Reports that IBM is reducing its offshore workforce are the result of cloud computing, automation and artificial intelligence (AI) shaking up the IT outsourcing sector, and 2015 could see acceleration in the sector's evolution.
IBM used to be described as the bellwether of the IT sector, yet, in today’s world of internet giants such as Google and Facebook, this no longer appears to be the case.
But although the company might not be as vocal as the fast-growing giants, which have their fingers in all sorts of pies, IBM is quietly getting on with its transformation. Recent huge IT services deals are evidence that IBM remains a constant fixture on the contract lists of large enterprises. In December 2014, IBM announced deals worth $3.6bn.
All suppliers must transform, as IBM has, if they are to prosper.
Traditional outsourcing models, which have seen third-party suppliers take over the running of IT or business processes for organisations, are changing. Customers want IT services contracts to add value and suppliers want to increase their profit margins.
This might appear an uncomfortable marriage, but both can achieve their goals by harnessing the latest technologies.
By using technology such as automation software, AI and cloud platforms, businesses can become more efficient without spending heavily with suppliers for human resources. At the same time, suppliers are increasing sales and margins, because they are not just adding costs in line with business volumes and are instead moving to non-linear business models.
Time for IT outsourcing model to change
Perhaps the most overt transformation will be seen in India, where suppliers that have grown through the provision of low-cost IT skills and business process outsourcing (BPO) staff have recognised the need to change.
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Recent reports that IBM is cutting back its India-based workforce and that India's biggest IT services firm Tata Consultancy Services (TCS) is cutting its own workforce suggest acceleration in this transformation.
It has been happening for some time, particularly in India where the revenues of the big offshore service providers have being growing more slowly.
According to advisory group ISG, between 2005 and 2008 India-heritage providers experienced average annual revenue growth of 32%. That growth rate has since halved to 16%.
In reaction to this, India-based suppliers are increasingly creating intellectual property (IP) and selling platform-based software for specific industries. These services mean that with each new customer the cost of delivery increases at a lower rate, giving non-linear growth.
For example, Infosys and TCS have their own banking platforms.
In 2013, Cognizant CEO Francisco D'Souza said: "We continue to make solid progress developing emerging offerings in new markets, such as social, mobile, analytics and cloud technologies, and new non-linear solutions and services.”
Automation transforming business processes
BPO services are a good example. Michael Corcoran, senior managing director, global growth and strategy lead at Accenture Operations, expects 2015 to see business process outsourcing engagements to focus more on embracing technologies such as social media, cloud, analytics, mobility and automation to transform business processes.
Half of companies expect to begin wide-scale transformation of their business processes within the next two years, through greater use of technology
Michael Corcoran, Accenture Operations
"[Our research] shows that two-thirds of BPO engagements are still in an analogue state, focused on lift and shift activity to low-cost locations. Yet 50% of companies say they expect to begin wide-scale transformation of their business processes within the next two years, through greater use of technology," he said.
A good example of how automation software can transform BPO was a project at mobile operator O2, which deployed automation software from Blue Prism in 2012. At the time the company had to set up a business process to support the replacement of mobile phone SIM cards when the smaller SIMs were introduced. It used automation software, saving millions of pounds in back-office operations and cutting its reliance on offshore recruitment to cope with spikes in workload.
It is not just the end user businesses that have to harness new technology. In 2010, Scandinavian IT services firm Cygate expanded its business without needing to recruit more staff by using automation software from IPSoft. It was experiencing 20% growth in sales. This meant the company needed to add resources or risk service levels deteriorating. But just adding manpower would have reduced its margins.
After identifying automation as a strategy to address this, Cygate began working with IT automation software supplier IPSoft. The deal helped Cygate to automate many processes for customers that traditionally would have been carried out by employees.
Sales have since increased by 56% and pre-tax profit has grown by 118%. The technology has also enabled engineers to focus on higher-level services, which add more value.
Cost savings through artificial intelligence
Automation through artificial intelligence is also likely to accelerate this year.
The launch of IPSoft’s artificial intelligence (AI) platform, fronted by an avatar known as Amelia, is a significant development. The platform can be used for services such as technology helpdesks, contact centres, procurement processing and to advise field engineers, but can complete many more business processes.
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IPSoft's AI platform has an understanding of the semantics of language and can learn to solve business process queries like a human. It initially learns using the same manuals as humans – it can read 300 pages in 30 seconds – and then learns through experience and by observing the interactions between human agents and customers.
If it can’t answer a question, it passes the query on to a human, but remains in the conversation to learn how to solve similar issues in future.
Accenture's Corcoran also expects that the next year will bring an increase in the role of robots and smart machines in outsourcing.
“These technologies will help provide consistent responses to business problems while enabling change to happen at greater scale across the operations portfolio,” he said.
“Today, this technology is mostly being used to consistently apply policies at scale, but in the future, as the technology matures, we expect to see robots being used for pattern matching to identify systemic issues. At Accenture, we’re using this technology to free up our people for more complex and rewarding consultative tasks.”
Dean Gulzar, head of insurance at BPO supplier Genpact Europe, said the increased use of AI and robotics will lower the full-time equivalent costs in BPO outsourcing.
“We are using less labour in our outsourcing contracts by using things like robotics to reduce the manual labour element,” he said.
This is enabling the company to offer more services to customers, which adds value rather than just offering economies of scale, according to Gulzar. The use of big data to help businesses better understand customers is one example of this.
“We now have the capability and tools to understand the huge amounts of publicly available data about consumer behaviour,” he said.