Profits, Partnerships and Intelligent Automation

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A few days ago we held our 59th quarterly global and EMEA ISG Index™ calls. It’s an incredibly exciting time to study the trends that are fundamentally changing the technology and business services industries. This quarter we discussed the impact of intelligent automation on service providers – especially those with large offshore footprints.  

It’s no surprise our industry is undergoing a massive change as we witness the once-in-a-generation transformation from a physical to a digital economy. And, while much of the focus inside enterprises has been on digitizing the front office, companies are starting to shift their focus to the heavy lifting of digitizing the middle and back office. This includes thousands of systems and processes, all screaming to be refactored and digitized.

The work required to wrench these legacy systems and processes into the digital world should be good news for ITO and BPO providers. Ed Caso, managing director at Wells Fargo Securities, asked this very question on the global call: Given that this is transitioning to back office work, doesn’t it favor IT and BPO providers? The answer is yes and no.

The rapid democratization of technology – enabled by as-a-service platforms and commercial models – gives business units and support functions the opportunity to easily procure enterprise-class technology services on their own. And more often than not this technology is delivered by a new breed of technology vendors. Think Adobe, Workday and Amazon. It takes a lot of work to get legacy systems to these new platforms, which represents the project-based, systems integration opportunity for providers.

But once the workload lands and is stabilized, much of the traditional revenue that has sustained offshore-centric firms – application testing and upgrades, infrastructure monitoring and patching – disappears because the As-a-Service provider now performs much of this work as part of the per-user subscription fee or the per-hour usage fee. This is one of the key reasons the financial results for offshore heavy firms are so worrisome. Slowing revenue growth, reductions in revenue per employee and declines in net-income percentages are no longer viewed as a quarterly blip. We’re now into secular trend territory.

This is where intelligent automation (IA) comes in. While it does not solve the top line growth problem, IA can address the bottom line profitability problem. Service provider thinking goes something like this: if we can deliver our services more efficiently using intelligent automation, we will need fewer people to deliver the same service, improving net profit. This in turn means more wins due to a lower price point for buyers, which, when combined with our new digital offerings (oftentimes via acquisition of digital agencies or cloud specialists) means revenues will increase.

The challenge is that intelligent automation eats legacy work. So, the new “digital” revenue needs to grow at a pace faster than the old work is eaten. This is really hard for providers – especially publicly traded ones – because it means cannibalizing existing revenue today for new revenue tomorrow. And it’s based on the assumption that the intelligent automation strategy will deliver on its profitability promises. So getting this strategy right, right now, is now a mission critical priority for every IT and BPO provider.

We’re already starting to see the impact of intelligent automation on ITO and BPO contracts. The most recent ISG Automation Index™ shows productivity soaring. For the deals we analyzed, we saw anywhere from a 24 to 80 percent improvement in productivity due to intelligent automation. This is in contrast to a traditional 5 to 10 percent improvement over the same time period. This means providers are betting that their IA strategy will be able to deliver the same services with less people, or more services with the same number of people, within 24 months.

We’re also seeing intelligent automation become a really big priority for enterprise buyers. The outcomes of intelligent automation – namely, increased productivity and cost avoidance – are in high demand. Earlier this year, when we surveyed 500 business and IT leaders, they told us they plan to double their investments in automation and artificial intelligence, and plan to apply automation to multiple mission-critical business processes over the next two years. And a data point that should really concern providers: A majority of respondents feel that automation may actually diminish their need for outsourcing by enabling them repatriate work from offshore.

After dozens of conversations and briefings with providers about their intelligent automation strategies, it’s clear that all recognize the shift from human capital to “software capital” is underway. And what’s really interesting to watch is the recognition that they are going to need new technology vendor partnerships – and lots of them, to succeed. This means bringing to bear a vast array of technologies that automate repetitive business processes (at the keystroke level), technology processes (at the event or ticket level) and interpret unstructured data and mimic human decision-making (using cognitive technologies). There is simply no way IT and BPO providers can build these technologies fast enough; this is why the M&A and partnership activity in the intelligent automation space is really starting to heat up. And while this is already paying dividends for enterprise buyers, we’re going to have to wait and see if provider profits follow. 

Associated Insights

ISG Index™: As-a-Service Surging
Second Quarter 2016 ISG Index™ – As-a-Service Arrives

NOTE: this Lens360 blog post was originally published online by ISG at http://insights.isg-one.com.

 

 

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