The COVID-19 pandemic forced Australian Authorised Deposit Taking Institutions (ADIs) to operate with limited offshore business support. Will this stimulate onshoring post COVID-19? Or will it be business as usual, post-pandemic? We spoke with ADIs and outsourcing service providers to find out.
Rapid uptake of digital technologies
The COVID-19 pandemic has had a huge impact on all our lives.
Who could have imagined - at the start of 2020 - that working from home would be the norm?
After Australia’s lockdown was announced on Sunday 22 March, the Work From Home (WFH) response was swift, and comprehensive.
Millions of workers were set up to work by remote.
Business transformations that would normally have taken months, if not years, happened overnight.
With everything from court hearings to social gatherings occurring online, out-of-office infrastructure became available, and familiar. Just as importantly, there’s a population willing to embrace digital technologies far more readily than ever before.
In ADIs, executive teams were forced to open up their thinking towards digitisation and automation.
Underlying business practices had no choice but to change. The usual scenario - a transformation journey delayed by the organisational changes required - went out the window.
As a result, there has been a rapid uptake and acceptance (out of necessity) of digital technologies.
Throughout those initial months, many ADIs were unable to rely on their offshore service providers (through business process outsourcing, or BPO) in India and the Philippines - as they, too, struggled with lockdowns.
ADIs learned to cope. As we look to a post COVID-19, where does that leave the future for BPOs?
Growth of BPOs in decline
Use of offshoring or BPOs had already started to decline over the past few years.
Offshoring may have initially been driven by wage arbitrage. But the trend has been for companies to offshore more complex and higher-value-adding activities.
These required access to subject matter expertise and a growing number of highly skilled and qualified workers.
That has led to higher wage costs, exacerbated by the continued fall of Australian dollar. The cost argument lost ground.
Business also began to realise that they were potentially robbing themselves of future talent pools, for example, where more than half of call centre staff are university graduates.
Then COVID-19 hit.
Following lockdown orders in the Philippines and India, most BPOs - caught between mobility curbs and client security obligations that prevent work-at-home scenarios - were unable to meet contracted service levels.
ADIs using offshore service providers in India and the Philippines found their contact centres struggling to cope with increased call volumes.
This was intensified when the Australian government simultaneously announced sweeping changes to the superannuation scheme as a result of the pandemic.
With most of the world's workforce working from home, organisations realised they can supplement a wide variety of functions with the remote working model.
It is normalising the requirement to relook at how organisations conduct business. This challenges long-held beliefs about where to conduct work and the ecosystems needed to support those activities.
The pandemic has heighted ADIs' aware of their supply chain vulnerability, and they have taken a more hands on approach to business continuity. It was inevitable that major organisations would example the critical activities they have offshored. Now they find themselves reviewing whether it makes economic sense.
Yet although some of the benefits of offshoring have fallen away, there are pervasive business continuity risks that must be factored into the risk reward trade off. Going forward, Australian entities are more likely to take a hands on interest in the risks of service interruption and the range of reliable and cost effective mitigants. In addition, the costs of reshoring are high, possibly prohibitively so.
So, what will it be: onshoring, business as usual, or digital commoditisation?
Transformation, BAU or commoditisation?
In speaking with ADIs and outsourcing service providers, we can see three potential scenarios.
1. Rapid transformation
In this scenario we see government incentives for onshore services, digital transformation occurring rapidly, and increased nationalism.
Regulatory changes focused on operational resilience make it more difficult for traditional offshore BPO agreements to achieve regulatory compliance.
The large BPO providers look to establish onshore models that are not in conflict with government incentives, and may resemble onshore captive outsourcing solutions. Existing offshoring agreements are not renewed, and there is significant churn between service providers.
Digital solutions can be delivered cost effectively and are assisted by favourable economic recovery. Generic digital solutions are widely accepted, there is little demand for digital service differentiation.
2. Business as usual
In this scenario we see offshore service providers reduce the cost of delivering services. They transform with digital solutions, improving service levels and resilience.
Regulatory changes do not significantly affect ADI’s use of offshore BPO services. There are no government incentives for onshore services.
Digital solutions increase, provided by the large international service providers who have teamed up with digital agencies.
Cost take-out pressure remains a key driver, as recovery is slow. Cost savings provided by offshore BPO service providers are needed to meet targets. Offshore BPO providers attempt to rebrand their offerings, but struggle to compete in a saturated digital service marketplace.
3. Digital commoditisation
In this scenario we see government incentives for onshore services to the exclusion of digital services. After an initial rapid take-up, the acceptance of digital services slows. Digital solutions are no longer differentiators and have become seen as low-value generic offerings.
Offshore BPO service providers are not able to compete with a market flooded with low cost digital alternatives. Existing agreements are not renewed.
Organisations look towards a 'second wave' of digital technology as differentiators. Digital service providers trial new technologies, but these remain immature and unproven. Meanwhile digital transformation has plateaued, with most of the cost savings having been taken. Automation technologies such as robotic process automation dominate.
Organisations increasingly emphasise the domestic nature of their services as a differentiator, as nationalism grows. Slow economic recovery places further pressure on transformation projects.
An uncertain future
Which of the three scenarios is more likely is uncertain.
What is certain is that the nature and the extent to which offshore outsourcing services are used by Australian ADIs will change, and most likely decrease.
If the GFC can serve as a guide, we can expect forward-looking regulatory policy (international and domestic) to be announced in 2021.
A key factor would be government stimulus to promote onshore services (reshoring or onshoring). If such a stimulus package was announced, we would expect to see the shift away from offshore service providers to be rapid.
Businesses will need to create two million jobs in a 'colossal ask' as part of the nation's recovery from the coronavirus crisis. According to the Business Council of Australia, re-thinking outsourcing arrangements will be part of the answer.
Whether offshore service providers can transform themselves to the extent necessary to preserve their existing market share remains to be seen. It is likely to be a difficult journey, with significant industry shake up along the way.
This will be an ongoing study. We will refine our scenario analysis as new information comes to hand.
Finally, we would like to thank the ADIs and service providers who provided their candid input to this study, without whom, this report would not be possible.
To discuss your needs, and the future of offshoring, please contact the MinterEllison team.