Seismic Shifts in Sourcing

For decades, IT service providers have promised productivity gains by applying specialized tools, processes and people oriented specifically to an industry or service line. Their success has come from an understanding of the whole, a logical decomposition of the whole into its various parts, and then a systematic approach to replacing – or eliminating – those parts with something cheaper or faster or both.

While the improvements they’ve offered have revolved around tools, processes and people, the fact is that most of the productivity gains providers have been able to achieve over the past 15-20 years were realized through labor arbitrage – the shift of high-cost work to lower-cost offshore centers. This shift has been well documented and has been the focus of much political debate.

But, no matter the political climate, for many enterprises, labor arbitrage has already reached the point of diminishing returns. Some companies are repatriating specific functions back onshore in a quest to better balance business knowledge and proximity with routine service delivery capabilities. Service providers – and savvy sourcing buyers – have started to understand that IT autonomics, which eliminates human labor involved in routine IT monitoring, and robotic process automation (RPA), which eliminates human labor involved in rules-based processes, are the new enablers for increasing productivity and improving the value and quality of services. In fact, the ISG Automation Index™ finds that nearly three-quarters of companies will use RPA to automate support functions by 2019. The use of automation frees employees to handle a greater volume of work and focus on higher-value activities.

Today, much of the back office can be automated. More than half of the work associated with processes such as order to cash, procure to pay and record to report are automatable. This means that these processes can run 24x7, at a speed much faster than using human labor, and with nearly 100 percent accuracy.

As the shift accelerates from labor arbitrage to labor reduction to labor elimination, enterprises must think differently about how they source their services. Here are the Top 5 initial steps:

1. Rethink sourcing models and contracts. Companies engaged in contracts with a timeline of less than 24 months should investigate their service providers’ intent to leverage automation in their service agreements. The automation of routine tasks will allow service providers to commit to higher service levels, faster processing and greater accuracy. Expect lower costs than what would have been previously available through labor arbitrage alone. When negotiating for automation, expect shorter transition times and a pricing model that is unit-based instead of FTE-based. Be sure to negotiate with the provider to retain IP rights to automation scripts.
2. Develop the business case. Reducing or eliminating your dependence on human labor will drive significant cost savings across the planned time horizon. Defining and knowing the costs will reveal how and where the savings will be, and inform the team regarding how to prioritize and plan for them. This detail will also be important to the steps that follow – negotiating exit(s) from an existing agreement(s), planning for communications and operational alignment and managing the transition. Making the savings and benefits to the business known encourages all stakeholders to drive toward that outcome.
3. Plan for organizational change. There is no question automation will create change. Prepare to invest in activities to help you manage it. Organizations that proactively address the reality that employees may have anxiety about their positions being eliminated by software robots will have lower attrition rates and higher success in making the most of an automation implementation. Automation impacts not just IT organizations but also back-office business functions such as order to cash, procure to pay and claims processing. Make sure business units and IT cooperate in automation initiatives so you can adequately communicate coming changes, prepare employees and secure buy-in from leadership.
4. Reformulate the skills equation. Organizations that adopt automation will rebalance to higher-skilled resources as fewer people will be required to perform routine tasks. Resources with process knowledge will be at a premium. Rethink staffing pyramids and consider who will manage the bots. Business and IT will need to work closely to install, script and maintain automation tools. The fusion of business and IT will be best managed in a DevOps environment that encourages integration between all involved parties.
5. Up your compliance game. Automating routine tasks and end-to-end processes will mitigate risks and improve compliance. But the same kinds of hazards that exist when we fail to adequately configure and test manual processes can exist when we fail to adequately define and integrate security protocols in automated processes. Document the new compliance plan as part of the implementation and auditing of each step in the process and make it an output of the automation scripts. A bot will not vary from its documented script. Auditing of the script modifications should be managed through normal ITSM change management protocol.

Automation is altering the sourcing landscape in ways that many of us could not have predicted just a few short years ago. As the definition of productivity shifts from offshore labor arbitrage to labor reduction, enterprises also must shift the way they think about sourcing, the way they deliver services and the way they contract with outside providers.

They must define their business objectives and fully develop the cost to achieve them – including the transition, contract termination, tool implementation and development of new services contracts. They must also calculate anticipated savings and new run-rate expenses. The accuracy of such a business case is tightly linked to the re-engineering of business and IT processes and the corresponding impact to the organization.

ISG helps companies navigate the complex sourcing landscape to take full advantage of automation technology. Contact me to discuss how we can help you.

About the author

David Mitchell is a managing consultant with deep experience and expertise throughout the ITO sourcing process.  He offers more than 25 years of IT leadership experience helping dozens of clients, within a number of industries, achieve their sourcing objectives. He has deep experience in the sourcing process, from supplier rationalization, RFP development, provider evaluation, provider selection, contract development, contract negotiations and transformation.