The value chain for back-office services has evolved dramatically over the past decades. The advent of information technology and communications infrastructure has allowed firms to access large pools of talent at various locations across the globe.
Most of these locations were inaccessible in the past. Needless to say, offshoring has been revolutionary for these countries. This business model gives them the opportunity to participate in the global economy as distance has effectively ceased to be all-important.
The primary driving factor behind this trend has been the access to a larger and cost-effective talent pool. In other words, the impetus to this trend is talent and cost arbitrage – the business decision to favor the more cost-effective option.
In this post, we will talk about these megatrends in global human resource arbitrage and locate the gambits and prospects for the global BPO market vis-a-vis the Philippines.
Waves of HR Arbitrage
Over the past two decades, there have been a number of significant megatrends in human resource arbitrage. We can, in fact, see three major megatrends since the late 1990s: offshoring, outsourcing, and robotic process automation (RPA). Although RPA is not yet a mature and widespread business model, a new challenger business model has already emerged in the past two years or so, the business process as a service (BPaaS) model.
Megatrend 1 – Offshoring
Offshoring took off in the late 1990s. Pioneers of offshoring set up new captive centers in low-cost developing countries. This was driven by improved telecommunications and increased need for large-scale information technology (IT) operations.
Moving back-offices in new captive centers can be quite complicated and expensive, however, it can deliver significant savings. Offshoring proved to be revolutionary for businesses and countries. Large firms have long had many of their service operations offshore, and midsize and small firms are quickly following suit.
Megatrend 2 – Outsourcing
Firms wanted to save up even more. Hence, after spending time and resources to build their own captive centers in offshore locations, many firms sold these captive centers to outsourcing providers and bought back the service on a contractual basis.
Highly-specialized providers are in the advantageous position. By specializing in certain back-office functions, they can accommodate several different clients and deliver services more efficiently and effectively than captive centers. As such, firms who were late to the offshoring trend went straight to the outsourcing model. They essentially transferred capabilities from in-house to external vendors and from onshore to offshore at the same time.
Today, however, the pendulum is swinging back to toward captives. The impetus for the outsourcing business model was cost-effectiveness. Now, however, firms have become concerned about other factors as well. For IT, for example, security has become the primary factor for choosing captives over external outsourcing providers. Outsourcing IT capabilities can leave firms vulnerable in areas such as data integrity and chain of custody for example.
Megatrend 3 – Automation
Technological advancement has allowed robots to perform tasks only humans used to perform; this has great implications for industry rationalization and labor markets. This so-called “second machine age” has caused many to fear for their careers as robots are believed to be poised to replace them in the workplace.
For highly-skilled laborers, there’s nothing much to worry about losing their jobs to robots, as J.P. Gownder, vice-president and principal analyst at Forrester Research, believes that ‘humans will find themselves working side by side with robots, rather than being replaced by them’. But for those performing tasks that are massive in volume and are repetitively boring, they are at risk of automation.
Related: Robots are Coming After Our Jobs
Automation is attractive to many firms because back-office employees spend roughly one-quarter of their time on repetitive, rules-based tasks – the ones that are easy to automate. Moreover, robotic process automation (RPA) software processes operations three times faster than the average human (with no absences, no errors, no diminishing returns, and works around the clock). RPA can produce savings between 25 and 50 percent in select back-offices processes.
Indeed, RPA has significant implications for in human resource arbitrage as well. The important question to ask then becomes: How fast can firms adopt this new technology? Can traditional outsourcing providers be quick enough to adapt before their business model becomes obsolete?
Bring It All Together
Outsourcing providers compete on their ability to hire and manage large groups of employees across various locations. For outsourcers, automation can be a way to stay competitive when most other sources of savings have already run dry. But for those who do not adapt fast enough, automation poses risks.
Offshoring itself was an industry disruptor when it was first introduced in the 1990s. Today’s emergence of automation is no exception. The industry is ever-evolving and firms are always recalibrating the use of outsourcing, offshoring, or of “no location” models. For firms, they must always reassess how they deploy talent. For countries, while challenges are mounting, the global services industry is vibrant and presents great opportunities to develop their economies.
Nevertheless, what does this mean for BPO country players like India and the Philippines? We will talk about that next week.
Lewin. (2012). Global Sourcing of Business Services Key Findings and Trends from ORN Research (paper presented at the International Association of Outsourcing Professionals’ 2012 Outsourcing World Summit, Orlando, February 2012)
Laudicina, Peterson, and Gott (2014). A Wealth of Choices: From Anywhere on Earth to No Location at All. The 2014 A.T. Kearney Global Services Location Index.
Sethi and Gott (2016). On the Eve of Disruption. 2016 A.T. Kearney Global Services Location Index.