The end of offshore outsourcing?

Explore the results of the annual joint global market study, learning about hot topics, including exploring the impact of the rise of digital labor on the offshore information technology and business process outsourcing industries (ITO/BPO).

(Hint – No! But it will look much different five years forward than five years back.)

KPMG LLP (KPMG) and HfS Research released the results of their annual joint global market study on the state of shared services, outsourcing, global business services, and operations. Not surprising, the hot topic this year was process and cognitive automation being manifested in the form of digital labor. The growth of the deployment of digital labor will have many impacts for end-user organizations, third-party service providers, employees and employers, and more grandly society as a whole as potentially huge numbers of white-collar work is partially or fully automated.

One dimension of this that the study explored was the impact of the rise of digital labor on the offshore information technology and business process outsourcing industries (ITO/BPO). Organizations undertake services outsourcing for many reasons. Often touted are access to third-party skills and talent, enabling retained staff to focus more on value-added activities and less on transactional work, and creating a more agile and nimble organization. While all of these are real potential benefits, often they are a bit of smoke for the primary driver of saving money. 

Literally every research study ever run on the drivers for outsourcing find that cutting costs in one way or another is the top driver. More mature organizations view cost savings as “table stakes” and also seek much more strategic benefits, but driving ongoing costs savings is always part of the equation and business case. So with the rise of the use of digital labor, we hear similar things in terms of benefits sought: improved process effectiveness, less errors, faster throughput, and enabling workers to focus on more value-added activities. The bottom line, however, is that most organizations primarily view digital labor as a means to reduce headcount and reduce costs. So what does this mean for traditional offshore outsourcing?

If traditional outsourcing was really primarily focused on cost cutting and digital labor is a means to cut more costs faster than via labor arbitrage centric outsourcing, then why should organizations continue with outsourcing? Additionally, digital labor does not have the stigma of “shipping jobs offshore” and its deployment will not be constrained by things such as restrictions on H-1B visas under the new administration in the United States.

The reality is that the outsourcing market will continue to grow, albeit slower than in the past, but that it will look different in the future. Regardless of digital labor, there are many tasks organizations do not want to do themselves, either because it is cheaper to have someone else perform them or because they are simply not viewed as strategic. This, in the context of process automation, could include building and managing bots (harder than many organizations think). Many organizations will work with third-party service providers to deploy and manage digital labor efforts. This could involve everything from building and managing bots to figuring out what to do with and where to start with cognitive automation. Also, process automation often only eliminates a portion of a job, mainly the transactional activities, meaning humans, either internal to the organization or at a service provider, must still perform the balance of the work of the role.

What will change is the importance and relevance of labor arbitrage in the context of offshore outsourcing. Days are numbered for service providers, or shared services operations, whose main value-add is offshore campuses full of cheaper labor performing transactional activities that digital labor can automate.

The KPMG/HfS Research study found (see Figure 1) that many enterprises no longer care about offshore and labor arbitrage as a strategy. It has become part of the fabric of managing a global operating model in which operations’ leaders tap into whatever resources they need to achieve their desired outcomes. This is not to say that traditional offshore destinations such as India and the Philippines will go bust overnight but it does portend a leveling of the playing field where process automation and digital labor become the preferred means both to reduce costs as well as improve performance. Service providers and user organizations in these and other similar locations that can co-opt digital labor will survive and potentially thrive; those that cannot will die.

Figure 1 – The Slowing of Outsourcing Growth (Projected use of outsourcing in the next two years by process)