Why it's time for Robotic-BPO to break the mold of legacy F&A engagements

March 18, 2016 | Phil Fersht

Robotic BPOAmidst the relentless robo-hype in our current era of robotic rhetoric, it’s fast-emerging that many buyers and service providers are really struggling to work together to create workable Robotic Process Automation initiatives – in many cases, neither are willing to make the necessary investments, trade-offs or sacrifices to make his work.

So let’s start with those selfish service providers unwilling to share the robotic rewards...

Some service providers want to implement RPA on themselves and avoid passing on the savings to their buyers. Having come off a great many buyer discussions about their developing Robotic Process Automation (RPA) capabilities to augment their BPO engagement productivity, I have been shocked to hear a common thread from several buyers: their service providers only want to implement RPA on themselves and insist on charging their buyers the same legacy FTE rates.  Some service providers simply cannot stomach sharing gains with their buyers - some have, but the general experience, from the buyers, has been they are not really interested. And one of those service providers even boasts its own "cannibalization fund", while refusing to do anything different with several of its biggest engagements.  It's quite mind blowing how contrary some of these service providers can be, when it comes to what they claim they are doing versus the reality of what they really up to.

Yes, amidst this talk of the leading service providers breaking away from the old model and openly exploring ways to invest in initiatives to delink headcount from revenue, it would appear that some are simply playing lip service to the industry while, in reality, they are just looking at RPA as a vehicle to drive down their own costs and improve their margins, while maintaining their legacy FTE-pricing.  One buyer even mentioned to me that their service provider had the nerve to ask them if they could reduce their own staff delivery headcount using RPA, but keep charging them the same FTE rates.... no joke.

However, this isn’t just the fault of the service providers, many buyers are equally to blame for robotic restraint...

Buyers need to entrust their providers with more intimate data access. Most enterprise buyers, for security and control reasons, keep the providers at bay and force them to connect to their systems only using Citrix. This limits the effectiveness of RPA overall and encourages an “us versus them” mindset between buyer and provider, so it’s no surprise service providers do what they can on the other side of the “Citrix” firewall. Both parties cannot enjoy the full benefits of RPA and Intelligent Automation, without genuine collaborative engagements and a holistic security model that aligns the capabilities more effectively.

Greedy buyers need to stop treating RPA like legacy offshore BPO, demanding all the savings up front. I would also argue that many costs of RPA –greater testing, maintaining a fall-back agent pool and the incremental manner that robots are typically actually rolled out (versus a one time overall reduction in costs, as often asked by buyers) diminish the “greedy” aspect of this from many service providers. In addition, many buyers want royalties for advancing the automation initiatives of the sell side - there is a whole new business model evolving around access to data as well as contribution to IP, when it comes to developing effective RPA platforms.

Sadly, many buyers are often too greedy and want to get all the theoretical cost savings from a new deal up front, even before the RPA benefits have been formalized - and without realizing that RPA often drives up service provider costs in the short term for increased testing and QA. In this way, buyers are keeping the mindset used in legacy outsourcing deals, where savings driven through labor arbitrage were much more predictable and tangible. I would argue that many costs of RPA – a great deal of testing, maintaining a fall-back agent pool to mitigate transition risks, and the incremental way that robots are actually rolled out (versus a one time overall reduction in costs as often asked by buyers) put the service provider in a much riskier position to guarantee productivity benefits and cost efficiencies, than they ever were with their legacy outsourcing deals. Robots are not as easy to plug into legacy processes as offshore labor…

So clearly we are rapidly arriving at a juncture where a couple of scenarios will play out as to how buyers and service providers make RPA work...

Legacy BPO deals will continue to stagnate for some time.  In most cases, deals struck several years' ago have met their initial productivity targets through offshoring and some basic process standardization.  The service provider has no incentive to do anything but maintain the same rates and same margin, and most are willing to risk their buyer trying to bring in a competitive bidding process.  They know that in many cases, their business is not that attractive to other providers, and the cost of switching outweighs the benefits of "winning" the business.

Where we will see the advent of Robotic-led BPO solutions 

Definition of Robotic BPO: "Applying robotics to transform legacy business process outsourcing engagements that were developed with a legacy FTE pricing and mindset.  Deals are wholly or partially financed by the anticipated future headcount reduction and productivity improvements driven by the RPA, where the buyer and provider share the risks”.

It’s very rare today that RPA results in the elimination of entire job roles for staff in the BPO world (less so than with IT automation). Hence, we view an emerging focus on human-augmentation robotic solutions that combine people-driven processes with genuine RPA capability where it is cost effective and secure to implement.

We are already witnessing a serious potential for service providers to offer RPA-led offerings to streamline bloated stagnant BPO engagements, especially where there is a lot of very automatable offshore work that is efficiently run with well documented process flows.  Enter R-BPO, where we will surely see the first automation-led human augmentation solutions, where the deals are partially funded by the expected headcount reduction and productivity improvements over the course of a multi-year engagement. We believe this will be especially relevant in F&A contracts which form the baseline of the BPO market today

Once we get passed the constraints of Citrix and the non-collaborative application and data security strategy of many enterprises there is real opportunity to reshape the market of F&A BPO contracts. In Finance and Accounting, many deals are mature and rooted in legacy models, the work is highly transactional, and buyers have been stuck with the same FTE loads for years (or decades). But the real reason why F&A is starting to deliver real potential for R-BPO is the simple lack of widely accepted enterprise F&A SaaS which can fix the dysfunction of a process, with a broad-brush implementation and hefty license fee.   We are seeing it in pockets with SaaS solutions such as Workday FM, Netsuite and even FinancialForce, but it's the ultimate failure of F&A to over-rely on legacy technology, maintain strict controls that defy collaboration, and keep bloated numbers of people to deliver legacy processes that is creating a huge potential new market for robotic-led processing and human augmentation.

The Bottom-line: Legacy BPO may be stagnating on its own, but it’s ready for R-BPO

What's abundantly clear is that the outsourcing industry is caught in one bloody great rut:  too many engagements are simply stuck in this Catch-22 where they are no longer attractive to competitive bids and the incumbent providers simply do not see the value (or have the onus) to invest in the buyer.  You can't trim the fat until you fix - and automate - the process underbelly, and today's emerging RPA tools, such as Automation Anywhere, Blue Prism and UiPath, are increasingly providing the platform to do that.  So the next phase is for R-BPO solutions to be come to market that are priced against future productivity gains through automation, not immediate cost-savings through labor arbitrage and elimination.

Posted in: Business Process Outsourcing (BPO)Cognitive ComputingDesign Thinking

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1 Comments

20 Comments

  1. Why it’s time for Robotic-BPO to break the mold of legacy F&A engagements | Lovehealth.science
    Posted Mar 18, 2016 07:42 AM | Permalink Reply

    […] (Cross-posted @ Horses for Sources) […]

  2. James McMillan
    Posted Mar 18, 2016 03:33 AM | Permalink Reply

    Excellent blog.This really gets to the heart of the issues when it comes to moving away from the legacy model. Most clients and providers just want to get the most for themselves, when they should be approaching this collectively to make progress - each thinks the other should pay for RPA, as if they are entitled not to have to make any investments in the future model,

    James McMillan

  3. Cheri Mangum
    Posted Mar 19, 2016 04:23 AM | Permalink Reply

    Love the article. As BPO providers, we must collaborate with our clients to help guide and usher in this new reality. We are seeing additional F&A work streams come from clients and we help them with a business case to implement robotics where it makes sense throughout the BPO process. It is imperative for providers to plan for the RPA evolution and make sure business models and pricing plans are in place. It's no longer just about input "butts in seats" pricing. We have to start thinking about transaction and outcome based models.

    Cheri Mangum

  4. Rahul Prashar
    Posted Mar 18, 2016 04:06 PM | Permalink Reply

    Great article Phil. Thank you.

  5. Phil Fersht
    Posted Mar 18, 2016 07:20 PM | Permalink Reply

    @Cheri - completely agree. On the positive side, the "outcome conversation" is so much more real than 2-3 years' ago, when is was still a pipedream. This is one of the major positives of RPA - when deployed effectively, it helps refocus attention on outcomes shaped by improving human performance, than simply creating new "productivity targets" based on future FTE reduction. Future focus needs to be on value + cost, not just cost,

    PF

  6. Robert Brant
    Posted Mar 19, 2016 05:09 PM | Permalink Reply

    Good Article and timely, outcome based results are more than just £££'s. There is a great opportunity to improve the experiences of both internal and external customers too.

  7. Simon Greenwood
    Posted Mar 19, 2016 08:00 PM | Permalink Reply

    I spoke to an old colleague last week who works for one for a BPO who informed they were not really interested in Business Improvement. There is so much opportunity for RPA in BPO but you can only take a horse to water........

  8. Malcolm Norquoy
    Posted Mar 18, 2016 07:04 PM | Permalink Reply

    Good article. It's not just time to break the mould, it's well gone time!

  9. Phil Fersht
    Posted Mar 19, 2016 08:09 PM | Permalink Reply

    @Simon - my fear is a lot of the old criticisms of BPO are coming true - it was designed as a one-time cost take out and noone really cared about the "what next". Suddenly, there is a realization that there is a "what next" and the new challenge is how to break very old, smelly habits... so many firms and their providers are stuck in a terrible rut,

    PF

  10. Phil Fersht
    Posted Mar 19, 2016 08:11 PM | Permalink Reply

    @Robert - in my view, this all starts with writing-off legacy. It's about buyers adopting a longer-view mindset to overhaul obsolete processes and scrap legacy tech investments. A preparedness to invest in change... If they can't get to this mindset little will change. Incrementalism is a recipe for failure in today's market,

    PF

  11. Simon Greenwood
    Posted Mar 19, 2016 11:31 PM | Permalink Reply

    There is often a fear of sharing benefits with clients from a BPO perspective and as often a distrust from clients that BPO's are not sharing benefits. In my opinion to extract most benefits from RPA then you need look at the end-to-end processes across BPO / client boundaries. The technology has improved quickly and almost unimaginable software is still to come in the light of AlphaGo which will not only reduce operational costs but also improve compliance and quality. If I was a Local Government CEO in the UK with shrinking budgets I would be looking to bring much clerical activity back in house and automate it and then invest any savings left after the cuts into front line services. My fear it is not in the interests of the BPO's to work with local or central government to be quite so altruistic. The other big users of BPO's such as banks, insurers, telecoms etc may choose to have BPO's manage their RPA operations either onshore or offshore - time will tell. The real issues of lack of control and poor quality control may be fully mitigated if 80% of the operation is automated. Management of an RPA operation is very different than a traditional BPO department. More Technical skills rather people skills will be required, where are these hybrid BPO managers going to come from?

  12. Ben Sharp
    Posted Mar 20, 2016 12:46 AM | Permalink Reply

    Phil,

    This is the most honest and insightful viewpoint into the issues surrounding RPA that has been written. Good discussion too!

    Ben

  13. Durgesh
    Posted Mar 20, 2016 08:49 AM | Permalink Reply

    This line summarises the current BPO industry - "in many cases, their business is not that attractive to other providers, and the cost of switching outweighs the benefits of “winning” the business"

    The situation will only change when people believe that the benefit of changing provider is more than the switching cost. Once one or two such success stories get famous, more providers will start to follow and competition will drive the efficiencies. Similar to 1990s when Labour arbitrage got traction and BPO industry was born.

    The question is, who will start the chain like GE did in 90s. Any suspects Phil ?

  14. Michael Ryan
    Posted Mar 20, 2016 09:49 AM | Permalink Reply

    Phil,

    You hit the nail on the head. We are beginning to see some providers building expertise in RPA with what we have been calling "utilities" or as you say....automation-led human augmentation solutions....perhaps....ALhAS!? Can't disagree with the challenges BPO's face in landing the first one and breaking the mindset. But the really cool part is once they convert, they have the reference, the data and the confidence to convert the next. We are seeing first movers gain a clear advantage that they exploit to accelerate innovation and resultant success at a much faster pace than the laggard competition. I think we are in for an exciting few years with some spectacular winners and equally spectacular losers.

  15. Jyllene
    Posted Mar 20, 2016 12:27 PM | Permalink Reply

    Great blog Phil. From this provider's standpoint, we've been engaged in outcomes based pricing agreements and transformation with some clients for years. That said, you identified a critical component that needs to be addressed and sorted by most enterprises in order to truly move forward: non-collaborative application and data security concerns. Solving for that truly opens up the floodgates on design points and impact.

  16. Phil Fersht
    Posted Mar 20, 2016 06:24 PM | Permalink Reply

    @Durgesh - we need service providers that are prepared to invest in productivity savings upfront, and buyers adopting a "write off legacy" mindset, to be honest, or this is going to be an incremental journey to nowhere, and little will change.

    As I've pointed out several times, buyers and providers need to find smarter ways to put a $$ value on human augmentation and not simply obsess with the headcount reduction they hope they can ultimately achieve.

    The most tangible "RPA-driven BPO", where I am starting to see productivity increases being calculated, is centered more on the service provider delivery resources being reduced, where they have processes well standardized and there is a genuine ROI for applying RPA into certain processes. I see this in the shape of some motivated service providers, determined to promote an R-BPO model where the nature, attitude, focus and financial constructs of engagements is reshaped. But there needs to be real buy-in and investment from their leaderships to get there.

    For my money, I see some of today's incumbents completely missing the boat here - many talk a big game, but are simply not structured in the right way to bring in the right talent, integrate their solutions across service lines and have leadership prepared to put up genuine "cannibalization" funds to build the new model - either on their own clients, or through competitive re-bids. They are too focused on reducing their own delivery costs to maintain their own margins, as opposed to passing their savings onto their clients. And many of the savings they are making are more through their own tried-and-tested method of hiring cheaper, younger delivery staff and making them do more work. Of course, they are using the term "automation" as the justification for reducing their headcounts, but when you look under the covers, most automation initiatives are still very nascent.

    However, we are seeing some nascent R-BPO components in new deals (mainly in F&A), where there is enough RPA built-in to prepare a broader RPA platform for the future. The more some of these providers can experience RPA on their own resources, the better - and more confident - they will become to offer up similar productivity increases for their clients to win future business.

    I do do see one or two very disruptive potential offerings out there, where a new style of provider will start pushing a whole R-BPO agenda, but I still think the industry is in a "suck it and see" state for now. There will continue to be a lot of talk (and hype), but the first genuine R-BPO business cases will really start to emerge by the end of this year. I look at 2017 as the year this really starts to make the shift... it has to... just takes time for the early leaders to prove the value, and for clients to have the drive to change their habits.

    PF

  17. Phil Fersht
    Posted Mar 20, 2016 06:43 PM | Permalink Reply

    @Jyllene - there is transformation to be enjoyed both in front and behind of the Citrix firewall... but it's the latter where we need to see more of an open mind from clients to let their service providers work with their more intimate processes and data. This is a core issue IMO that is preventing progress for many clients... many can't get the full benefits from the RPA and Intelligent Automation products on the market because of the perceived "security risks". Both buyers and providers cannot enjoy the full benefits of RPA and Intelligent Automation, without genuine collaborative engagement and a holistic security model that aligns their capabilities more effectively. In so many cases, it's buyers being completed wedded to legacy ERP systems that is their biggest impediment to do anything more than labor arbitrage. The provider can do nice things with helping with some analytics and some desktop automation, but beyond that, most clients simply do not have that "write off legacy" mindset to even think of changing their underlying legacy technology.

    Changing this mindset is the starting point for many - and this needs to come from leadership and their middle managers working together to understand what is possible. This is where there is such a huge disconnect IMO.

    PF

    PF

  18. Andreas Bernhard
    Posted Mar 21, 2016 07:07 PM | Permalink Reply

    Hi Phil, I believe that the legacy BPO engagements are just the wrong place to look for RPA: there is a lot of pain to get it off the ground, security concerns, investments needed, etc and it is not clear who gains. In the moment FTEs are reduced, the provider is still stuck with the IT & office equipment, the office space, etc, while the buyer would expect that cost are going to be reduced. There seems to be a lot of finger pointing, but at the end both parties would not profit enough during a running engagement. Introducing RPA means a second transition period - who wants t take the risk and the cost before the contract is up for renewal? Neither the buyer nor the provider I guess.

    I wonder: If RPA offers such a big potential, how are the Shared Services Centers doing?

  19. Phil Fersht
    Posted Mar 22, 2016 04:55 PM | Permalink Reply

    @andreas - RPA is building traction in two areas right now - shared services and BPO. Outside of those domains, noone knows what it is =)

    I would agree, in some cases, that a legacy F&A engagement may simply be not worth the investment, but I would also argue that buyers must look at "writing off their legacy" if they are to be effective in 2-3 years. RPA is the perfect "coming together" of obsolete manual process and technology. It's not overly complex and smart buyers need to learn to manage robots in their centers, in addition to people. I would also surmise that we won't even be using the term "RPA" for much longer, but "digital labor"....

    PF

  20. Fte Accounting Term | Rates for CPA Services for SMB
    Posted Apr 03, 2016 06:16 PM | Permalink Reply

    […] Why it’s time for Robotic-BPO to break the mold of legacy F&A engagements – Where we will see the advent of Robotic-led BPO solutions Definition … In Finance and Accounting, many deals are mature and rooted in legacy models, the work is highly transactional, and buyers have been stuck with the same FTE loads for years (or … […]

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