Stop using offshore business models as a crutch for cost savings: Gartner

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By 2018, 40 per cent of outsourced services will leverage smart machine technologies, rendering the offshore model obsolete for competitive advantage, says Gartner.

For more than a decade, the use of offshore business models has been a "go to" option in sourcing strategies, but Gartner maintains the rise of smart machines will send organisations back to the drawing board with regard to their long-standing arsenal of sourcing approaches.

“Smart machines are not future fantasy; they are commercially available,” says Frances Karamouzis, vice president and distinguished analyst at Gartner.

Start to build the capability to analyse, rethink, reimagine and recalibrate your sourcing portfolio, and appropriately balance risk with business value and cost. Frances Karamouzis, Gartner

Gartner’s analysis of external sources finds more than US$10 billion of these machines have already been purchased through more than 2500 technology companies.

“For the business and IT services industry, this translates to a new source of fuel for the industry - namely ‘virtual talent’. It's faster, cheaper and more predictable," says Karamouzis.

This does not mean that there no longer will be offshore services and all of these long-standing contracts will disappear. It does mean, however, that it is not going to be the primary means of cost control or speed to competitive advantage.

“The offshore business model represented a significant milestone in the business and IT service industry because it recalibrated the single largest driver of cost - labour,” says Karamouzis. “The new normal is hyperautomation arbitrage, which will be the new avenue for a completely different cost structure through virtual labour. It also addresses scale and predictability.”

Smart machines are not always complete replacements for subject matter experts (SMEs) or other labour. There could still be a role for offshore centres, albeit changed and refocused. Human labour is still part of the mix, and cheaper human labour always will be appealing to business leaders.

Gartner notes all types of smart-machine-enabled services will be used in renovating core efforts, as well as exploiting the new efforts. As a result, the following market implications will be critical for sourcing executives:

  • Offshoring for competitive advantage already has declined, and will continue to decline, due to the rise of virtual talent, as well as digital business and analytic skills needed in domestic locations.
  • Evaluation criteria of service providers will shift from cost of labour to business outcome through algorithmic business models. While labour arbitrage was once the primary cost driver, the location of low-cost labour will not be the most differentiating factor for providers in the near future. In fact, Gartner sees a rise in demand for onshore resources. More importantly, hyperautomation arbitrage will be the new source of differentiation and innovation.
  • Providers will be primarily focused on the significant increase in revenue per professional of smart-machine-enabled services fuelled by virtual talent, rather than top-line revenues of outsourcing. The new reality for those providers with successful leverage of virtual talent will be more profitability for each incremental unit of revenue. This will drive vendor consolidation and a new bar being set for innovative offerings.
  • Big shifts in the vendor landscape because some product vendors also may enter the game by offering "business process as a service" or cognitive business offerings. This will create a buyer's market with a large abundance of choice.
  • The margins created via embedded technologies within new smart-machine-enabled service offerings may lead to significant issues for vendors unable to invest.

“Organisations must embrace the market change and be able to evolve in light of the new fuel of virtual labour,” says Karamouzis. “This means stopping the use of offshore business models as a crutch for cost savings and starting to build the capability to analyse, rethink, reimagine and recalibrate your sourcing portfolio, and appropriately balancing risk with business value and cost.”

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Copyright © 2016 IDG Communications, Inc.

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