Forget Arbitrage: Just Take Labor Out of the Cost Equation

Labor arbitrage, or the moving of jobs from more expensive to less expensive locations, has long been seen as one of the chief potential benefits of BPO. And while reducing the cost of labor by shifting it overseas certainly remains an appealing option for many BPO customers, with the assistance of technology the BPO model is starting to evolve to a point where, in many cases, labor can be removed from the equation entirely.

“BPO is migrating to a continuous-improvement model where technology solutions take the labor out of the cost of BPO,” says Marc Tanowitz, principal of Pace Harmon, a consulting firm specializing in outsourcing advisory services. “Taking labor out is a better solution than labor arbitrage.”

Tanowitz says the removal of labor costs from BPO via automated technology solutions makes the whole cost of BPO go down. “There is market saturation [of labor-based solutions],” he says. “The next wave of BPO solutions will leverage technology to drive costs of BPO down.”

Delivering BPO via Platform

Using technology to minimize or remove the labor factor from the BPO model also allows BPO vendors to create a new, platform-based model of delivering services that resembles the traditional model of delivering IT services.

“Platform-based BPO solutions create a competency- and utility-based BPO model with variable, transaction-based pricing,” says Pace Harmon senior associate Dave Borowski. “Back-office processes are still very labor-intensive, but there is a new interest in creating an incentive for the BPO vendor based on outcome.”

Borowski cautions that delivering BPO via a platform model is not a simple task. “It takes a lot of work to move BPO toward becoming a truly managed service,” he says. “There is a lot of talk about it, but it’s a less proven model.”

End-to-End Process

Tanowitz says that removing the labor cost from the BPO model and creating a platform-based means of delivery can also help evolve BPO into a truly transactional “end-to-end process,” as opposed to the traditional less flexible, labor-based model.

“The typical BPO approach looks at how many people are performing a process today, assumes there will be that many throughout the process, and provides a cost based on that amount of labor. We are moving away from this model towards a transaction-based model.”

Borowski estimates that by integrating technology into BPO solutions, approximately 50% of its savings compared to in-house process management is driven by increased efficiency and automation, and 50% of its savings through leveraging low-cost labor location(s). He also notes that Pace Harmon does not necessarily advise a client having business process issues to pursue a full-blown BPO solution.

“We go into an assessment without a predisposed conclusion that outsourcing is the best answer,” he says. “That could mean we advise re-engineering processes or migrating to a captive shared-services delivery model, rather than outsourcing.”