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2016 AN EVEREST GROUP VIEWPOINT

The Impact of SDA on Services TCO


Sarah Burnett, Vice President
Amardeep Modi, Senior Analyst
Abhishek Sharma, Vice President

Copyright 2016, Everest Global, Inc. All rights reserved.

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2016 THE IMPACT OF SDA ON SERVICES TCO

Introduction

Demand for Service Delivery Automation (SDA) is changing traditional global services
models. Partially- or fully-automated processes reduce the number of FTEs that are needed
to deliver services. Automation is also changing the skill levels that are required for
operations. Given that it is often the simpler and higher volume processes that are
automated, the bigger headcount reductions will be seen at lower skill levels. People with
higher level skills will be needed to help program robots handle process exceptions, and to
manage the robots/automations.

The reduction in headcount can bring big cost savings to an organization or outsourcing
service provider with not only lower salary costs but also the total costs of hire to retire.
Automation brings other benefits that contribute to the changes in services and the Total
Cost of Ownership (TCO). These include:

Elimination of errors: Robots do not make cut & paste or other typing errors and,
therefore, the quality of data should be improved

Robots adhere to the rules that are embedded in their code and, therefore, apply the
same rules to everything. This improves standardization and adherence to policies or
regulatory requirements

Robots can be programmed to automatically log everything that they do, further
enhancing audit controls and regulatory compliance

Robots can run as long as needed, to deal with capacity fluctuations and, therefore, can
deal with seasonal peaks and troughs in demand

The location of service delivery also becomes moot as automation costs, such as
software licenses, are the same no matter where they are run

This report considers all these factors and the impact on services TCO and subsequently on
pricing models and how they can change to reflect increasing automation.
The paper is intended for enterprises, service providers, and advisers as a guide to the
impact of SDA on contract TCO and new styles of pricing.

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Adoption Trends

Regulated industries with transactional, repetitive, and high volume business processes offer
the highest potential for SDA adoption. The Banking, Financial Services, and Insurance
(BFSI) sector is at the forefront of adoption of SDA technologies with around 25% share of
the market across both industry-specific and horizontal functions. It is closely followed by
healthcare & pharma, which accounts for about 16% of the pie. Industry-specific processes,
such as cards activation, fraud discovery, claims processing, and new business preparation
in BFSI as well as reporting and system reconciliation in healthcare, offer higher potential
for automation.

Among horizontal functions, F&A has the highest adoption of SDA followed by contact
center, across industries. However, this is largely based on Robotic Process Automation
(RPA), which is a subset of SDA. The market for Smart Automations (SA), the other major
subset of SDA, is nascent but is set to grow rapidly. Progression of technology and
emergence of tools that are based on Artificial Intelligence (AI), for process automation
open up opportunities for automating of judgment-intensive and complex tasks such as
large-scale document processing and risk management services. Subsequently, the
combination of RPA and SA is expected to make way for near complete automation of
business process and IT services across industries with minimal human intervention in the
future. Continuing the historic adoption trend for RPA, BFSI and healthcare sectors are
expected to lead the adoption of SA as well. Exhibit 1a shows the adoption potential of
RPA in BPS and Exhibit 1b shows RPA opportunity in IT.

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EXHIBIT 1a Potential for RPA Low High XX Example of processes with higher potential

RPA adoption potential in Banking Cards


BPS by buyer industry and & financial activation
function services Frauds claims
discovery
Source: Everest Group
Insurance Claims
processing
New business
preparation
Healthcare Reports
automation
System
reconciliation
Manufac- Bills Of
turing Material
(BOM)
generation
Hi-tech Service order
& telecom management
Quality
reporting
Energy & Account setup
utilities Meter reading
validation

Human Contact
F&A Procurement resource center Industry-specific processes
Accounts Invoice Payroll, hiring Linking
receivable, processing, candidate customer
accounts requisition management service to
payable, to purchase back-office
general order processes
ledger

EXHIBIT 1b
IT Infrastructure support examples Database support examples
RPA opportunity in IT is in Desktop AD lockout Backup & Backup creation
the repetitive tasks Delete ID recovery Amendment and removal
Password reset Backup validation
Servers Server diagnostic Security Login failure checks
Source: Everest Group
Restart Security policy violations
Networks MPLS check Underlying Diagnostics
Non MPLS check operating system Review critical and error
WAN/LAN check events
Internet check Remediation actions
VPN user ID Maintenance Log checks
Email Create, modify or delete activities Job history checks
IDs Adding users
Password resets Creating or moving
Exchange updates databases
Storage SAN daily monitoring Indexing
SAN replication sync Data migration Formatting data and
Databases DB check copying into new fields or
DB admin databases
Extend tables Database health/integrity
checks

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SA tools with machine learning add multiple dimensions to automation in BFSI and
healthcare. The opportunity for automation and innovation is significant given the ability of
AI-enabled tools to process unstructured content. It would offer high potential for bringing
effectiveness in regulatory compliance and risk management and can result in saving
millions of dollars of fines paid by banks due to non-compliance. Additionally, SDA
adoption by banks can open up new opportunities such as:

Corporate banking concierge services: Build customized robots to enhance services to


major clients on a 247 basis; for example, using robots to enhance transaction data
processing and synchronization across systems and thus enhancing real-time access to
treasury and trade services across digital and mobile channels across geographies

Enhancing partner experiences (e.g., distributors and telco): Take automation across
business boundaries by automating partners information or transaction interfaces

Increasing customer intimacy and personalization: Enhance the quality of customer data
and its integration across systems to improve analysis of customer habits and income &
expenditure patterns to offer personalized or bespoke automated services such as
financial advice

New combinations of channels: Combine back-office automation with a new generation


of omni-purpose ATMs and the-not-so-new mobile and digital channels, and the
possibilities are endless, for e.g. new online retail channels

Some of the likely applications of SA tools in healthcare are:

Smart routing of incoming documents to the right operational teams, subject matter
experts, or other automated processes for further action

Intelligent search of research and health trial documents to match to specific


requirements or patient groups

Medical diagnosis assist and recommended treatments

Payment processing quality checks and fraud prevention & detection

Health and treatment monitoring with risk mitigation and preventative recommendations

The list will grow as the experience with the technology matures and organizations start to
explore new frontiers.

Other industries, such as travel, hospitality, and leisure sector, can be expected to see high
adoption of scalable cognitive virtual agents answering customers queries in place of
human FTEs to improve efficiency while reducing the cost of operations.

In business functions, such as HR, automation rates are already high due to end-to-end
integration of processes through various technology platforms connected usually through
APIs. In this domain, RPA offers limited gains and only through the non-intrusive nature of
its integration with the underlying HR system. However, there is a huge potential for
adoption of SA that can automate more complex and judgment-intensive tasks such as
assessment of candidates from interview scripts, provide initial shortlist of
recommendations, as well as adoption of cognitive virtual agents to answer queries.

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Impact on TCO

FTE de-linkage

SDA has ongoing TCO implications for providers, and it is not limited to just a one-time
FTE replacement effort. The structure of delivery teams is also changing. Exhibit 2 shows the
important TCO components to be aware of when negotiating with providers.

EXHIBIT 2
NOT EXHAUSTIVE
Important TCO components
Reduced direct people costs
Salaries and benefits Reduced direct people costs
Reduced indirect people costs Annual wage increases
Savings drivers

Source: Everest Group


Transportation and T&E Reduced Indirect people costs
Reduced facilities and overhead Recruitment
costs Training
Higher accuracy Ongoing
Higher speed standardization/improvement
Improved standardization benefits
Better governance and audit trails

Automation tool implementation


costs License cost (if periodic)
SME effort Ongoing tool maintenance costs
Cost drivers

License costs (if one-time) Tool version upgrade costs


User training costs Potential down time
Cost of additional staff to manage Additional KM cost to manage loss
exceptions of tribal knowledge
Potential down time

One-time impact
Ongoing / recurring impact

Headcount
Current delivery pyramid is bottom-heavy with the majority of volume-intensive repetitive
transactional processes being delivered by FTEs. Typically, one software robot can replace
1.5 to 3 FTEs depending on the nature of the task and the SDA technology being used.
FTEs would still be required to handle exceptions and deliver decision-making components
of processes. This can lead to a 40% reduction in the bottom layer of the delivery pyramid
leaving the middle layer of the pyramid comparatively bigger as staff move up to do more
judgment-intensive tasks as well as handling automation exceptions and management.
Subsequently, as the adoption of SA increases with automation of more judgment-intensive
tasks, the delivery model will change again with a reduction in the middle level too. This
offers potential for significant reduction in service pricing ranging anywhere from 15-65%,
depending on the process, technology used, and existing delivery location.
Exhibit 3 shows how the typical organizational skills pyramid is turning into a diamond, with
shrinking lower levels and growing middle grades.

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EXHIBIT 3

The changing delivery


pyramid
Pre-RPA delivery pyramid Post-RPA delivery pyramid Post-smart automation
delivery pyramid
Source: Everest Group

Senior (2%) Senior (2%) Senior (5%)


Mid (8%) Mid (8%) Mid (25%)
Mid-to-entry (25%) Mid-to-entry (48%) Mid-to-entry (35%)
Entry (65%) Entry (42%) Entry (35%)

Current delivery pyramid is Upskilling resources Adoption of smart


bottom-heavy with majority delivering repetitive automation will lead to
of volume intensive transactional processes to more upskilling of
repetitive transactional handle judgement- resources already handling
processes being delivered intenseive / customer- judgement-intensive /
by FTEs facing roles customer-facing roles

Administrative / office space costs


Reduction in headcount would lead to a decrease in administrative and office expenses
such as office space / real estate cost, salaries, and other benefits given to employees (who
get replaced by robots). Further, it would also bring down costs in support functions such as
HR, furniture, cost of utilities, employee transportation costs, and office supplies as well as
equipment costs such as desktops and telephones.

Skills
Service providers deploying SDA solutions have plans in place to upskill the bottom layer of
the pyramid and redeploy staff in either more complex / judgment-intensive processes or
customer-facing roles. For example, the staff handling basic form filling tasks can become
robot supervisors and then move on to be trained for production of management reports.
SDA may also potentially require companies to overhaul their recruitment and training
engine to hire and train skilled FTEs with greater domain competencies capable of handling
more judgment-intensive processes.
SDA could also lead to better talent retention, as attrition for complex processes is notably
lower than that of transactional and repetitive processes.
Another area where it could have a notable impact is in the seasonal or contingent labor.
The cost of hiring and training temporary staff can be very high and some companies also
complain about the poor quality of work when temporary staff takes time to learn what they
have to do. Companies that have introduced robots to replace seasonal temporary staff
report satisfaction with better outcomes, e.g. fewer errors in the processed data and overall
improved data quality.

Hire to retire
SDA will lead to reduction in associated HR cost due to lower number of hires, however,
this will be somewhat balanced as hire to retire cost per hire would increase due to demand
for higher-skilled FTEs. be increased.

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SDA software costs


Total implementation cost of SDA software is usually an amalgamation of one-time and
recurring costs. One-time costs generally include consulting, implementation, training, and
transition fee. Overall one-time costs depend upon a number of factors, such as size of
deployment and number of processes covered under deployment. Recurring costs include
license fees, hosting fees, and maintenance costs. These depend on various factors such as
complexity and number of processes automated, number of licenses required, number of
working days for robots, and deployment option. The robot licenses are usually made
available on a perpetual basis or for a monthly/annual fee. Maintenance fees generally
include product support and version updates.

Productivity per FTE

As the level of process automation and optimization increases within organizations we will
see improved throughput and capacity. Fewer FTEs will be required to run and maintain the
systems and to manage complex and judgment-oriented work. This will lead to quicker
time-to-value realization for the buyers. At the same time, service providers can charge
higher margins for the provision of automated processes and for the productivity
improvement that they offer due to SDA adoption.

Process accuracy

SDA adoption leads to minimization of manual intervention, errors, and duplication, thus
helping organizations meet Service Level Agreement (SLA) with comparative ease. Multiple
enterprises, that have adopted SDA, report achieving 100% accuracy. This positively
impacts the service pricing, as usually there are incentives for the service providers to meet
or exceed SLAs. Given that SDA adoption can almost always help service providers meet
SLAs, the targets set by their clients are likely to be increased.

Deeper standardization

SDA adoption leads to deeper process standardization benefiting both buyers and service
providers. Organisations would be able to realize higher business value as standardization
reduces the overheads of rework. It can also make benchmarking and optimization easier,
providing the opportunity for better services and higher prices.

Qualitative factors: Service and process governance, policy, and compliance

Adoption of SDA has additional qualitative benefits that go beyond direct cost savings:

Improves governance, compliance, and audit trails by embedding requirements into


automation rules as well as automatic logging and reporting

Improves security of processes and data by reducing risks from inside the organization
such as data theft

Enhances disaster recovery by allowing processes to be switched to other servers in


emergencies and offers easier remediation with the roll-back features in case the system
fails to deliver the desired gains

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Regulatory compliance is a complex process in general and a serious subject for many.
Leveraging technology/automation, for example, can help enhance regulatory reporting
and compliance documentation by enabling system integration. Also database
consolidation through automation can eliminate data gaps and timeconsuming file
searches associated with manual processes. This will also enable organizations to maintain
an audit trail and prepare for effective responses to any regulatory audit that may occur.
SDA will enable the service providers to meet or exceed their SLAs easily, subsequently
benefiting buyers by cutting the potential for fines imposed by regulators due to non-
compliance, business gains due to higher customer satisfaction, and positive impact on top
line growth. In turn, service providers can get additional revenue in a gain sharing or
similar construct.

All in all, given both the quantitative and qualitative cost benefits of SDA, we expect to see
a decrease in the TCV of contracts (assuming same scope) but an increase in margins.
That said, as adoption matures and confidence levels increase, we might see new
processes that have not traditionally been outsourced put out to tender, e.g. risk and
regulatory compliance management services or customization services that would allow
enterprises to offer seemingly highly bespoke services to their customers. As a result of the
new opportunities that SDA can generate, we might see service providers broaden their
service portfolios and win more work from their existing buyers and increase revenue. These
opportunities will also absorb some of the FTEs that will have been replaced by robots.

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Impact on Pricing and Pricing Models

The traditional input-based / FTE-based pricing is the most prevalent model in outsourcing
deals. With advances in technology and increasing adoption of automation, this model is
becoming increasingly outdated. Over the next few years we will see a growing trend for
more advanced pricing models in new contracts. These include output-/transaction-based
pricing, outcome / gain sharing, and blended pricing.
The direction of travel for prices is likely to be:

Downward for transactions delivered through automated processes

Upward for FTEs with higher skills who would handle the exceptions

These could be combined with SDA standalone service prices charged on a per robot or
utility-style basis.
The pricing models will have some flexibility to incorporate an expected level of transaction
exceptions that would have to be resolved by higher-skilled FTEs. This can be as high as
20%.

In addition, service providers will continue to charge a base price for service management.
We believe that there are two common routes to incorporating these factors into SDA-
oriented outsourcing contracts. Exhibit 4 provides an overview of these.

EXHIBIT 4
Option 1: Incremental
Two common routes to
incorporate use of SDA Primarily input driven / FTE-based pricing models
within outsourced contracts Leveraging RPA to incrementally reduce the FTEs
required to perform selected activities
Source: Everest Group
Reduced effort leads to a lower total price of the
contract
Typically used where there is a high potential of
exceptions and/or unstable baseline volumes
Benefits realized as higher ongoing continuous
efficiency commitments (~30-40% cumulative)

Eventually, incremental adopters may move to


transformational adoption
Incorporating
SDA into
contracts
Option 2: Transformational

Moving from an input-driven model to a truly


output or outcome-based pricing model
Significant changes are required to the underlying
operating model and processes
Typically used where baselines are well-known and
processes are aligned to maximize value capture
For highly transactional processes, the per
transaction effective price could reduce by ~40-
60% very quickly

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In situations where standalone SDA technology is being offered by the vendors (mostly
technology vendors) and not as part of broader BPS or ITS deal, pricing per robot or per
licence is simple and the most prevalent pricing model is used, as a direct analogy to per
FTE pricing. Most of the SDA technology vendors use this pricing model in deals. Vendors
usually charge one time licensing fees or a monthly/annual subscription fees, based on the
number of robots/licences required by the company and the number and nature of
processes automated.

There is also a new breed of service providers that offer largely automated outsourcing
services delivered from centers where operations are manned by robots. These highly
technology-oriented service providers could well grow into offering more transaction- and
outcome-based pricing.

Going forward, as the market for process automation becomes more mature, a blended
pricing model is expected to gain popularity, where lower transaction pricing is used for
automated processes and higher input pricing for people handling the exceptions.

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Conclusion

Adoption of SDA is a disrupting trend that is impacting the traditional service delivery model
and the associated TCO. Enterprises and service providers can ride the wave of disruption
by embracing change and adopting new service delivery and pricing models.

In the coming months we will see increasing demand for SDA in scope of contracts. The
change to SDA-based service delivery can be adopted in an incremental way in existing
contracts or treated as a transformational step in new contracts or at time of renewal.

Change is on the way and never before has the need for agility been required more.
Organizations on both the buy- and the supply- side of the market need to consider new
styles of services and embrace change. If they do not, others will, leaving the laggards
behind in an increasingly competitive world.

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Outlook

We will see adoption of SDA increase globally. There will be some teething issues with the
new style of automated service delivery, for e.g. if large scale automations are managed
badly, we will see issues appear in the handling of large portfolios of robots. However, both
deployment methodologies and automation skills will get better resulting in higher quality
implementations and outcomes. We will see the more mature adopters of the technology
start innovating in services using SDA. This will also open up new outsourcing opportunities.
We are already seeing automation itself as a service offering, as part of which, service
providers will automate and run clients in-house services.

The balance of deployments is currently highly tilted towards RPA. We will see growth in SA
over the coming years as AI-based technologies improve and high profile case studies
reveal the big benefits that can be realized from SA.

As for pricing, the inevitable change to alternative pricing models will happen, and with it,
we will see revised SLAs come into effect.

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Glossary: Overview of SDA and definitions

Everest Groups first principles of SDA and definitions can help organization develop a
unified vocabulary for automation:

SDA is utilization of technology to replace a series of human actions when delivering


business and IT services

Much automation is already embedded in software systems (e.g., Microsoft Excel


functions), but since it is part of the normal feature-functionality of a system, it is
generally not considered as automation, but rather simply a more powerful system(s)

SDA can refer to automation in IT infrastructure and application management services


as well as business processes.

Robotic Process Automation (RPA): This is a subset of SDA. It refers to a group of tools
that interact with computer-centric processes, typically, through the user interface and so
can do away with the need for other types of integration with the underlying system. RPA
handles structured data, for example, taking data from electronic forms and entering them
into databases. RPA tools are rules-based and deterministic with known outcomes e.g. data
copied from one system into another.

Smart Automation (SA): This is another subset of SDA. SA denotes a group of intelligent
tools that use techniques such as machine learning to learn how to undertake a process.
They learn from people and extend their process knowledge in order to do more. SA tools
can typically handle both structured and unstructured data. Those based on big data and
analytics can be non-deterministic i.e. come up with new ways of doing things to enhance
the process or identify unexpected risks by spotting patterns in big data. Some of these tools
infer decisions from their knowledge and experience and work in a non-deterministic way.
Others are designed to always ask a human for approval to any changes so that the
outcomes are always deterministic.

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About Everest Group

Everest Group is a consulting and research firm focused on strategic IT, business services,
and sourcing. We are trusted advisors to senior executives of leading enterprises, providers,
and investors. Our firm helps clients improve operational and financial performance
through a hands-on process that supports them in making well-informed decisions that
deliver high-impact results and achieve sustained value. Our insight and guidance
empowers clients to improve organizational efficiency, effectiveness, agility, and
responsiveness. What sets Everest Group apart is the integration of deep sourcing
knowledge, problem-solving skills and original research. Details and in-depth content are
available at www.everestgrp.com and research.everestgrp.com.

For more information about Everest Group, please contact:


+1-214-451-3000
info@everestgrp.com

For more information about this topic please contact the author(s):

Sarah Burnett, Vice President


sarah.burnett@everestgrp.com

Amardeep Modi, Senior Analyst


amardeep.modi@everestgrp.com

Abhishek Sharma, Vice President


abhishek.Sharma@everestgrp.com

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