Crisis of Outsourcing

For the last few decades “outsourcing” jobs from developed countries to developing, low-wage countries to increase profit based on cheap labor and operating costs have been the logical evolutionary step for large corporations. Statistics of the United States Department of Commerce show that in the past decade, since China joined the World Trade Organization in 2001, around 3 million jobs were outsourced overseas. These trends have been similar in Western Europe as well. Based on the available data of 11 European Union countries, only between 2009 and 2012 over 80.000 jobs were outsourced to China and India for enterprises with 100 or more employees.

Of course, these statistics include all kinds of jobs in various sectors – production and manufacturing playing a significant role – but it must be noted, that outsourcing business processes have been very popular trend too. Initially, in terms of the IT sector, a whole new industry (Business Process Outsourcing or BPO for short) was created based on labor arbitrage, scaling, sizing, offshoring, and cost-cutting.

However, using Bob Dylan’s words – “the times, they are changing”.

When looking at the most popular outsourcing destinations for North America, Western Europe and other developed countries, there’s no real surprise – China and India are leading the way (and are doing so since the early 2000s). However, the future for them are not so bright anymore. There are multiple political and economic reasons, but one stands out of all the rest, effecting the essentials of outsourcing. That is: the rising cost of labor in established outsourcing destinations. The cheap labor, that was the ignition for the growth of the Chinese economy, quadrupled since 2006. Consequently, labor unrest has also been growing. The same can be said about India. The Indian IT sector – first in the world for BPO – due to the increased IT offshoring, witnessed an annual 10 – 15% wage growth in the last decade. As for proofs for labor unrest, in September 2016, only two months ago, the India witnessed a nationwide strike by tens of millions of public sector workers. (Hailed by the union officials as “the world’s largest ever” industrial action.)

The effect of the rapidly growing labor cost in China and India can already be seen in recent researches. According to a 2015 research from global real estate adviser Cushman & Wakefield, with one of the highest growth rates in outsourcing, Vietnam, capitalizing on increasing Chinese labor cost, emerged among of the world’s top outsourcing location for the first time.

And while India remains the world’s largest BPO market (partly due to the large resources of English speakers), Philippines already leapfrogged India in terms of growth, strengthening its status as a new BPO market. In 2014 The Philippines BPO market in fact hit a record US$15 billion in revenue and are already absorbing 70% of India’s voice and call center operations. Large western corporations are now facing the challenge of choosing the right strategy to react to these labor cost changes. There are three main approaches to choose from:

• Follow the same logic as before. Keep on moving toward still-lower labor cost countries like Bangladesh, Laos, the Middle East or Africa. Or as a sub-alternative, rather than chasing low cost, aim for shorter supply chains and lower transportation costs and manufacture, for example North American goods, in Mexico or South America. Some companies already came up with a creative name for these efforts: “best sourcing”. This can be especially tempting for low-cost manufacturers, typically apparel producers, for whom labor is the largest portion of their operational costs.

  However, these efforts often lead to greater risks like political uncertainty, infrastructure issues, re-building the whole plant, etc. In addition, there are no guarantees, that the new destination wouldn’t go through the same changes, as China and India. And then what? Move again?

• Insourcing. To put it simply: reverse outsourcing, or re-shoring. A surprising study conducted by Boston Consulting Group in 2014 shows that more than 50% of manufacturing executives were at least considering shifting manufacturing back to the U.S., whose low-wage regions BCG projects to move within 10 to 15% of cost parity with China, while allowing for better service of the American market.

• A new type of automation. We are talking about a new technology, or more like a new approach, that promises to revolutionize traditional business process outsourcing, in a similar way, to how automation already revolutionized traditional production. This technology is Robotic Process Automation, or RPA for short.

Since the idea behind the first two approaches (further outsourcing and insourcing) are clear, let’s take a deeper look at RPA.

RPA – The next level of automation?

As often in technology, especially in IT, new buzzwords and the technology behind those buzzwords, tend to be an already existing technology, with a slight twist to it. So, what is Robotic process automation? The Institute for Robotic Process Automation defines RPA as, “the application of technology that allows employees in a company to configure computer software or a ‘robot’ to capture and interpret existing applications for processing a transaction, manipulating data, triggering responses and communicating with other digital systems.”

RPA is an emerging form of the long-existing clerical process automation technology, but one that introduces the concept of software robots, software applications that replicate human interaction, mostly repetitive human work more accurately and reliably and using the same user interface as their human “colleagues” do.

This is a significant change to the traditional process automation approach, where the machine-to-machine (API-based) communication happened on an architectural level beneath the actual user interface.These new software robots interpret the user interface of third party applications just like human users would. They are configured (“trained”) using demonstrative steps, rather than being programmed using code-based instructions. Ideally, RPA does not require programming skills. This is the most important concept of RPA. Instead of providing another coding solution for IT professional, vendors create software robots, that can be configured by non-technical business users (business operations employees) similarly to how they would train a new human colleague based on their process and subject matter expertise.

RPA market size

So how big RPA is right now? According to a study by Transparency Market Research published only this month, in 2013 the global IT robotic automation market was valued at US$ 183.1 million, while by 2015 only the US robotic automation market it was already valued at 209 million. The same study expects the global RPA market to expand at a CAGR of 47.1% over the period between 2016 and 2024. If their calculations are right, the market will rise to a valuation of US$ 16,884.0 million by 2024. The same numbers, from a research done by Grand View Research are a little more conservative, but they too expect the global RPA market to grow rapidly and reach USD 8.75 billion by 2024.

If we look at the present RPA market from a geographic perspective, we see it’s been predominantly adopted in regions previously the pioneers of outsourcing – North America and Europe. Both regions are likely to witness further significant grow in the coming years due to the rapid developments in computing technologies, but the Asia Pacific region is also anticipated to be a high potential market for IT robotic process automation during the forecast period. And there is good reason for these optimistic expectations. Adopting RPA (properly) offers a lot of benefits.

Benefits of RPA

Implementing and RPA solution can have a wide range of business benefits:

• Maximizing time and efficiency. Unlike any human, robots can work 24/7.

• Cost reduction. Replacing a full-time employee with an RPA software can bring about 25-50% cost saving. (Source: Robotic Process Automation by Infosys) and the investment recovery period can be as short as 6-9 months (Source: Seizing the Robotic Process Automation (RPA) Market Opportunity by Everest Group).

• Better use of existing workforce. Human workers can focus on customer-related issues that require a human touch, instead of the mundane repetitive work that consumes hours of their day.

• Faster turnaround time leading. Automating and speeding up processes leads not only to higher productivity but a quicker response time therefore a higher customer satisfaction.

• Elimination of human errors. Robots don’t make mistakes. (Well, assuming they were programmed properly.)

• Quicker and cheaper integration and deployment, faster go-live. With a no-coding approach, programmers don’t need to modify the back-end applications or build custom interfaces. Furthermore, since RPA doesn’t require re-engineering the existing processes, or changing platforms that are core to your operations it can be deployed more quickly than traditional automating solutions.

Looking at the benefits gained by implementing RPA, and the current market trends, can we say that RPA will replace traditional outsourcing in the IT sector? We will discuss this in our next blog post.