As the big Indian outsourcers race for automation kudos, risk looms

Profile picture for user gonzodaddy By Den Howlett August 4, 2015
Automation is a topic du jour for Indian outsourcers but it hides a labor problem that will require careful management.

Outsourcing on Red Keyboard Button. tashatuvango - Fotolia
Early in his tenure at Infosys as CEO, Vishal Sikka told me there was (and is) a pressing need to help customers get more bang for the buck by automating routine and mundane processes. Earlier in the year, he was quoted as saying:

The company has set a long-term internal target of up to 70% automation in its infrastructure management business, and up to 55% automation in its business process outsourcing business. Currently, 35–40% of its BPO processes are automated.

It is an interesting topic given that the labor cost arbitrage that fueled so much offshoring is being whittled away. In SAP Nation 2.0, Vinnie Mirchandani expands on this topic, pointing up the value that Panaya brings to the Infosys customer table. I regularly hear how the inclusion of Panaya has allowed Infosys to up its RFP appearance rate although I have no insight into the win rate.

Mirchandani goes on to add two pieces of important color.

Frank Casale, a long-time observer of the outsourcing industry, has projected:

Making the pivot to Robotic Process Automation (RPA) is a decisive moment for service providers. The benefits of digital labor are rapidly eclipsing the benefits of physical labor, and service providers can choose or decline to translate that into success. I forecast that by 2020, as much as 40 percent of information technology outsourcing (ITO) and business process outsourcing (BPO) service providers will be out of business or acquired by larger enterprises, if they fail to embrace the change and reinvent their business models.

Phil Fersht, the founder of HfS, an outsourcing-focused analyst firm, has been forecasting the emergence of the “as-a-service economy,” and wrote this past May:

What struck me was how quickly our industry has genuinely become focused on achieving business outcomes over the past few months, and this is being woven into many of today’s new contracts and governance performance metrics. The conversation has moved along quite markedly and I view this is a major leap forward for many industry stakeholders to change the way we manage service delivery that isn’t purely based on valueless metrics and squeezing out those last remnants of bloated labor cost.

Infosys was relatively late to the automation party but now all of the major Indian outsourcers are getting on the bandwagon and trumpeting their offerings. Good news for customers, not so good news for the outsourcers. Why?

In an article titled Why Indian IT firms want to shift outsourcing projects from offshore to onshore model, Anirban Sen breezes through the automation story but concludes:

To be sure, this does not mean that customers will move work away from third-party vendors such as TCS and Infosys. What is likely to happen is what is commonly referred to as "rebadging" — the process where third-party vendors take over the assets of a customer and replace personnel with their own staff, experts say.

I'd love to know who these 'experts' are because 'they' and Casales cannot both be right. That was the nub of a discussion I had with Mirchandani yesterday.

Simple logic suggests that if grunt work is automated, then outsourced labor shrinkage is a certainty, unless outsourcing staff is actively re-skilled for new classes of work. That is not a done deal. Neither is the assumption that outsource staff can seamlessly swap into roles previously filled by in-house teams. The legal hurdles alone are daunting as this Wipro article lays out.

Mirchandani's view is that a company of Infosys size and with 179,000 employees will need to shed some 20,000 jobs at some point. I can see that argument, but it isn't necessarily something that results in an upheaval of the kind seen at, for example, Microsoft over the years. Infosys current attrition rate of around 14% alone would take care of that inside a year, provided those leaving are the ones who will likely be most affected by automation.

This is not a topic I see actively discussed so it is difficult to know what will happen and in what timeframe. In my discussion with Mirchandani, I pointed out that Sikka's long-standing and firm commitment to lifelong learning will help to insulate the company from structural changes that require a reset in the organizational mix.

As evidence, I referred to Infosys design thinking training for 40,000 staff. Infosys is encouraging a cohort of 'super coders' and has reframed its training program to add depth to the program. That will lead to improving the quality of coders Infosys has available for more complex projects while also incentivizing the best and brightest to achieve better outcomes. In short, I expect Infosys revamped training programs to serve as differentiators in a market already under pressure, yet with emerging needs.

As always in these kinds of discussion, there are plenty of open questions, and this is a topic I will follow closely in the coming months. It will be both fascinating and with far reaching implications for all the big outsourcers.

Image creditL Outsourcing on Red Keyboard Button. tashatuvango - Fotolia

Disclosure: Infosys is a premier partner at time of writing