ISG Automation Index™ Report Indicates Broad and Growing Adoption

What Is Happening?

The use of automation in IT, Finance, and HR operations is growing and accelerating. And so far, it is more likely to improve productivity by removing robotic tasks from humans than by replacing humans with robots – so far.

ISG released this week its latest installment of the ISG Automation Index™, an analysis report focused on the use and impact of automation in IT services contracts and business support functions. The research leverages data collected from recently signed ISG-advised ITO contracts with a significant automation component and ISG-advised robotic process automation (RPA) assessments in Finance, Accounting and Human Resources. The report provides the most current analysis of how automation is changing the nature of IT services and business support functions.

Key findings from the report include the following:

Service provider productivity is surging. Employee productivity is improving across all towers by 24 to 143 percent; this is in sharp contrast to a historical norm of 5 to 10 percent.

Average Service Provider Productivity Impreovement by Tower

Figure 1: Average Service Provider Productivity Improvement by Tower. Source: ISG Insights.

Costs are declining, especially in areas where software is replacing hardware. Against ISG market benchmarks, double-digit cost reductions continue, with network and email management services showing the sharpest cost reductions, at 64 and 71 percent respectively.

Average Service Provider Cost Reduction by Tower

Figure 2: Average Service Provider Cost Reduction by Tower. Source: ISG Insights.

Shared services processes using RPA require an average of 37 percent fewer resources. Procure-to-pay, order-to-cash, record-to-report and hire-to-retire processes, as well as a number of vertical-specific processes, such as loan servicing and underwriting, all require significantly fewer resources to execute with the application of RPA than those same processes without RPA.

Average FTE Reduction by Business Process after RPA

Figure 3: Average FTE Reduction by Business Process after RPA. Source: ISG Insights.

Why is it Happening?

For IT service providers, competition is fierce. In one out of every two competitive renegotiations, providers lose all of the scope they once managed for the client. Offshore labor rates and ratios are in flux as well, making labor arbitrage a less effective/certain way to reduce prices for cost-conscious customers. And finally, adoption of Software-as-a-Service and Infrastructure-as-a-Service platforms in on the rise while traditional outsourcing is generally flat. These factors, combined with the need to decouple a business’ potential for growth from the number of people it employees, is driving IT service providers to aggressively incorporate automation into their service delivery model.

For business buyers, the rapid emergence of digital business means that customers, employees and partners need access to products and services in real-time. It also means that transaction volumes created by new digital experiences are increasing. The challenge for business support functions is that their budgets are flat to shrinking – even in the face of new digital requirements. Therefore, buyers are turning to technologies like RPA to execute business processes faster, improve quality and compliance and avoid future costs – usually in the form of hiring new people to handle increased volumes.

Net Impact

For IT service providers, the impact will be sudden and dramatic. While the ITO deals we analyzed for this report do not reflect the entire $114B outsourcing market, they do represent the new types of contracts we see emerging in our client activity. We believe that in the second half of 2017, and into 2018, the size and number of contracts with a significant automation component will grow quickly, which will put even greater pressure on service provider pricing. The question will be: can service providers deliver on productivity commitments? As discussed in the report, we believe providers are committing “ahead of the curve” in some cases, and they have not yet fully proven that their automation software can reach the committed levels of productivity.

Given the newness of the technology and the conflict that exists today between IT and business support functions in areas like security and compliance, business buyers will feel the impact more gradually. However, as successful RPA implementations continue and business benefits accrue, adoption will broaden and accelerate, encompassing even more business support functions. This will, in turn, have a profound impact on the business process outsourcing (BPO) market, as enterprise leaders begin to opt for delivery models that focus on a small number of in-country, high-skilled resources supported by a large number of robots over a traditional outsourcing delivery model that depends on a large number of offshore resources. Additionally, as RPA gets “smarter” with the help of machine learning algorithms, the kinds of business processes that can be automated will only increase.

In both scenarios, today we see “task” automation versus “role” automation. This means slices of jobs are being automated, not entire jobs. In most cases, we see two impacts of this: 1) humans workers simply take on more work with the assistance of a bot or 2) humans have more capacity to accomplish higher-value work. However, as more and more tasks are automated, it is only a matter of time before entire roles will be automated. The tipping point has not yet been reached, but, given how quickly these technologies are maturing, it is not likely far away.

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