Process robotics: The economics of digital labor shakes up outsourcing- Valutrics
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 of business model transformation at Deloitte Consulting LLP.
Marc Mancher, principal of 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.
“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.
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.
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.
“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 [that] 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, CIO at 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 cyberattacks 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.