Not Your Parent’s Outsourcing: How Digital Transformation is Changing the BPO Game


Like many people who are part of the Outsourcing Institute’s community, I have spent my entire career focused on process improvement, automation and outsourcing. These are concepts which I have studied and applied for decades, and their use has been key to my professional success.  However, if you’re like me, you may have noticed that the world of Business Process Outsourcing (BPO) is changing in new, weird, and unexpected ways.  Many of the things that BPO practitioners like myself have come to believe as facts are starting to look more like inaccurate beliefs or approximations.

In the face of dramatic change, old beliefs die hard, and old believers die harder. If BPO is going to undergo transformation over the next decade, and I’d argue that this has already begun in earnest, then it is our beliefs in how things should be that will prevent our awareness of how things really are.  I thought I’d write a quick post about some of these core beliefs in the BPO world, and point out how these are being challenged by the changes all around us.

Historically, BPO was predicated on two value propositions: labor arbitrage and economies of scale and scope.  Neither of these propositions is rocket science.  If the labor pool in one country is cheaper than another, switch jobs from the expensive market to the cheaper one.  Second, if an outside firm can perform a needed service for you, and a dozen other companies, they can leverage economies of scale and scope to perform that service more cheaply.

 

Rise Up

These propositions are completely rational based upon two centuries of capitalist thinking, and their implementation created the roughly $76 billion outsourcing industry we see today.  If you’re a member of the Outsourcing Institute you’ve likely benefitted from this massive flow of capital and productivity from old organizations to newer ones, and from domestic organizations to other shores.  The outsourcing trend represents one of history’s great transfers of wealth and shifting of power between organizations and nation states.  If outsourcing is now considered to be somewhat controversial, this may be why.

In a labor arbitrage model, someone wins and someone loses.  The first jobs to move are those easiest to replicate with relatively unskilled or unspecialized workers, which is exactly what we’ve witnessed over the last quarter century.  The lower- and middle-class of developed countries were sacrificed to create a middle class elsewhere in the name of cost efficiency. There are many benefits to the global economy from outsourcing, but these don’t manifest particularly well for those workers whose jobs changed hands.

Hence, we are experiencing the rise of nationalism and populism in many mature markets such as Europe and the United States.  After 25 years, sufficient numbers of workers have been displaced that they represent a significant political force, creating no shortage of discord to the trends of the last several decades.  While the global economy has sustained increasing productivity and growth on average, the number of those who have suffered at the margin has grown to the point that they are no longer marginalized.

The greater challenge is now this: outsourcing is moving up the food chain.  The next round of outsourcing won’t be for relatively unskilled labor, it will be for skilled, ‘white collar’ jobs.  There is already strong evidence of this trend, particularly in Financial Services, Legal Services and Health Care.  For some time now, it was risky being a factory worker or laborer.  Now, traditionally-cozy jobs, such as doctor, lawyer or banker, are no longer safe.  This is fed both by the relentless march of arbitrage up the skill-and-knowledge food chain and by the inevitable effects of Digital Transformation.  Regardless of the catalyst, the rationalization and reordering of the white-collar workforce will be a dominant theme in global politics and economics for the coming decade.

 

Digital Transformation

I frequently write about Digital Transformation and I try to emphasize that this transformation is not consulting jargon.  Rather, it is an actual social revolution, identical to, but dramatically faster than, the Industrial Revolution of two centuries ago.  I define Digital Transformation as the reorientation of our society from capital-wealth-centric to information-wealth-centric. In the world we are entering, wealth and power will be based more on the control and growth of information, rather than of capital.  This is no different than the transition from land-based-wealth to capital-based-wealth society experienced in the late 1700’s.

This transition is real, it is relentless, and it is inevitable. The landed-gentry of the last two hundred years refused to believe they would ever lose power, refused to believe the radical concept of democracy would ever work, and refused to believe that control of capital would take over for control of land.  History proved them to be comprehensively wrong.  The same will be true of dyed-in-the-wool capitalists of today.  Those who refuse to believe that information is the new source of wealth in the world, that capitalism will continue unabated, and that digital populism could never replace democracy will find themselves to be irrelevant tomorrow as a duke, earl or knight finds themselves to be today.

What does all of this have to do with outsourcing?  Plenty.  Capitalists create and manage capital-based wealth using what I call the Analog Trinity:  Bureaucracy, Process and Rules. For two hundred years, we have used these mechanisms to distribute, apply and control capital-based wealth.  These are deeply ingrained in all that we do, and our institutions and organizations are hyper-focused on their optimal application.

This was not always so.  For five millennia before the Industrial Revolution, control of land was the dominant source of wealth and power in human society. This wealth was created and managed with a different set of tools, what I call the Dirt Trinity.  Nobility controlled land-based wealth through heredity, edict and violence, and did so for a very, very long time.  It took a global, social, political and economic revolution to undo this old set of controls, and that’s what we also see occurring today.

Digital Transformation is the social, political and economic transition away from capitalism and towards an information-based system of power and wealth.  Information wealth is created and managed with the Digital Trinity of mobility, social media and analytics.  This new trinity determines how information wealth is distributed, applied and controlled, just like bureaucracy, processes and rules controlled capital wealth for the last two hundred years.

This transformation is an enormous issue for BPO practitioners, as most of us are Analogs of the first order.  When we look at how most organizations have managed outsourcing, our entire approach has focused on replicating old, analog structures (using Bureaucracy, Processes and Rules), only doing so more cheaply.  There may be some rationalization along the way, but fundamentally, outsourcers do the same old Analog things, just more cheaply.

Transformation will dramatically change the BPO equation. Startups that apply the Digital Trinity to how they deliver value and solutions will present their clients with entirely different value propositions, entirely different business models, and entirely different cost structures.  Rather than being a few percentage points cheaper at doing the same old thing, Digitals do entirely new things.  Analogs do things better, Digitals do better things. Indeed, BPO’s may find themselves to be disrupted even faster than their customers, because their customers have already separated themselves from the cost and complexity of switching.  I have this conversation almost daily with BPO executives, and their fear is palpable.

Robot Revolution

One of the first ways that Digital Transformation will manifest with BPOs is with the implementation of Robotic Process Automation (RPA) technology.  BPOs and their customers have tried to use information technology and automation to rationalize their Analog Trinity for decades.  Nonetheless, many process steps remain stubbornly-manual, and continue to employ tens of thousands of human workers.

RPA will be used to automate process steps that somehow eluded automation over the last 40 years, and this will be very disruptive.  Initially, this wave of automation will be used for simple cost-cutting.  However, the deployment of RPA questions many of the operating assumptions that are Analog dogma.  Do we really need all of these rules in order to create value? What is the purpose of a bureaucracy, when people have instant access to accurate, timely data? Do customers value processes or outcomes, and if they value the latter, does the former actually prevent value creation?

These are questions that the use of RPA will bring forward, and they’re indicative of the changes to come from transformation.  The deployment of robots is starting out as a means of being more effectively Analog.  But, in the longer term, RPA will be a catalyst of and accelerator to digital transformation.  BPO’s will be on the leading, bleeding, edge of this revolution.

 

Question Everything

In summary, get ready for change, get ready for discomfort, get ready to be disrupted.  This transformation is happening today, and it will occur whether you and your organization acknowledge it or not.  It is not that we have been wrong in our Analog ways for two hundred years; indeed, we have collectively been massively successful Analogs, and we have created the vast capital-based wealth we enjoy in our world.  But, going forward, information wealth will be the new source of wealth and power in the world, and information wealth is created and governed by the Digital Trinity, rather than the Analog.  To survive and thrive in this world requires a complete rethinking of how value is created and success is measured.  Failure to make the transition may leave you insisting that the world is flat, feudalism will never give way to democracy, and land will always be the basis of wealth, while capitalist democracies sprout up around you.


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