For decades, businesses have relied on labor arbitrage to reduce costs and increase profits. Labor arbitrage involves outsourcing work to countries with lower wages, allowing companies to pay less for the same work. But this practice may be going extinct faster than the dinosaurs did.
The Rise and Fall of Outsourcing
In the 1990s and 2000s, outsourcing exploded as companies shifted call centers, manufacturing, and back-office work to India, China, the Philippines and other low-wage countries. Businesses saved millions by offshoring jobs. But there were downsides. Language barriers, timezone differences, data security risks, and quality control issues often negated the cost savings.
Over time, wages have risen in these outsourcing hotspots while automation has flourished. The labor arbitrage advantage has shrunk. Now, innovative technologies like artificial intelligence (AI) and robotic process automation (RPA) are threatening to make outsourcing obsolete.
Labor arbitrage has been a viable business strategy for nearly 30 years. As recently as 2013, U.S. overseas affiliates employed 14 million workers1, affecting technology, call center, human resources, and manufacturing industries the most.
However, a recent trend is showing that organizations are looking to bring work back on shore. PricewaterhouseCoopers reported2 that reshoring could create around 100-200,000 extra jobs in the U.K. over the next 10 years and raise the annual national output by around £6-12 billion at today’s values by the mid-2020s.
A recent study by Ilan Oshri, Professor of Technology and Globalization at Loughborough University found that 40 percent of 200 U.S. and U.K. companies had reshored work in the past three years.
More and more, organizations are turning away from labor arbitrage as a viable business strategy. There are two reasons for this:
- Labor arbitrage has (ironically) become wasteful.
- There is now a more efficient and effective business strategy for organizations of all sizes.
Let’s break those two reasons down.
Reason No. 1: Labor Arbitrage Has (Ironically) Become Wasteful
Since its inception, labor arbitrage set out to reduce spiraling costs and operational inefficiencies for organizations of all sizes. However, it may now be failing on both of those fronts.
Companies can be overpaying by 30 percent or more3 for outsourced full-time employees (FTEs). That’s right — the method that was supposed to save organizations money may now be costing them more than they need to spend. Offshored labor has even led to some security issues. A recent example are the data security breaches at an AT&T call center in Mexico. Those breaches cost the company $25 million in fines alone.
All of this becomes even more worrisome for organizations when you realize that 70 percent of the offshore provider market is open to disruption. Wages in offshore locations have increased and providers are moving operations to smaller cities – driving down the advantages of labor arbitrage.
However, the most cutting-edge organizations are quickly catching on to the fact that there is a new way to achieve the benefits previously offered by labor arbitrage – now you can reduce costs, shorten timelines, and improve efficiency through automation.
Reason No. 2: Automation Is the Better Way
Automation is already displacing labor arbitrage at a stunning rate. The diminishing returns (or, in many cases, increasing losses) caused by labor arbitrage are addressed by the benefits of automation.
Skilled resources have become increasingly scarce and more expensive worldwide, making the automation of manual activities highly attractive for companies in all industries. Digital labor is the next frontier for improving operational efficiency, and that’s where automation comes in. Now, a software robot can cost about a tenth of a full-time employee in the U.S., U.K., or Australia, or a third of an FTE in India. In fact, experts say automation can reduce the cost of an FTE by more than 20 percent4 in large delivery centers.
Automation, specifically robotic process automation (RPA), can currently impact around 20-40 percent of processes. That’s a large part of your organization’s processes that are open to disruption.
According to Gartner analyst Frances Karamouzis5, "The search for just cheaper people is a thing of the past." She added further that what customers now want is to buy more "thinking" and automation for the "doing.”
Automation is the future for businesses. Organizations can reduce costs and create efficiencies at a scale that has never been achievable before.
Soon, digital labor will not just be a driving force for business initiatives — it’ll be a competitive advantage. The organizations that recognize the importance of automation over labor arbitrage stand to capitalize in a big way. We know because we’re enabling large enterprises to realize the benefits of digital labor today.
The Future is Automated
While automation will eliminate many low and medium skill jobs, it also has the potential to create new high-value jobs and free up workers to focus on more meaningful, creative tasks.
AI-driven automation will reshape the location, nature and structure of work in the years ahead. As smarter machines take over repeatable, rules-based tasks, human efforts will shift to management, quality control, innovation, customer relations, and other activities requiring emotional intelligence, cognition, dexterity, and problem solving.
Work will be distributed based on effectiveness and efficiency, not wage rates. As automation becomes the new offshoring, the days of labor arbitrage are numbered.
Replacing Manual with Digital Labor
There are a number of ways automation can help large organizations save time and money.
Let’s consider that a company lacks the necessary insight into their actual end-to-end business processes and their options are to hire a consulting firm to manually discover processes and interview employees, or take staff away from their value add activities and task them with identifying critical processes and all their variations. That doesn’t sound like a cost-effective way to get what the business needs.
A better way: In this case, companies could automatically capture every end-to-end business process. This can be done using automation to mine historical data from a system or by capturing users’ daily activities without disrupting their work. This gives companies a visual representation of how processes are actually being executed across enterprise applications and provides the insight to improve and implement best practices, generate necessary documentation, or easily create automation – for RPA or testing.
What if an organization is constantly making changes to their enterprise landscape – updates, fixes, migrations, new users, and more? This exposes companies to risk as speed increases and system complexity grows. How can automation help ensure there is no interruption to the business and that changes are implemented seamlessly? One option is to commit staff and many man-hours to manually testing end-to-end business processes before changes are introduced. That, or manually test as much as you can and hope for the best once changes are moved into production.
A better way: Organizations can save time and mitigate technology risk with the adoption of automation. Using already captured business processes, creating automated tests is a breeze. These tests can be run monthly, weekly, or daily and can be executed unattended on a regular schedule. They are designed for the business user and can be built, modified, and reused without programming. They can be used for a small project, major system implementations, or enterprise-wide as an essential part of the IT infrastructure.
The value of automation doesn’t stop there. Many compliance and audit processes require accurate business process documentation, as do training departments. Automation takes the pain out of generating and maintaining up-to-date business process documentation. Once every business process function, keystroke, and transaction has been automatically captured and visualized, you can quickly generate and maintain up-to-date documentation of critical processes to support training, audit, and compliance.
The possibilities are endless, but the outcomes are the same: less risk, less time, more innovation.
- Labor arbitrage through outsourcing is declining as wages rise overseas.
- Intelligent automation can now replicate or outperform human output at lower cost.
- Reshoring and onshoring jobs and production are accelerating.
- Smarter machines will transform the location, nature and structure of work.
- Automation makes arbitraging labor costs largely irrelevant.
The dinosaurs' extinction holds a lesson for labor arbitrage. Adapt or die. The meteor is automation - and it's hurtling closer each day.
In conclusion, the business is looking for IT to deliver business outcomes -- more output, better quality, lower costs, revenue growth or improved market share. These outcomes can only be achieved as quickly as the business and the market demands with the help of automation.
“How Outsourcing Jobs Affects the U.S. Economy” TheBalance.com, 9/16/17, https://www.thebalance.com/how-outsourcing-jobs-affects-the-u-s-economy-3306279
"The Road to Reshoring (and its Impact on India’s BPOs)" The Accounting Mule, 11/5/14, https://clarity.sutherlandglobal.com/blog/accounting-minute/the-road-to-reshoring-and-its-impact-on-indias-bpos/
"Are you paying too much for outsourced resources?" CIO.com, 5/11/16, https://www.cio.com/article/3067753/outsourcing/are-you-paying-too-much-for-outsourced-resources.html
"How robotics is changing the face of Business Process Outsourcing" Robohub.org, http://robohub.org/how-robotics-is-changing-the-face-of-business-process-outsourcing/
"Automation, not cheap labor, is reshaping outsourcing" Computer World, 6/14/16, https://www.computerworld.com/article/3083264/it-careers/automation-not-cheap-labor-is-reshaping-outsourcing.html