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Marginal Cost Operations – when that NEXT thing costs NO thing.  Or, the death of the Linear Labor problem.

Marginal Cost Operations – when that NEXT thing costs NO thing.  Or, the death of the Linear Labor problem.

Ian Barkin October 15, 2014Blog

MarginalCostCurve.jpgI must admit, I had an economics education from some of the best schools in the world, and I’ve all too quickly let the lessons slip away into my academic past.  But, one lesson merits dusting off.  The concept of Marginal Cost.  Marginal cost is the change in the total cost that arises when the quantity produced has an increment by unit. That is, it is the cost of producing one more unit of a good. (Thank you Wikipedia).  Basically, once you’ve spent the money to set up a production capability, there is a (relatively) much smaller cost to produce the second unit.  And the third.  And, ultimately, every unit of production thereafter is cheaper – especially when high production provides significant economies of scale.  So, Marginal Cost captures the price of producing one more unit.  Memory dusted off.

In outsourcing, the problem with achieving low marginal cost is that each additional unit of production is performed by a person.  You need 10 people's worth of work production – you pay for 10 people.  You need 100 people's worth… you get the picture.  Yes, HR, facilities, and general management become cheaper per unit.  But, the cold hard fact is, you want a large amount of work performed, you will pay for a large team of agents to do the work.  And, if your labor force expands to a point of needing a second building, more management, additional locations - the costs go up accordingly.  And for decades, this equation has not been of real concern.  Of course services firms needed to have large labor forces, with associated large costs of labor.  How else would work get done?

But, in the very near future, this constraint will become less constraining.  Because….Digital Labor.

The ability to standardize and codify work (something outsourcing firms should have been doing all along) will now set clients up to begin performing the work via automated agents.  Once the appropriate amount of time has been spent on assessment, modeling, process redesign and process automation – the game is on!

Here is where it gets interesting.  In those scopes of work where volumes are high, routines are clear, and the staff is large, we have an exciting place to apply dusted off economics lessons.  Effectively, in a Digital Labor reality, each additional virtual agent can be had for something much closer to near-zero marginal cost.  Yes, there is software, a server, and some set up.  But, relatively speaking, this is zero cost compared to recruiting, hiring, training, housing, and managing the ‘Linear Labor’ of old.  What's more, the game is not just changing from a transaction delivery perspective.  Digital Labor unleashes capital (monetary and mental) to spend time on what an entire industry has promised, and seldom delivered – Transformation.

Once tasks are taken care of, the services firms of the future can begin adding Insight, Analytics, Awareness, and Collaboration in ways that have never been possible before.

If you are an enterprise that depends on large transactional teams; if the Linear Labor problem is a constraint to growth; if management of mobs is currently trumping the creation of capital – it’s time to turn the problem on its ear and look for a new way of working.  Digital Labor is part of that new way.

For bonus points, begin asking yourself new and inciting questions.

  • What if it cost nearly nothing to serve your customers?
  • How would your service mentality change?
  • How would your engagement with them change?
  • How would it influence the products you sold, the services you offered, and the resources you dedicated to customer experience?
  • What middle and back-office design decisions would you make?
  • Where would you locate your work?

The list goes on….

Tags: Automation, Blog, Digital, RPA

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