Smart Machine Technologies Will Render the Offshore Model Obsolete for Competitive Advantage

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By 2018, 40% of outsourced services will leverage smart machine technologies, rendering the offshore model obsolete for competitive advantage, according to Gartner, Inc. For more than a decade, the use of offshore business models has been a "go to" option in sourcing strategies, but Gartner maintains that the rise of smart machines will send organizations back to the drawing board with regard to their long-standing arsenal of sourcing approaches.

“Smart machines are not future fantasy; they are commercially available . According to Gartner’s analysis of external sources, more than $10 billion have already been purchased through more than 2,500 technology companies,” said Frances Karamouzis, vice president and distinguished analyst at Gartner. “For the business and IT services industry, this translates to a new source of fuel for the industry - namely ‘virtual talent.’ It's faster, cheaper and more predictable.”

This does not mean that there no longer will be offshore services and all of these long-standing contracts will disappear. It does mean, however, that it is not going to be the primary means of cost control or speed to competitive advantage.

“The offshore business model represented a significant milestone in the business and IT service industry because it recalibrated the single largest driver of cost - labor,” said Ms. Karamouzis. “The new normal is hyperautomation arbitrage, which will be the new avenue for a completely different cost structure through virtual labor. It also addresses scale and predictability.”

Smart machines are not always complete replacements for subject matter experts (SMEs) or other labor. There could still be a role for offshore centers, albeit changed and refocused. Human labor is still part of the mix, and cheaper human labor always will be appealing to business leaders.

All types of smart-machine-enabled services will be leveraged in renovating core efforts, as well as exploiting the new efforts. As a result, the following market implications will be critical for sourcing executives: 

• Offshoring for competitive advantage already has declined, and will continue to decline, due to the rise of virtual talent, as well as digital business and analytic skills needed in domestic locations.
• Smart machines and algorithmic business models will not always be complete replacements for human SMEs or other specialty roles. There still will be a role for offshore delivery centers, albeit changed and refocused. Human labor always will be an important part of the overall sourcing portfolio.
• Evaluation criteria of service providers will shift from cost of labor to business outcome through algorithmic business models. While labor arbitrage was once the primary cost driver, the location of low-cost labor will not be the most differentiating factor for providers going forward. In fact, we see a rise in demand for onshore resources. More importantly, hyperautomation arbitrage will be the new source of differentiation and innovation.
• Providers will be primarily focused on the significant increase in revenue per professional of smart-machine-enabled services fueled by virtual talent, rather than top-line revenues of outsourcing. The new reality for those providers with successful leverage of virtual talent will be more profitability for each incremental unit of revenue. This will drive vendor consolidation and a new bar being set for innovative offerings.
• Big shifts in the vendor landscape because some product vendors also may enter the game by offering "business process as a service" or cognitive business offerings. This will create a buyer's market with a large abundance of choice.
• The margins created via embedded technologies within new smart-machine-enabled service offerings may lead to significant issues for vendors unable to invest.

“Organizations must embrace the market change and be able to evolve in light of the new fuel of virtual labor,” said Ms, Karamouzis. “This means stopping the use of  offshore business models as a crutch for cost savings and starting to build the capability to analyze, rethink, reimagine and recalibrate your sourcing portfolio, and appropriately balancing risk with business value and cost.”