Digital Labor vs. Traditional Outsourcing: An Unfair Battle?

By Allan Andersen, Director Enterprise Solutions at IPsoft
January 26, 2017 • 3 minute read

Labor arbitrage is at risk of extinction. Learn more about the ramifications.

According to a recent ISG report on digital labor, it is not human employees who are quickly becoming an “endangered species” but rather the business practice of “labor arbitrage.”

Interestingly, the report, “Reinventing the Business with Cognitive Digital Labor,” which in full disclosure was sponsored by IPsoft, explains that the decline of labor arbitrage is not driven exclusively by cost reductions:

“Beyond the obvious low cost leadership that digital labor offers, enterprises can use digital labor to emphasize customer intimacy and grow new business.”

ISG is the behemoth in advising customers around sourcing and are uniquely positioned to spot trends and changes related to outsourcing in a worldwide context. They have just released their yearly/quarterly market insights report: ISG Index.

The reports paint the same picture with different brushes:

The ISG Index report is fact-based and looking backward: The traditional outsourcing market is divided into IT Outsourcing (ITO) and Business Process Outsourcing (BPO), and between 2015 and 2016 ITO declined by 5% and BPO declined 2%. This compares to Infrastructure as a Service (IaaS) which grew a healthy 54%. ISG’s outlook:

Traditional sourcing will have to find its footing as spending moves to business-led digital initiatives.

The digital labor report analyzes the “competitive differentiators” between digital labor and traditional outsourcing and highlights where the battle-lines are currently drawn — for example, absorbing Level 0 & 1 skills and fundamentally changing Level 2-4 skill responsibilities — and the battle-lines can change quickly as technology evolves.

A one-sided struggle

Memorable battles are fought when both sides are evenly matched, but that is not really the case here. First of all, digital labor is cheaper, faster and better than labor arbitrage. But more importantly, it is also inherently different as it scales easily and can re-invent how companies compete and build competitive advantage.

In some ways, this minimally suspenseful battle recalls the rapid ascendance of digital banking transactions. For example, most initial reluctance to perform basic banking tasks online or at an ATM has dissolved. Bank customers today have embraced a convenient digital approach — looking up balances, transferring funds — at the expense of traditional in-person activities. Like the human bank teller, the traditional agent working in an ITO or BPO function and performing scripted tasks will find many responsibilities outdated in the near future by pre-packaged digital labor solutions.

Out-of-the-box digital labor solutions

A pre-packaged bank teller is an ATM, and while you can’t buy pre-packaged “Digital Labor for Claims Processing” yet, that is not far off. In 2017 I predict that we will see a number of “out-of-the-box” digital labor solutions for internal functions such as employee benefits, IT service desk, expenses etc. Packaged digital labor won’t just be answering questions, but also providing guidance and performing tasks by being seamlessly integrated into internal processes and applications. Shortly thereafter, we will see out-of-the-box solutions for higher-level business functions. These solutions can be for internal employees or external customers, and they can be delivered via simple subscription cloud services.

2017 recommendations

2017 is going to be a pivotal year for anything related to artificial intelligence and automation. Based on their research and customer interviews, ISG has nine recommendations: I will highlight one and provide my perspective on the recommendation. For the other eight, you can read the full paper here.

“Do not push digital labor into the business. Rather the advice is to let business sponsors pull it to success. Have business sponsors describe what they want, why and when, and work on demonstrable automation steps from a smaller center of excellence (CoE) for cognitive digital labor.”

I agree completely with this approach, as digital labor is not one thing, but rather a set of technologies and methodologies in different stages of maturity. Understanding the differences and determining how to combine them into workable solutions takes time and research. When these technologies are pushed too quickly into the business, they often merely replace human labor with digital labor and miss truly transformative opportunities. The reason for this behavior is that disruptive opportunities are almost impossible to identify for the people close to the original solution. As the saying goes, “The light bulb did not come from continuous improvement of the candle.”

By building a independent Cognitive Center of Excellence, businesses can extract maximum transformative value from digital labor, rather than simply imitating the actions of a repetitive task.

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