it will need human guidance on what to do. It learns from experience. The more it does the faster it becomes as it learns how to handle different requirements according to the rules and knowledge that it accumulates.
inSTREAM reads unstructured content and applies rules to it to identify and understand key information such as context, sentiment, importance and urgency. It then structures the content and feeds it into the appropriate line of business application (LOB) for processing. The objective is to get guaranteed perfect structured data that can be fed into a line of business system such as ERP, CRM, and workflow, so that the data can continue along its corporate journey. In many instances, the data that goes into the LOB system has to be connected to its source e.g. route to source in the insurance industry where there is the need to go back to the original document for audit purposes. InSTREAM retains the data that it has processed including the original source document. It delivers the data to the LOB system and the document to a document management system.
InSTREAM is a non-invasive system. Integration is done via web services or the data can be delivered to a holding area for the target system to pick up.
inSTREAM runs on Microsoft platforms utilizing SQL Server, Internet Information Server and .NET technologies. It can process all types of incoming documents, and it is platform agnostic. It is provided on a hosted basis. Subscription rates are based on volumes, complexity of the processes in question, and the levels of benefits that it is expected to generate. Pricing starts from £1500 per month and can go up to £60k or more per month.
Celaton’s typical customers are retail, travel and insurance companies. Benefits are realized through increased productivity and improved customer management. One client, a UK loss adjuster, has reportedly reduced its head count by 85% while managing a fivefold increase peak in demand in insurance claims.
Celaton has a reselling partnership with Agilisys, the UK technology and outsourcing services company, was the first to sign up. Agilisys Automate, based on inSTREAM, is targeted at UK local government sector and has its first customer, a London borough council, signed up already. There are more council deals in the pipeline.
Celaton is carving a niche for itself in textual and document processing automation. It is in the right place at the right time to grow with rising demand in the market.
My take on the company’s proposition, benefits and challenges:
Competition: There are not many competitors in this field with AI-based standalone tools, but some capabilities are on offer as part of other offerings. Examples include Oracle RightNow Email Management Cloud Service and its Email Management which is integrated with a self-learning knowledge base and across customer interaction channels. Optimized for smartphones and mobile web devices, this receives enquiries via email and web forms and automates responses. New entrants to the market are highly likely with at least one new product on its way – a new cognitive engine from a well-known IT services automation company.
Marketing: The cost advantage of automation can clearly be significant but there are challenges too. Celaton has to overcome buyer uncertainty about machines doing the job of an employee in a service-line, such as in-bound document management, which has to deal with highly unstructured content. A Good marketing of a few success stories could work wonders. Anderson is doing a good job of telling the Celaton story and the company also has a substantial investment by BGF to orchestrate a robust marketing campaign.
Go-to-market and Scaling Up: I believe one way for Celaton to find more willing clients is to target companies that have outsourced their in-bound document handling and who are looking beyond labor arbitrage and offshoring to build on efficiencies. Celaton also has to look for ways that it can scale up to respond to demand. At the moment it is the only company that can fully configure, deploy and host inSTREAM. Agilisys is coming up to speed but more deployment partners are needed to meet the two objectives of reaching the right client segment and gaining scale.
Outsourcing service providers are also looking for new ways to increase their cost competitiveness, but they need to think about alternative pricing to the FTE-based model.
Service providers will be investigating partnership opportunities with Celaton and other automation technology providers, such as Blue Prism, and asking themselves the classic question about timing new investment. Do they invest in business process automation today or wait for the opportunities to come before spending on new capabilities? Agilisys has gone halfway – with Agilisys Automate, it is focusing on technology sales for now and gaining new skills. Other service providers, such as Sutherland Global Services and Capita have already invested in automation (e.g. Blue Prism). For the undecided, there are lessons from the journey of analytics into the business process services market. What started as added value is now being built into specific offerings by some leading vendors. A similar approach to automation could lead to a significant competitive edge through automation.
Check back for more of our views on technology players in service delivery automation.
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