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TMCNet:  A robotic threat to outsourcing

[November 20, 2012]

A robotic threat to outsourcing

BANGALORE, Nov 20, 2012 (Mint - McClatchy-Tribune Information Services via COMTEX) -- Robots and humanoids that automate and deliver information technology (IT) projects at a cost that is less than one-fourth the billing rates of engineers from Tata Consultancy Services Ltd (TCS) and Infosys Ltd are the latest threat to India's $100 billion (Rs.5.5 trillion) IT services business.


Software robots and humanoids from US-headquartered IPsoft Inc. and British start-up Blue Prism Ltd are rapidly rendering irrelevant the political and economic debates about offshoring of software and back-office projects. They are doing this by automating more than half the projects they undertake, and by solving technical glitches at a speed (in seconds) that human engineers cannot match.

For years, Indian software firms have been hiring thousands of engineering graduates and building large campuses for training and housing them. The so-called "pyramid model" that sees the entry of a large number of fresh engineering graduates every year brings down the cost of software development and maintenance projects. The model has been successfully adopted and replicated by International Business Machines Corp. (IBM) and Accenture Plc, which employ thousands of engineers in India.

But as India's top tech firms seek the next big thing, relatively unknown start-ups with innovative algorithms are threatening to do what they themselves did to IBM and Accenture in the early 2000s.

"IT Robots May Mean the End of Offshore Outsourcing" was the headline on an article published last Friday on online magazine cio.com that also mentioned Blue Prism and IPsoft.

While IPsoft is already snatching business from Indian software firms, Blue Prism is now using robotics to manage computer infrastructure for retailers such as Shop Direct Group. Founded in 1998 by New York University mathematics professor Chetan Dube, IPsoft counts Comcast Corp., the largest US cable company and BT Group Plc, the UK's biggest phone firm, among its top customers.

"Everyone knows Einstein's quote on insanity (doing the same thing over and over again and expecting different results)... Automation is a cure for the current state of the IT outsourcing industry," said Jeya Kumar , chief executive of IPsoft's Asia-Pacific operations. "The economics are simple -- minimal human intervention with services delivered at un paralleled quality, and there are no annual wage increases, too." Software robots or algorithms automate the entire workflow, offer solutions in a fraction of the time and at a cost that cannot be rivalled by engineers, based in cheaper, offshore locations such as India and the Philippines. For instance, if a US bank faces issues in running a particular software application, an algorithm or software robot can solve it by sifting through the entire IT infrastructure of the bank within seconds, identifying the cause and fixing the problem. A human engineer would take at least few minutes to identify the problem and another few minutes to offer solutions.

While IPsoft hopes to cross $1 billion in revenue this year with less than 2,000 staff, Blue Prism is an early start-up with just 25 employees on its payroll and expects to achieve $10 million in revenue this year.

For now, the over $25 billion a year market for managing computer desktops and servers remotely is at stake, with both IPsoft and Blue Prism beginning to make inroads into the business. According to technology researcher Gartner Inc., one in every four IT projects will be automated in the next three years.

A UK-based phone firm is currently shifting projects from an offshore location to Blue Prism's robotic platform, Pat Geary, the company's chief marketing officer, said in an email response. And since these automated platforms do not need deep technology skills to run them, the shift offers employment opportunities for non-engineering graduates as well.

"These are not IT people, but business and operations staff. So you up-skill the operations team by giving them accessible and available automation, making this group more productive and faster reacting," added Geary.

"We believe robotic automation will have a very significant impact on the outsourcing market, to the same degree that offshoring offered major efficiency gains," he said.

Experts say companies such as Blue Prism can disrupt traditional models of IT services.

"The economics are eye-popping: while an onshore FTE (full time equivalent) costing $80K ($80,000) can be replaced by an offshore FTE for $30K, a robot developed with the Blue Prism tool kit can perform the same function for $15K or less -- without the drawbacks of managing and training offshore labour," James R. Slaby, research director at HfS Research, said in his October report titled Robotic Automation Emerges as a Threat to Traditional Low-Cost Outsourcing.

"In particular, we think robotic automation has the potential to wreak some dramatic, painful changes on the Indian outsourcers who are the current bulwark of the industry," he added.

Already, senior executives at Wipro Ltd, Infosys and Cognizant Technology Solutions Corp. are scrambling to partner with IPsoft instead of losing some existing and even potential projects to the new model. Officials at these companies confirmed they are in talks with IPsoft for a potential alliance, but asked not to be identified citing non-disclosure norms.

The experts add that traditional outsourcing firms have no choice but to partner.

"Now that robots have arrived, low-cost outsourcers may soon be forced into an unpleasant choice: cannibalize your own business, or let an innovative new entrant do it for you," said Slaby of HfS Research.

"We have never invested in services R&D (research and development) -- all these 10 years. Now, these companies could do to us what Amazon is doing to old-world retailers," said the chief executive officer (CEO) of one of the top five Indian software exporters. He requested anonymity because he doesn't want to talk about rivals publicly.

To be sure, robots are making offshoring irrelevant, raising questions on whether India's software firms have under-invested in the next big thing. "Robotic automation can serve as a substitute for the offshore labour that the current political, business and regulatory climate has made increasingly unpalatable," Slaby said.

Outsourcing customers evaluating options to deploy solutions from vendors such as IPsoft say the potential rewards far outweigh the risks associated with trying a new model.

"We have asked some of our existing Indian service providers to come with a proposal that includes plan to use this (robotics) model for at least 25% of the work," said a senior executive at a large bank that currently works with TCS and Wipro, among other software firms. The person requested anonymity because he is not authorized to discuss future IT plans.

Executives at India's top tech firms said the biggest test for IPsoft and similar firms would be to demonstrate that their product works in large, complex projects.

But Kumar of IPsoft said it's not something that worries his company. "Critics never believed that man would land on the moon either. We do support customers of various size and scale, and scalability is a non-issue. We have built a platform, over the past 14 years, to be the autonomics platform for the industry and scale has been a forethought," said Kumar who was also CEO of Patni Computer Systems Ltd until it was sold to iGate Corp. in January last year.

___ (c)2012 the Mint (New Delhi) Visit the Mint (New Delhi) at www.livemint.com Distributed by MCT Information Services

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