By Michael A. Fabrizi, Principal Member of the Technical Staff, The MITRE Corporation
Introduction and Summary
The factors most telling for making outsourcing decisions are changing. In outsourcing’s early years, one of the most important considerations was the potential to reduce costs of input factors. While cost is still important, a more recent focus has been access to key technologies and innovation. This paper’s position is that automation and advanced fabrication technologies will continue to diminish the value of inexpensive labor inputs as a sourcing decision factor. By contrast, the value of creativity and access to intellectual capital are becoming more important than ever. Finally, emerging economies, which heretofore were viewed as sources of cheap labor inputs will need to be viewed as integrated buyer-seller markets and as full partners in the globalization agenda.
The Rise of Smart Machines
Just a decade or so ago, many authorities were of the view that autonomous driving was a long way in the future. However, Apple, Google, Audi, and others are actively working on fully self-driving cars. Clearly, machine intelligence has come a long way more rapidly than many thought possible.
From the services outsourcing perspective, two particularly relevant trends are Robotic Process Automation (RPA) and more advanced machine learning, such as Cognitive Intelligence (CI). These can be thought of as occupying two ends of a spectrum, with RPA being suited for tasks that are measurable, repeatable, and routine. CI, a less mature technology, is more suited for higher-level jobs requiring sophisticated pattern recognition and learning. Integrated workflow could, in the near future, combine these two. For example, RPA could handle routine claims processing; exceptions, which at present are processed by humans, could be addressed by CI.
In the product-producing realm, additive manufacturing is gaining much interest. An early example here is the now familiar 3D printer. Compared with traditional manufacturing technologies, the transformation process becomes both less labor intensive and more skill intensive.
This is just the beginning. Atomically Precise Manufacturing (APM) and other more futuristic technologies, while still some years off, promise to radically transform the entire supply chain. They would also produce complex products very cheaply, with much less associated pollution, and with minimal human input.
What This Means for the Sourcing Decision
This much is obvious: to the extent that increasingly smart machines and advanced fabrication technologies can be substituted for human labor, inexpensive labor will become less relevant. Thus, labor arbitrage strategies will likely begin to lose their appeal; indeed, this is already happening.
Access to capital, at least in the traditional sense, may also be seen as less important. In a world in which software and robots – forms of capital – can be replicated very cheaply, the values of such capital will likely fall, even if it is deployed in great quantities. Simply put, traditional capital may become commoditized, even to the extent that it will be taken for granted.
On the other hand, creativity – the ability of some people to create new ideas and to innovate – will likely become more important than ever. In addition, the new advanced technologies will require well-trained, sophisticated intellectual capital. The rapid growth of science and engineering higher education in Asia, particularly China and India, will certainly keep these regions on the preferred sourcing location short list. The following chart, while a projection from 2011, nonetheless shows a trend of the increasing importance of China in scientific thought as evidenced by citations in scientific literature.
This growing importance of intellectual capital and creativity – as opposed to inexpensive labor rates – will also likely argue for a shift in conceptualizing markets. The labor arbitrage world view of segregating the planet into distinctive buyer and supplier markets will likely give way to regarding these markets as integrating production and consumption, with the latter – especially consumption of higher culture and education – critically enabling the former.
Hence, future sourcing decisions will likely more heavily accentuate factors such as:
1. Access to hotbeds of innovation
2. Access to highly educated, creative people
3. Access to growing markets and the new global middle class
The changing sourcing criteria thus reflect growing maturity of the global environment. This includes the diffusion of technology and learning as well as full participation by emerging economies in the realm of ideas and thought.
Quote: Atomically Precise Manufacturing (APM) and other more futuristic technologies, while still some years off, promise to radically transform the entire supply chain