AI 101: An Introduction to Automation and Artificial Intelligence in Outsourcing

The traditional understanding of outsourcing tends to perceive cost reduction as one of the main factors for any client. The idea that the "total cost of ownership" of a business over the entire term of an outsourcing contract should decrease, very often acts as a business case. Similarly, the perception of outsourcing as a way to convert assets on a balance sheet into a subscription fee for services and a reduction (or at least an apparent decrease) in capital costs is another common deterrent at the beginning of a transaction. While technological transformation / business transactions are made when the goal is to update services with an increase in the total cost, they are not as common as cost-based transactions.



Today, most of the savings obtained through outsourcing transactions, especially those related to the transfer of production processes abroad, to neighboring countries or even to the north (at least in that part of the UK, which is located near London) - associated with the movement of labor: the basic idea is that the activity in the outsourcing of the relatively more expensive labor of local workers can be carried out at a lower cost, but at the same or even higher standards with the help of an outsourcing provider. Ideally, the quality of service is enhanced by an accurate description of the services, flow sheets / guidelines for operational procedures and a list of measurable quality levels, provided with compensation and other contractual remedies for the client, if the service does not meet the required standards.

The continuing rise in the cost of outsourcing and its expansion from a relatively specialized non-core business to a highly qualified and critical activity testifies to the success of this formula. Anything Harry can do at his desk in Basingstoke, Harun can do at his desk in Bangalore, but at a lower price.

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Look, but without hands ...



While the cost of labor may be lower, there are other significant costs associated with outsourcing. The most obvious aspect is that the seller must recover their costs and get some profit, so the customer always pays for it. Especially when a foreign resource is used, the cost of visiting the supplier’s facilities and the cost of verifying compliance / procedures (data protection, anti-money laundering, industry regulatory regimes, including financial services or insurance, etc.) add a portion of the cost to this equation . Add to this the cumulative effect of significantly higher wage inflation at traditional production sites, and the daily savings may fade away by the end of the term.



Conversely, technological costs continue to fall. While Moore's law may slow down a bit as it approaches physical limits - this is like a small microprocessor that can be made using modern silicon photolithography technologies - the cost of computer calculations continues to rapidly decrease from year to year. And these costs are essentially equivalent anywhere — developing economies do not have price advantages when it comes to buying computing equipment. And if the cost of a desktop computer is equal to several monthly wages of the operator, this is no longer relevant, even for places with low costs.



If you can get the computer to do the work that the computer is currently doing under the control of a person, then you can significantly reduce costs. Moreover, you can place a computer anywhere in the world at an equivalent cost. Moving services from remote production facilities to those closer to the customer will subsequently significantly reduce the cost of transportation, auditing, and the corresponding prices.



Magic box



Talk to any large outsourcing company, and they will offer you a number of automated production lines. For the most part, these systems (for the winter of 2015/16) have not yet largely replaced a person. And for companies located in places with a huge and still relatively cheap labor reserve, the motivations in this regard are not clear - such changes in the provision of services erode the very basis of the advantages of labor costs that have allowed these suppliers to take advantage of the rapid and profitable growth in recent years. two decades.



But change is coming. Various market players are already demonstrating truly intelligent systems. IBM famously defeated the TV show 'Own Game' with Watson's artificial intelligence system and is already using the same technology in the field of diagnostic medicine. The implications for deploying this technology in other 'diagnostic' areas, such as technical support and application maintenance, are fairly easy to predict. And everywhere, in such diverse areas as the processing of insurance claims and call-center management, 'business process automation' is opposed to outsourcing as a new standard.



The key difference is adding some form of 'artificial intelligence', 'machine learning, or other' smart 'technologies to this cocktail. The latest automated systems are self-developing and are capable of more complex analysis and decision-making based on this analysis. It is not easy to automate the if-this-then-this, it is a system that can replace the role previously played by humans. And as systems become more complex and are able to cope with a more complex set of input data to make correspondingly more complex decisions, the replacement of roles will take place from the lowest position to the most senior roles.



Contract development



The evolution from human solutions to machine solutions will not be a change from the “all or nothing” category. Over the next few years, we will see that the services of outsourcing providers will gradually begin to include more and more automated elements, and will slowly approach the point where very few people will be required to provide the service, although today a similar process is rather laborious.



Along with the development, the relative importance of various aspects of standard outsourcing contracts will also change. With software license machines, access to information and access to systems and / or derivative logic of exit scripts have a much stronger effect. When people work - a small number of more qualified personnel who provide work and management with the help of key personnel and provisions to prohibit poaching are much more important. Similarly, the impact (which is already very important in itself) of the availability of various service levels of systems is likely to increase, but almost certainly it will be easier to reduce because the reduction in equipment cost affects the cost of working systems, which adds stability and redundancy to the workforce.



Other aspects of contracts may become more standardized. Currently, attention is paid to the risk of non-compliance with foreign laws - especially risks in the field of data protection - they are reduced if the system can be located in the client's jurisdiction.



Other risks that need to be considered are rarely considered in the discussion of outsourcing at this time. Systems are becoming smarter and more decisions are being automated based on large sets of input data, and the systems themselves can develop decision-making logic, but the reason for this is associated with legitimate problems. For example, someone managing a system that works with people with specific surnames, depending on the settings they use in the input dataset, could be accused of discriminating on a racial basis if the surnames correspond to a particular ethnic group, as if such decisions were would be based on simple prejudices. It is necessary to take responsibility for verifying the decision-making logic and ensuring that it does not violate the law — in this example — it is discrimination based on the characteristics defined.



Last person



It seems that a change in technology always happens much faster than we expect. The impact of automation on outsourcing transactions will undoubtedly follow a similar path. The speed of change may mean that the five-year deals concluded today will be replaced by automated processes when they are revised. If you think about it now - especially in the context of the transfer of workers or issues of labor surplus - this will greatly help both customers and suppliers.



About the author : Gareth Stokes is a partner of DLA Piper, which mainly works with information technology, outsourcing and intellectual property. Gareth’s experience encompasses many complex and large procurement and supply projects in regulated industries. Most of these projects involve shipping to the mainland, while other elements go farther, both to the coastal territory of the new EU member states, and to India, China and countries with developing economies. These projects are usually associated with innovative contractual designs, including multi-level structure and specified structures, trust funds and other multilateral contracts.