Press Release

Mumbai, India, February 11, 2016 View All Press Releases

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

By 2018, 40 percent 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.”

More detailed analysis is available in the Gartner report "Predicts 2016: The Rise of the Machine Leads to Obsolescence of Offshoring for Competitive Advantage”.

Contacts
About Gartner

Gartner, Inc. (NYSE: IT) is the world's leading information technology research and advisory company. The company delivers the technology-related insight necessary for its clients to make the right decisions, every day. From CIOs and senior IT leaders in corporations and government agencies, to business leaders in high-tech and telecom enterprises and professional services firms, to technology investors, Gartner is the valuable partner to clients in approximately 10,000 distinct enterprises worldwide. Through the resources of Gartner Research, Gartner Executive Programs, Gartner Consulting and Gartner Events, Gartner works with every client to research, analyze and interpret the business of IT within the context of their individual role. Founded in 1979, Gartner is headquartered in Stamford, Connecticut, USA, and has 8,100 associates, including more than 1,700 research analysts and consultants, and clients in more than 90 countries. For more information, visit www.gartner.com.

Comments or opinions expressed on this blog are those of the individual contributors only, and do not necessarily represent the views of Gartner, Inc. or its management. Readers may copy and redistribute blog postings on other blogs, or otherwise for private, non-commercial or journalistic purposes. This content may not be used for any other purposes in any other formats or media. The content on this blog is provided on an "as-is" basis. Gartner shall not be liable for any damages whatsoever arising out of the content or use of this blog.