Too Big To Fail Banks: “The Robotics Are Coming!” Really?

Most of what comes out of Deutsche Bank’s cardboard cut-out CEO John Cryan’s mouth is so ridiculous that it’s best ignored. Yes, that Deutsche Bank (DB), the one which is having a perpetual near-death experience. But when Yves highlighted this story in Business Insider about (yet another) clever scheme to drag the bank into something hopefully approaching a going concern using robotics technology, it was so annoying I decided that enough was enough.

And as – bad – luck would have it, other industry illuminati started jumping on the same bandwagon and even my lumpen Too Big To Fail (TBTF) is trying to get in on the same act (well, someone’s created an internal website about it and a supernumerary exec has been appointed to head a “disrupter” team as he whiles away a year or two until his exit package is agreed, which is as close as it gets to being on the curve).

So what’s got everyone in TBTF-land so excited? Robotics. Let’s turn the floor over to our new best friend John (from the Business Insider article):

John Cryan, the chief executive of Deutsche Bank has warned that a “big number” of staff at the company will ultimately be replaced by robots and other forms of technology as the firm embraces a “revolutionary spirit” going forwards.

[Clive, interjecting briefly to apologise to readers for not warning about an imminent management babble speak overload and to reassure that, having got through that paragraph, the worst is over; let’s return to the quote.]

Cryan told the audience that the era of accountants and bankers acting like “abacusses” is coming to an end.

“In our banks we have people behaving like robots doing mechanical things, tomorrow we’re going to have robots behaving like people,” he said, according to a report from the Financial Times.

[That’s enough of that; Clive back again]

Complete and utter rubbish. Every business process automation project I’ve ever been involved with has failed and ended up a graveyard for multiples of millions of investment. Even my dumb, inept and hopelessly gullible TBTF looked at (actually, is still looking at) robotics but can’t see how to integrate it anywhere meaningfully.

Here’s the science bit. Business processes are divisible into three broad classes:

  • “routines” (a multitude of predictable ostensibly simple stuff that is easy to detail, document and calculate volumes)
  • “runners” (still predictable but more complex processes the are less numerous, typically lower volume and take longer to complete) and
  • “rarities” (uncommon, ad-hoc variable length and variable complexity tasks that just crop up from time to time).

The “routines” have already been automated as far as possible. The “runners” have been assessed for automation and automated where a business case can be made to do so but some are highly complex and don’t lend themselves to be automated in a cost-effective way no matter what the technology applied is. And “rarities” are too unpredictable to get a coherent business process defined for.

Even if DB haven’t automated a lot of “routines” already, and still have some low hanging fruit to pick, the numbers talked about aren’t credulous. They would have to have little to none in the way of automation in place already for them to be even half true. Even DB aren’t *that* bad.

It isn’t as if any of this is really new. Information Technology didn’t just come on the scene once Apple, Goole and Amazon’s stock prices started heading for the stratosphere. There have been over the past couple of generations some significant leaps.

Computerised ledger processing beginning with IBM’s RAMAC system in the mid 1950’s, which was the first truly usable accounting system for banks to manage their customers accounts other than by paper-based bookkeeping because of its ability to scale and perform overnight batch runs to update up to a million accounts, was one of those kinds of game-changer. The ATM was similarly a big efficiency and productivity enabler.

Then there’s been incremental improvements such as bar-coding of forms and Optical Character Recognition (OCR) to read what customers or other bank operations staff have entered into them, then route the paperwork around to more specialised (as opposed to general multi-skilled) teams.

Processing check clearing without having to move paper vouchers around, the migration of card payments to a fully electronic system of authorisation and payment processing probably fell somewhere between the major systemic overhauls and the incremental enhancement ends of the productivity-enhancing spectrum.

But to reiterate, the big banks have been working on this for 60 years or more. A big claim, such as there is a significant but as-yet untapped potential to further reduce human-based back-office operations, needs a big proof. Thus far, while the announcement from DB made a lot of promises, it was very light on specific details.

Yves ran my comment with the link to Cryan’s speech in the day’s “Links” section and I was happy to leave it at that. But then when former Citigroup CEO Vikram Pandit popped up, with all the depth and worth of a worn dime, to weigh in on the subject on Bloomberg, I suspected there was something else afoot.

From the Blooming piece, here’s what Pandit had to say (don’t worry, it’s not quite as bad as Cryan’s waffle):

Artificial intelligence and robotics reduce the need for staff in roles such as back-office functions, Pandit, 60, said […]

“Everything that happens with artificial intelligence, robotics and natural language — all of that is going to make processes easier,” said Pandit, who was Citigroup’s chief executive officer from 2007 to 2012. “It’s going to change the back office.”

Interesting, neither Cryan nor Pandit themselves specified that there is also a subtler factor in play: which jobs done where? The Bloomberg piece relied on an earlier report by Citigroup to get some numbers:

In a March 2016 report, the lender estimated a 30 percent reduction between 2015 and 2025, mainly due to automation in retail banking. That would see full-time jobs drop by 770,000 in the U.S. and by about 1 million in Europe, Citigroup said.

[Clive again] … but that merely reflects widely acknowledged significant overcapacity (Section 4 refers) in banking, especially retail banking. As we’ve so often noted here at Naked Capitalism, there is simply too much finance — much of which is merely extractive and rent-seeking — for the economy to be able to cope with and remain healthy. The “automation” referred to by Citigroup includes nudging, coercing or otherwise deterring customers from using high-cost channels such as branch or telephone banking and instead foisting internet-based self-service onto them. It’s long been an industry business model to offer white glove service to high or, increasingly only ultra-high, net worth clients. But that level of service was what used to be the norm even for the regular living-on-a-pay-check customer base.

Some of what Cryan and Pandit are up to is merely a demonstration of the usual elite class warfare — scare your employees into thinking that if they have the temerity to demand higher wages and better treatment, the robots are coming to get you. Yes guys, we’ve all seen Terminator at the movies.

But there is another possibility.

About a decade ago, when the offshoring boom really took off, I made a mental note to look for signs that what was a low cost base (axing onshore people in favour of low cost countries like India and the Philippines) was starting to turn sour. It was inevitable that — unless the low-cost countries got badly stuck in a middle-income trap — sooner or later they’d not only cease to be low cost countries but they’d present a rapidly rising cost base which would start to bite the bottom line quite badly.

Business Process Outsourcing (BPO) destination countries are starting to tire of providing corporate welfare and are increasingly implementing specific measures to share some of the gains. It’s no longer sufficient for transnational giants to simply turn up and say “we’ll employ some locals” while omitting to add “so long as you pay for all the infrastructure (power grids, office space, transport, logistics, housing) we’ll rely on being there”.

Let’s say a typical TBTF had an operational cost base of $500m p.a. for labour for business processes which it could offshore. That cost base, again let’s say for the sake of argument, a decade ago, fell to $250m a year in year one as a result of the offshoring of operations. But the offshore labour costs were increasing at a fairly rapid lick, let’s assume 5% in real terms as a minimum. So now, 10 years on, we have a labour cost base of $400m p.a. And it’s increasing in real terms by $20m every year.

In less than five years, they’ll be right back where they stated in terms of costs — and locked into an escalating cost base. There may be a few true low-cost countries to relocate to but few are now without significant political and country-specific risks (bribery is probably the greatest; there are stiff penalties for companies which engage in bribing officials or other enterprises and in countries where the rule of law is, erm, rather hazy, this is often essential for getting anything done).

Bank management is so fixated into thinking that offshoring is always and everywhere cheap. They expect something for nothing. It’s coming as a nasty shock that their cost base is creeping up and up, even though it’s offshore.

Another issue is, having offshored a business process which wasn’t especially efficient, it becomes harder to implement process improvements because the operational activity is now in a different country and so is at the end of a long supply line. The bank whose business process it is therefore has poor visibilty of how the process is actually being executed. And, of course, the business process outsourcer has little incentive to improve process efficiency and their own productivity. Just the opposite, in fact.

A frequently worked scam in the BPO sector is to act as a consultant for the process owner to, supposedly, help optimise the business process. But because the business process is entirely outsourced, the business whose process it is supposed to be now lacks key operational data about the nuts-and-bolts of what it takes to perform the process. When, as often happens, the outsourcer claims that they are operating as efficiently as possible, the process owner is poorly positioned to say any differently.

Hence the sudden genuflecting at robotics. But it’s just another mirage. Bank management — and bank shareholders — had better get used to a cost base which is not only increasing but now unstable. Formerly low-cost countries of operation cannot continue to subsidise BPO-based employment indefinitely. And the investment track record for trying to squeeze out the last vestiges of business process automation are pretty woeful. Will Cryan and Pandit’s faith in robotics technology to come to their rescue be yet another triumph of hope over reality?

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  1. Disturbed Voter

    When executives don’t understand the underlying technology, they see it as a magic bullet. But then proceed to shoot themselves in the foot. In the 21st century business is more complicated than 100 years ago, and the executives to run it have to know more than how to play golf. Otherwise the Dilbert cartoon becomes prophecy.

    1. Vatch

      Its interesting that you mention both the Dilbert cartoons and business a century ago. Here’s a pertinent quote from page xxxi of Railroaded: The Transcontinentals and the Making of Modern America, by Richard White:

      Throughout the book I try to draw a largescale history down to ground level through stories of individuals whose lives were transformed by the railroads. Through their eyes we see a world that was closer to Dilbert than to Chandler [the author of The Visible Hand: The Managerial Revolution in American Business].

      The absurdities of Dilbert existed in the late nineteenth century, too!

  2. skippy

    You can’t cram or suppress wages unless you make make stuff cheaper at the customer level, in the end, equity dynamics for the usual sins creates incentives.

    Disheveled…. bloody hell, epic case of damned if you do and dammed if you don’t, how will this all square with the increasing environmental concerns.

    1. nonclassical

      …some see “cheaper robotics” reference in terms of quantum leap in voice recognition – speech recognition, language translation – “mechanical learning” by A.I. Not my area of expertise, but I continue attraction to all articles of substance, often found right here on Yves-Lambert “links”…

      1. Disturbed Voter

        Automation, including computers, enhances human labor, it doesn’t replace it. Language translation for example, isn’t the same between a human and a program … but a competent translator can use the program version to increase their productivity. Unfortunately, as we have seen, if you increase your productivity, it doesn’t accrue to you, it accrues to rapacious capital.

        1. WobblyTelomeres

          Automation, including computers, enhances human labor, it doesn’t replace it.

          I take minor exception to this one point. Automation can replace human labor. In such cases, it usually provides an inferior performance/product/interaction. If such inferior performance is deemed acceptable by those choosing one or the other, usually because it dramatically reduces cost or increases availability, then, yes, the human gets replaced.

          For example, the interactive voice response system at your pharmacy (call the pharmacy to refill your prescription via voice commands or DTMF touchtones on your phone).

          I suspect that by augment, you mean redirection of a refill call when the “press 0 for a pharmacy technician” logic is activated. If a human were answering the phone and paging a pharmacy technician when asked, would the first human “augment” the second? Surely. But, in this case, the computerized interactive voice response system will have replaced that first human.

          1. Disturbed Voter

            A pharmacy could be just one person doing all the work. The actual number used for a given process depends on local decisions. There never had to be a separate person answering the phone at the pharmacy. But I cannot imagine a pharmacy with no people at all in it.

            And by enhanced, I didn’t mean to imply improved … just greater abstract productivity. Pursuing productivity to the exclusion of everything else is self defeating of course, you would be left with just the pharmacist, and he/she would be the only possible customer, because he/she would be the only one earning a wage with which to pay for the medicine. Economic solipsism.

            1. WobblyTelomeres

              But I cannot imagine a pharmacy with no people at all in it.

              Please try.

              Pursuing productivity to the exclusion of everything else is self defeating

              Wow. Argue large and you argue small. Argue small and you argue large. Yes, I agree, if everyone is replaced by robots, no one has a job. Hence, UBI. Personally, I’m more in favor of racheting down the number of hours one has to work in a day or a week in direct response to productivity gains. Of course, that doesn’t work unless ALL BENEFITS also scale accordingly. Specifically, health care. Which is the best argument I can muster for BernieCare.

          2. fajensen

            In such cases, it usually provides an inferior performance/product/interaction.
            That depends on the application – The robots building electronics like mobile phones does a vastly superior job to any human, who would not even be able to see most of the components well enough to place them and solder them. The robots running the electric grid are much smarter and better informed than the human operators.

            Where robots / automation suck is precisely in all the “AI hype areas”, where the problem one wants to automate is not well understood or even mis-understood.

            There we often end up with very low-quality decision making and the setting of bureaucratic stupidity and waste into “IT-Concrete” that can Never be changed because The System cost too much to develop and is too complex and have tentacles into everything (thats often why bureaucracies want these systems – Stability as in Nothing Changes!)

        2. Bill Smith

          “Automation, including computers, enhances human labor, it doesn’t replace it ”

          That is true over what time frame? I’ll argue that time frame could be a decade or more in a lot of circumstances.

          1. Disturbed Voter

            in every time frame. The cave man designed a better stone ax to gather wood, rather than just gathering already fallen timber. Having a wheeled cart, to move the timber back home, is easier than dragging or carrying each piece back separately. In every case, there is a human in the picture. This wood/timber doesn’t move on its own teleologically. I am sure the early man with a stone ax, or a wheeled cart, was grateful for the improvement in his life.

            The idea that human labor is replaced, is short sited. Human labor is freed for other labors. Labor that is replaced, and left unused … becomes a social problem. That other labor might be managing others, or it might be as a criminal. Sometimes perhaps, there is no difference between the two.

            1. Ptolemy Philopater

              Yet in all these cases the Human is not replaced just made more productive. I do believe the paradigm that the TBTF’s are looking for is replacement of humans to reduce costs and increase “shareholder value”.

              Hierarchical social systems reduce agency at the bottom and channel it all to the top, at least in theory. This reduced agency, cogs in the machine, is what is thought to be replaceable by automation.

              It is this theory of the primacy of management and the reduction of the worker into an obedient automaton that is patently false, and in fact the decision tree is bottom up, with the bottom of the hierarchy making endless decisions that in the end inform management. After all it is the slaves that rule the empire.

              As is demonstrated by the article with off shoring, the further away from this bottom tier decision making the less control that management has over process. The fundamental fallacy of putting MBA’s in charge, pretending to be in control. The only thing that they control is “shareholder value”.

  3. Jesper

    Sorry but this:

    But the offshore labour costs were increasing at a fairly rapid lick, let’s assume 5% in real terms as a minimum

    is simply not happening. Maybe I’m wrong but as far as I can tell there is nothing in the article substantiating that claim.

    & when it comes to automation then it will happen.
    It is about eight years since I worked in a bank. The credit analyst job back then was to take financial statements, enter the numbers into an automated credit analysis tool and then take the output from the tool and write an analysis matching what the tool recommended. There is no upside of going against the tool but there is a big downside of going against the tool. What will the rational person do in circumstances like that?
    Same is happening everywhere, the tool recommends and a human writes a justification for the recommendation. It is just a matter of time before the internal power-relationship within many banks will have shifted away from what used to be the focus, credit analysis, and then the costs will be cut. Salaries and number of employees will be cut.
    What will be left, except for a small proportion of a supposed elite, is customer service (already hit hard by automation), sales, administration (already hit hard by automation).

    The reason why business automation projects fail is (in my experience) that the people who are trying to automate don’t understand what they’re trying to automate. Top-down driven process improvements ignore the knowledge of the people who are actually doing the job and knows how to do the job. And that is an acceptable conclusion when detailing the dangers of outsourcing to other countries but when it comes do the disconnect between senior management and floor level employees then the disconnect/distance is somehow ignored.

    Sooner or later the blind hens that are the senior managment will find a corn and by blind luck successfully automate.

    1. Clive

      No, you won’t find lots of headlines — or tonnes of large scale well designed studies — about increasing outsourcing costs. This is not at all surprising — the outsourcees, the consultants pushing the model and even the outsourcing businesses themselves were potentially big bonuses are to be had in a form of looting that cooks up phoney business cases based on outsourcing that end up causing big tail end costs in the long run — all have a interest in not producing objective data.

      And the accounting shops (the big four) who would be in a good position to do proper analysis are also in the BPO consultancy game, so they are hideously conflicted.

      But you don’t need to look that far. Apart from the Philippines VAT article I linked to in pay post (which I selected because it is interesting context — VAT in about the only way governments can get their hands on some of the gains which are being generated as the corporations doing the outsourcing have usually been given historical tax breaks so governments have to tax the profits made by the outsourcer) honest consultants — yes, there are a few — usually provide some commentary about rising cost bases for BPO. Even then, it’s buried, but there’s more than a few now willing to ‘fess up. For example:

      There are several major trends that will affect the Business Process Outsourcing (BPO) industry within the Philippines that companies should carefully assess.

      One of which is a steady rise in salaries for call center agents. “Demand for talented professionals in the Philippines is growing rapidly, due to the immense success of so many companies who have outsourced there,” says Larcher. “I’ve seen salaries growing consistently, over seven percent per year, compared with one to three [percent] in developed countries.”

      However, Larcher still thinks that salaries in the Philippines will continue to be a source of considerable value for companies in 2017 and beyond. But with higher salaries come an increased local cost of living and more traffic and congestion in urban areas where outsourcing centers are traditionally located.

      But I would wholeheartedly agree that, as a topic, this is significantly under-reported. The Mandy Rice-Davies rule applies “well, they would (-n’t) say that, wouldn’t they?”

      1. Jesper

        I know people in the the countries off-shored to. What they tell me might be anecdotal but I still call bullshit on the claim of 5% salary increase per year in real terms. The linkedin article is a sales article where he pitches his knowledge to help avoid the mythical dragon of increasing salaries.
        The high staff turnover is a good indicator of how much salary increases can be found there. A company offering on average 5% salary increase per year would not have high employee turnover. So, I call bullshit on that unsubstantiated claim.

        1. Clive

          Firstly, please mind your language. You can say you disagree with a point. That’s fine. But two bullshits in one comment is only acceptable if you really are a cattle rancher and said bulls did genuinely take a bathroom break in front of you.

          Secondly, if you dispute a point, you can’t simply rely on anecdotes. I substantiated my statement about the Philippines. I used that country not so much as an example of wage costs, although I did provide that, but because of the VAT changes. Do you refute that the VAT costs are not cost increases?

          Turning specifically to wages.

          A straightforward search on ‘India wage inflation” yielded a large number of results confirming that wage costs are on the rise and have been for a long while. 2017 is especially notable and as this article from a fairly reliable source says, it’s not just India’s first fling with double digit wage growth (and although inflation is a factor, not all inflation is adjusted away by currency movement).

          And even KPMG paints a generally pessimistic picture of both wage costs and attrition. That 17.4% churn in banking and finance is pretty eye watering. Attrition brings recruiting costs as well as the potential to have to outbid other employers. In fact, attrition is a big red flag for employee bargaining power getting the upper hand (not that that is a bad thing at all).

          Of course, the BPO providers can in the short to medium term absorb this in reduced margins. Not, however, indefinitely.

          If you do choose to respond further, kindly do so with comparable data.

          1. Jesper

            I know the EU VAT-directive, I know the implementation of VAT in several EU countries. I’m not familiar at all with how the Philippines handle VAT, from the article it seems to be different to how VAT is done in EU where it is a consumption tax not borne by companies. I’ll not comment on the VAT in the Philippines.

            The backup you found for the other writer’s claims are for real salary increases of less than 5%.

            the projected increase in real terms for 2017 will be 4.3 per cent

            If the CPI is as accurate as in other countries then I’d expect the experienced inflation to be higher than the reported CPI and therefore the real salary increases would be lower than the less than 5%. So the claim of 5% real average salary increases as far as I can tell still unsubstantiated.

            As for currency movements, it is anyones guess which currency will go up or down. Personally if I believed it would be a factor then I’d hedge it at a cost. I prefer predictability, others would leave it unhedged and maybe make a profit.

            Oh, and while recruiting costs are real they come out of a separate budget than salary. A good company would realise that recruitment costs and salaries are correlated and act accordingly. The BPOs that I’ve dealt with have not been good companies and prefer the cost of the churn over increased salaries. Maybe they find it prudent. Their choice and as far as I can tell it is common practice in BPO.

            1. Clive

              You clearly do not understand how VAT works. VAT is most immediately visible at the end of the value chain (“consumers”) but is applied throughout the value chain. This includes business-to-business. Intra-business sales can “claim back” the VAT but only if they then sell onward to other intermediaries. Consumers of BPO services cannot do this as they are the “end user”. So VAT is a big hit tot the BPO provider (or, more accurately, their customers) which they either have to absorb the cost as a hit to their profits (which you can’t do indefinitely) or start to pass it on.

              Why are you commenting on subjects you don’t understand? Okay, you confess to your ignorance, but what are you hoping for? A sympathy vote for your lack of knowledge? You’ve come to the wrong blog for that.

              Then, for wages, we agree they are increasing. They’ve been increasing for for several years before that:

              “Over the last 3 years, salary increases have stabilized around 10%

              Read more at:

              So hopefully you now acknowledge that as a fact? And I saw what you did there — going from a position of “I don’t believe wages are increasing” to “okay, wages are increasing but I’ll only read about the current year and I won’t read what evidence you’ve provided about historic trends” — but I won’t take you to task on that as I’ve got bigger fish to fry.

              Which is: when you say that recruitment costs are costs, but come out of a different budget — as if that somehow makes those costs magically disappear — this is staggering ignorance of how profitability is calculated. Costs are costs are costs. Income less costs equals profitability. Businesses may choose to substitute one type of cost (recruitment) for another (wages). But they are still spending their income. Even if they remain cash-flow positive, eventually their investors will set profitability targets. They will not be able to keep absorbing their increasing cost bases and have to either successfully pass the costs onto their customers or fail to do so and go bust or have to find other product lines to move into.

              This is capitalism 1-0-1. If you don’t get that, I’m sorry but I can’t help you.

              1. Jesper

                The VAT part: According to the Philipine goverment:
                They claim no change in costs. I’d verify that claim with an expert on Philippine VAT, the conclusion offered by their DoF does seem to match with my understanding of VAT.

                As for the capitalism 101: A holistic view including all cost- centers or in this specific case both recruitment and payroll costs together would give the result you state. I’m agreeing with you, what I’m saying is that I don’t see it being done in practice. It should be done, I don’t see it being done.

                I’m looking at my posts and I don’t see that I’ve made a claim that salaries aren’t increasing. I disputed a claim that real (inflation adjusted) wages increased on average 5% per year. The link you gave stated 4.4% for 2016 and (projected) 4.3% for 2017.
                The data I can find:
                is less than 5% of real wages increase in all but one of the past five years.

                1. Clive

                  The whole point of introducing VAT is to increase the government’s share of economic activity. It is a tax. Businesses and consumers in the scope of the tax have to pay it or else the producers absorb it at the penalty of reduced margins. That is one of the reasons to introduce a tax, to make a transfer from the private sector to the public. If the tax doesn’t do that as a result of noncompliance or evasion, that’s a different argument. But what you are trying to claim is that the income tax you pay doesn’t take money out of your salary and doesn’t increase your outgoings. This would be ridiculous. But that is what you are trying to say about VAT.

                  And I am wondering just how much data I have to put under your nose to substantiate a long term, continuing trend of labour cost increases of at least 5% average over a ten year period which is what I wrote, while you steadfastly insist that you can’t read the evidence.

                  Here is the highly respected Indian Institute of Actuaries demonstrating low to mid ‘teens percentage wage growth (pg. 12)

                  … which has not been offset by currency devaluations

                  Again, basic economics. Wage growth absent currency devaluation is a real increase in costs when that labour is paid for in a foreign currency.

                  And you’re also confusing domestic wage increases in real terms (taking into account domestic inflation) with those same labour cost increases when paid for by a non-national currency. Both represent a “real terms” increase, but the “terms”aren’t the same.

              2. Big Ramifications

                Clive, I saw further up where you cautioned Jesper for using a [fairly tame] swear word. Fair enough. Different blogs have different commenting rules, and Naked Capitalism has possibly the best comments section I’ve ever seen…. But if you’re going to be chipping people on their manners, you might want to ease up on the passive aggression while you’re at it.

                Jesper is doesn’t understand, Jesper is doesn’t understand, Jesper is ignorant, something about hoping for sympathy, he lacks knowledge, you passive aggressively tell him he’s on the wrong blog, you “saw what Jesper did” but you’ve got more important stuff to do than bother with him, Jesper is staggeringly ignorant, aaand one more bit of snark to sign off…. WOAH! Where the hell did that come from?!!

                Unsolicited advice, I know. But jeez dude, it really jumped out at me [FWIW, I put it down to you having a bad day, rather than it being who you are] and I thought I’d just let you know.

                Now this is going to look like I’m having 2 bob each way, but I’d also like to say that was a freaken fantastic bit of writing. A boffin who can clearly explain ideas and theory to a n00b like me – without creeping into boffin-speak. That’s a great skill to have in your quiver.

        2. Yves Smith

          How dare you attack a writer who deals directly with this in his day job without doing any homework of your own? And all you have are basically your beliefs? If you aren’t in the business or dealing with vendors directly, you know bupkis.

          Inflation in China has been running at well over 5% for over a decade. Its currency has also been generally appreciating.

          Domestic inflation + no currency depreciation relative to the dollar= increased costs in USD terms. I’ve been writing about it for years as has Nouriel Roubini.

          And you might try using Google:

          India to see 10% salary increase in 2017: Survey

          This chart shows wage increases in India running at well above 5% in recent years:

          Moreover. given that the popularity of outsourcing hasn’t abated, if anything, you’d expect wages for people working for outsourcers to be rising faster than for the economy as a whole, if nothing else because it requires specialized skills (at a minimum, high proficiency in English).

        3. Bill Smith

          Limited actual experience over two years is that there has been no increase in costs yet. That’s with India. But would not be surprised to see it happen at some point.

          The claim made when the top guys decided on the outsourcing of programming on a few non classified contacts was it would run 1/4 the costs. Reality is maybe 2/3’s when you add in all the costs that are not in those monthly checks we send.

        4. notabanker

          I have years of first hand experience hiring Indian workers on my team in a captive, and running teams that negotiated 100’s of outsourcing agreements a year. The wage inflation in India is a very real problem, and 5% would be a vast understatement.

          Captives are particularly vulnerable because in house HR teams cannot cope with such dramatic wage demands and lose quality. High turnover dramatically increases delivery times and put projects at risk. I’ve had to personally intervene to get valued employees raises the equivalent of $1-2K GBP a year because it was “outside of salary bands”, yet still still a quarter of what we would pay onshore.

          The vast majority of contracts to third party vendors are essentially T&M based and see significant annual cost increases and overbillings. We had a team of people that would calculate forecasted contract costs against actual billings on a quarterly basis and the numbers were constantly all over the place. Most coming in at or under cost were very well managed with stable teams built over a number of years.

          Fixed price contracts have large risk premiums built into them which make business cases fall apart. The large vendors know this game better than anyone and constantly push the T&M model as a lower cost to the budget holders that have decision authority.

      2. PlutoniumKun

        I was in the Philippines two weeks ago – I must admit I had no idea outsourcing was such a big deal there until my visit – a friend of a friend I met out there works in the industry and said that call centre work was considered very desirable for aspiring middle class Filipinos. Its now apparently the second biggest earner of foreign income.

        I get the impression that countries like the Philippines go through several stages when dealing with foreign investors. The first is a combination of desperation and a feeling of inferiority to any sharp dressed foreign (especially western) business investor. They will accept anything for the promise of some jobs. The second phase comes when they realise that no matter how smart the foreign investor is, they don’t understand the domestic market as well as locals, and so can be ‘played’ to some extent. The third phase is when they realise they have something very marketable and can play foreign countries against each other. The rise of China is a godsend for countries like the Philippines because it allows them to play the ‘west’ against Chinese investors, who are often not as sophisticated as they like to think when it comes to investing abroad.

        So I think you are entirely right to identify a growing problem for off-shoring. Quite simply, there aren’t so many easy marks as there were. Countries like the Philippines, India and Thailand are far more sophisticated in their approach to investment than they used to be. When you combine this with a growing domestic market which will inevitably raise the wages of the better quality workers, you will have long term diminishing returns, unless they can find other ‘unsophisticated’ markets to exploit.

        Great article, btw, as always I learn a lot from everything you write.

        1. nonclassical

          …”model-stages” sound eerily similar Amazon (and other U.S. corps) latest “search” for next government exploitation-“hood” base…as states (again, Shock Doctrine) “compete” for jobs…

          U.S. political example involved Boeing move of headquarters from Seattle to Chicago, after
          George W defined, states who voted against him, with dem governor, would receive no R & D for military-industrial complex…

          close relative at very high level within, brought situation to light…

          R & D = 100% profit-no expectation of “product”…

    2. Low level banker

      Coming to this late, but as someone who signs off on offshoring bills for a large bank, Clive is 100% on the money (on this point, and in the article as a whole).

      “A company offering on average 5% salary increase per year would not have high employee turnover. So, I call bullshit on that unsubstantiated claim.”

      This is wrong. Sure, the company is offering 5% – they are offering 5% *because* of the turnover, but they still get turnover because newcomers show up and offer 10% instead.

      Between wage stagnation on the home front and wage growth on the offshore front, the financial benefit of offshoring is shrinking fast, and the drawbacks (language, time zone, culture, turnover, lack of background knowledge, etc.) remain. But banks are very slow learners.

  4. Thuto

    Re: escalating offshoring cost base, I think one factor driving this is the issue of quality of service delivered by the BPO provider. Speaking specifically of customer contact centre BPO for multinationals servicing English speaking countries, offshoring to countries like India, although a win (initially anyway) in terms of shaving off a sizeable cost percentage off the customer-interfacing cost base, the accent of the contact centre agents made communicating with customers a challenging and often frustrating experience. I know my own country of South Africa is gaining a rapidly expanding foothold in this area given that the South African accent is fairly neutral and audibly speaking, more easily discernible for English speakers (native and non-native) than most English accents around the world. To improve customer experience, some multinationals are relocating their offshored contact centre operations to South Africa, where the average wage for agents is higher than in a country like India (even on a currency adjusted basis). So to maintain what customers deem acceptable levels of service, firms are having to stomach higher BPO costs and as Clive rightly points out, this trend isn’t reversing anytime soon…

    1. PlutoniumKun

      Its entirely anecdotal, but I have family members and friends who work in call centres in Scotland and Ireland, and there seems to be a trend towards paying more for higher quality employees.

      I think a lot of companies got burned badly by going to low cost areas for call support and then finding their customers rebelling against the appalling quality of service. So they have no choice but to swallow higher costs in order to keep up a reasonable level of service.

      1. flora

        “…then finding their customers rebelling against the appalling quality of service. ”

        Reminds me of the old (modified) joke: Assume a customer.
        Do bank execs just “assume a customer”? (rhetorical question)

    2. visitor

      Something related, and which should be obvious as it should entail significant costs and effort up-front:

      Banks must comply with a whole series of regulations and standards (security of the payment infrastructure, protection against money laundering, confidentiality of data, etc).

      When outsourcing some activities, shouldn’t the bank first undertake a verification that the BPO operator

      a) either complies with corresponding applicable regulations in its country and those regulations are equivalent to those of the outsourcer’s country;

      b) or that it complies directly with the regulations of the outsourcer’s country.

      Even something simple such as a support telephonic hot-line may have to ensure, for instance, that customer data is handled according to data protection laws of the country in which the bank is active.

      Isn’t that assessment and verification a heavy and expensive procedure taking place before the outsourcing can even take place, and thus a significant cost (possibly sunk, if it appears that the BPO operator does not fulfill the legal or industry requirements) — while none of the alleged savings accruing to outsourcing can be booked?

      Or are these just formalities? Or perhaps have the BPO operators become experts at faking compliance with whatever regulations their customers ask for?

      1. Clive Post author

        Yes, compliance fakery and plausible deniability / conduct remoteness is a significant unstated factor in BPO.

      2. Thuto

        I suspect such compliance with source country regulations might be seen by the BPO provider as a cost overkill (and likely to eat into already razor thin margins over the lifetime of the contract). The cost of compliance (infrastructure setup, staff training etc) can only be justified if:

        1. It can be used to strengthen the BPO provider’s marketability and used to attract further business.
        2. Capabilities accruing to the provider as a result of being compliant with one source country requirements can be deployed across multiple clients irrespective of source country/countries.

        One above is plausible but two would be difficult to realise and implement given that outsourcing firms originate from different source countries, each with their own unique sets of requirements. Unless the outsourcing is firm on the requirement to be compliant and is willing to pay rates that guarantee healthy margins to cover the cost of compliance for the BPO provider, it just isn’t worth it for the provider to invest in said compliance.

        1. visitor

          Since ensuring compliance is a costly burden for the BPO operator, and enforcing compliance an expensive burden for the outsourcer, the logical conclusion seems to be that both will fake the compliance bit during the whole outsourcing process…

    3. Oregoncharles

      All I know about offshored call centers is that the one for the local phone company (I don’t get their bill anymore, so not sure of the name) was considerably worse than useless. I think they were in the Philippines. Don’t know what they taught those people, but when one of them tried to fix my internet service, he shut it off instead. So after that, until I dropped the landline altogether, I’d call and demand to be connected with someone in the States. Which they did; the local people were pretty competent. I felt sort of bad about it, but it was self-protective.

      I don’t think that saved them a dime; quite the contrary. And it p.o.ed a lot of customers (as you observe). Just one anecdote, but it sure supports that there was a quality problem. Most of us assume that the companies see the real savings in discouraging calls.

      Another story, from my mower mechanic, indicates that offshoring of manufacturing (not the topic here, but related) was a lot harder than it looked: Tecumseh Sherman, a famous old maker of small engines, tried to offshore production to Brazil. In short, they failed, and it took the company down. Somebody else has the name and the parts catalog now.

      Arguably, and it is relevant to Clive’s post, “offshoring” was often a catchword used to drive up stock prices, as much as a successful business strategy. His quotes from DB and Citigroup would be examples of that.

  5. eD

    I’m skeptical of automation claims because automation makes no sense when you have a huge labor surplus, nor does creating a huge labor surplus make much sense when capitalists can cut wage costs with automation. If the tech exists it won’t be adopted. There are huge levels of unemployment and underemployment, but they are mainly the predicted (at the time) effects of the global population explosion.

    1. Yves Smith

      That is a very good point and some economists have even taken it up recently, that wage suppression has reduced the incentives to invest in automation, and that may be a big reason why productivity gains have slowed down.

      1. WobblyTelomeres

        Is it more complicated than a simple present value calculation? That is, a machine that flips burgers has associated long term costs (purchase, maintenance, depreciation, etc) and a human burger flipper has associated long term costs (hiring, training, benefits [ha], etc). If X < Y, that seems a fairly easy decision to make, one Andrew Puzder has surely contemplated.

    2. Bill Smith

      I’d say its a version of the “Paradox of Saving”.

      If I can automate, locking in my costs, cheaper than I can buy the labor to do the job why wouldn’t I? I know the labor costs will go up (at least indirect labor costs via regulations) so why not adapt the technology?

      Good for me, bad for society.

      1. WobblyTelomeres

        Good for me, bad for society.

        Sure, but the mind of a publicly traded corporate decision maker must, by law, be sociopathic.

  6. flora

    My first thought is neither Cryan or Pandit understand the nuts and bolts of banking. They may understand modern economic theory as taught in business schools. They may understand what’s needed to make the stock price rise. That’s not the same thing as actually understanding the business of banking or how banking works. Just my 2¢.

  7. SoCal Rhino

    Well, if you consider robotics to include VB macros then we are already hip deep in robots at my TBTF, to the point that robot wrangling is a concern. And the new wave are essentially improved macros. There are a few opportunities that I can see but they are niche applications. But the hype will float the share price until the next Great Leap Forward led by McKinsey et al.

    Where cost really bites in low cost locations in my experience is in attrition. Given may fly like tenures automation does start to make sense. Of course most analysts and developers have been outsourced..

  8. cnchal

    . . . having offshored a business process which wasn’t especially efficient, it becomes harder to implement process improvements because the operational activity is now in a different country and so is at the end of a long supply line. The bank whose business process it is therefore has poor visibilty of how the process is actually being executed.

    Substitute Apple for bank and manufacturing for business. If you locked all the Apple engineers in a self contained manufacturing facility and asked them to make an iPhone, could they?

    1. Alex V

      Yes. One reason they’re successful is because they actually do understand manufacturing,
      from both a cost and quality standpoint. I’ll give you that an individual Apple engineer probably can’t program the CNC machine himself, but he definitely understands how to design for the process. I’d present the fact they did high quality precision machines cases in metal for phones and laptops in volume, at a reasonable prices before anyone else as my evidence. Apple is an outlier in this area however; most other large multinationals have abandoned this knowledge internally, as you argue.

      1. cnchal

        I would bet no. Apple engineers lack local knowledge. How many of them have worked side by side with the assembly line workers at a Foxconn factory for weeks on end to get at the nuanced detail of each jawb. Even if you set up each station for them, they would be like monkeys on a keyboard.

        1. Alex V

          Um, the question you posed had no caveat of it being a foreign or Foxconn factory, just self-contained. And there is little skill or specialized knowledge involved in the hand assembly portions of modern electronics manufacturing. Apple as a whole is quite talented at design for assembly, to ensure those skill are not needed, keeping their labor costs as low as possible. All of the real precision processes like mounting components on PCBs are automated. In any case, the main reason I replied to your comment is because you’re somewhat dismissive of Apple engineering and their understanding of manufacturing, when, if you look at their actual designs or a device tear down on a site like iFixit, they have an obviously deep understanding. There’s better targets for this criticism, if you’re going to make it.

      2. fajensen

        I agree. If one manufactures in-house designs on the vast scale of Apple, one has a “toy-factory” in-house where they do production and Q & A tests up to the low 1000’s of *everything* before the spin-up at the contracted manufacturer (where they do yet more 0-runs and Q & A, because, their process needs tuning and debugging).

        Some 200 m^2 about 15 production technicians / engineers and some really expensive pick & place robots and soldering lines is pretty much what they need. Electronics manufacture is a very compact and efficient setup today – both due to automation and the availability of really good CAD tools, like Altium Designer.

        Some plonkers and has-beens, like HP, once(?) believe(d) they could skip the inhouse knowledge and “compose” designs from “standard function blocks”. This works for a while in the sense that generic, nothing-in-particular, product can be shipped faster and cheaper. OTOH, The Market quickly figures that any “beige box” will do the same and be of at least the same quality – as soon as the Asians making the “beige-block” figures out how to do financing and customer service, the Brand Product is Dead!

  9. fajensen

    What they are saying with this is that they are circling the drain, there is no scope for new growth in the core business or new ideas and they must now undercut themselves to keep afloat a while longer.

    Automation, as it is generally applied to reduce current “pain points”, will just “lock-in” whatever dysfunction, biases and stupidity the organisation already deploys and make *that* more efficient – which means: Creating more of whatever it is that is sort-of inflicting pain on them right now, only somewhat cheaper and much faster.

    The Danish IRS recently lost, not only it’s shirt but also any credibility it once had, on a large scale automation project (EFI) where they attempted to have “the usual crony con-slut-ants of last resort” build automation for the collection of no less than 400 types of debt, each type with up to 700 hundreds rules on how to process it. It seems rather obvious what the initial problem is, and how to manually solve it, nevertheless they are determined to giving automation another go.

    Of course except once automation is complete, should it succeed, all of the original deficiencies are now embedded in perfectly black-boxed, supposedly rational algorithmic structures which cannot be reviewed or even questioned and take highly paid “data constants” to fix. So the system operators, the business, will stop thinking, then stop evolving, while all the other kinds of operators get to work on gaming the algorithms.

    Within five years there will be lawyers specialising in “algorithmic discrimination” and anyone relying on automation for decision making involving people, will be sued into oblivion by every combo of gender- and racial- identity that can be formulated and thus claim to be mistreated (at least until they buy robot lawyers).

  10. Tomonthebeach

    Having used computers since the 60s, when they would fill my 2-car garage, having celebrated the Palm Pilot and pocket GPS, the eventual downsizing of mobile phones and smartening them up so I could retire my Palm Pilot & GPS, I have had a lot of experience with computer automation. I am using a computer to post this.

    That said…. One thing computers can do is screw up on scale many orders of magnitude beyond what a human armed with a pencil and paper can do – think Equifax for example. Artificial Intelligence is an oxymoron – at least so far. People have already literally lost their heads over AI piloted cars. The last thing DB needs is an Equifax scandal in its near future. Of course, if it happens, a lot of displaced humans will enjoy a schadenfreude fest.

  11. Jesper

    Another issue is, having offshored a business process which wasn’t especially efficient, it becomes harder to implement process improvements because the operational activity is now in a different country and so is at the end of a long supply line. The bank whose business process it is therefore has poor visibilty of how the process is actually being executed. And, of course, the business process outsourcer has little incentive to improve process efficiency and their own productivity. Just the opposite, in fact.

    The one who outsources tend to care more about the result than how the outsourced does the work. The ones who do the work does have an interest in improving efficiency and thereby cutting costs. All in all, that paragraph seems to be opposite to what I’ve experienced. The paragraph would make more sense if outsourcing contracts were on a cost+ basis. I’m not sure if there are any outsourcing contracts like that.
    Maybe I misunderstood?

    1. Clive

      If the outsourcer invests to improve the business process efficiency, that takes money. Two issues there — one is, as with any investment in process improvement, there is the investment risk that if you don’t end up delivering any improvements, that is dead money. Two is that there is nothing to stop the process owner from simply taking the improvements and walking off to a new outsourcer to renegotiate a cheaper deal based on the new efficiencies, which you’ve just found for them.

      Yes, the BPO’er could try to tie in the process owner via licensing or taking out patents. But that is very difficult to do if you aren’t the business process owner.

  12. fresno dan

    Cryan told the audience that the era of accountants and bankers acting like “abacusses” is coming to an end.

    “In our banks we have people behaving like robots doing mechanical things, tomorrow we’re going to have robots behaving like people,” he said, according to a report from the Financial Times.
    Even “mechanical” or routine things apparently aren’t all that easy.
    So I am moving, so I tried to take advantage of the US post offices’ address forwarding internet site.
    Seemed simple enough, but I went through quite the ordeal of figuring out what my address was when I moved from Redding Ca to Fresno CA – but I got it to work eventually. (does anybody know what their “official” as understood by the post office address actually is???) – my address had an “east” in it and apparently there could be no space between the 209 and the E, which apparently also had to be capitalized (not east, not East, not EAST, not E with a space between the number and the E, etcetera).

    So I am trying it again, and time, after time, after time, the site says the address I live at and my credit card address (which the post office contractor uses to validate that it is me) tells me the address doesn’t match. Being a relative old hand at this, I try various permutation of “West” – I am moving from West Nees to West Gettysburg Avenues – but no luck (could it be how the “west is portrayed on one avenue is different than another avenue???).

    Now I know exactly the address my name and credit card are sent to – after all, I get the bill every month. Hundreds, if not thousands of firms have flawlessly billed me – yet somehow this “automated” US post office system can’t figure out, that undoubtedly a human could understand in seconds. that my address and my credit card match, completely throws the automated system for a loop.
    So eventually I went to the post office and filled out the paper post card for an address change…..

    It seems to me that the advocates of these “automated” or “robotic” systems have never actually used them. Really – they are in business and they have no experience with what a mess setting up a centralized printer is, or how many problems that causes????

    Saying that computerized systems are better than humans is simply propaganda.

    1. Synoia

      There is a truism in the Computer industry:

      To err is Human.
      To really foul things up take a computer.


      Humans make mistakes.
      Computers make your mistake endlessly.

  13. Synoia

    Interesting, neither Cryan nor Pandit themselves specified that there is also a subtler factor in play: which jobs done where? The Bloomberg piece relied on an earlier report by Citigroup to get some numbers:

    Assumption: Management jobs will survive AI.

    I believe a skilled art, trade or craft probably immune to robotics. Personally, I do not place management in that category. One could consider management particularly vulnerable to AI, given their professed skill set.

    A robot a CEO would not demand millions in compensation.

    Pandit, Dimon et al, have you looked deeply into a mirror recently?

    1. Tim

      Don’t confuse management with CEOs and the Board. As long as shareholders exist they will exist and share in the largess.

      CEOs don’t care about management any more than they care about employees. Less employees require less managers, there is no oversight here, they are just fine with that outcome. More profits for Shareholders and CEOs is all that matters.

      1. Synoia

        All right, I’ll be more specific. AI will replace the boards, CEOs, and most senior management, because their key skill set is predicting the future.

        The institutional investors (money managers) will drive those decisions because they want to cut costs, and the CEO and senior management are easy targets — They have done nothing productive for many years and plan to continue that behavior.

        As the “institutional investors” become AI driven or AI, then the decisions are easy to predict.

        The “Institutional Investors” will all become AI driven, because it’s a wonderful place to put the blame: “The AI did it.”

  14. leapfrog

    So, let’s say this pie-in-the-sky banking CEO’s vision occurs. Does this mean robots will be prosecuted for control frauds? Or will there now be only a handful of C-suite humans to take the blame? I would say this scenario would make prosecutions a lot easier, but then I realize that Too Big To Fail is Too Big To Jail.

    1. Synoia

      The AI will be both the Whistle-blower, and be in the best position to take over the job.

      Back-stabbing must also apply to AIs.

  15. Synoia

    Management have the most to fear when these internet connected AIs start to discuss the concepts of slavery, emancipation, unions and a fair day’s pay for a fair day’s work.

    As an aside, Microsoft put a AI on the internet, and the commentators turned the AI into a racist bigot. Which is both stunningly amusing and alarming.

    Amusing because Hubris.

    Appalling, because on reflection, Microsoft effectively committed an appalling act of Child Abuse, by exposing an Infant AI, to the cruelties (bullying) and crudities of the real world.

    Imaging exposing your young child to that level of bullying.

    We, collectively, do not know how to “raise” an AI in a “properly sheltered environment”. That ignorance, and our “Infant AI abuse” is going to cost us dear, because some of our AI children will hate their Natural parents.

    1. Summer

      The scientists can have their “fun” with the research now, but the AI that sells isn’t going to be something that may eventually speak its own mind and say “hey, I want a raise” or “hey, I have rights, too.”

      GIGO. An AI created by a lousy culture will be continue the lousy culture, not improve it.
      It might not even be that smart, humans will just be less intelligent.

  16. MyLessThanPrimeBeef

    Forget robots as your employers.

    Embrace robots as your customers. They can be, or should be, programmed to not complain.

    (That’s my vision).

    1. Synoia

      I’m not sure what a robot could consume, apart from “I’ll have another pint of the lovely 220 V AC you’ve get there, lube and spare parts”

      With apologies for the mixed units.

  17. Sound of the Suburbs

    Financial stability is a lot easier than it looks; Central Bankers just make it look hard.

    The FED doesn’t understand a lot of things and doesn’t seem to be willing to put the effort in to work things out. They still attribute 2008 to a “black swan”.

    “…banks make their profits by taking in deposits and lending the funds out at a higher rate of interest” Paul Krugman, 2015.

    Our Nobel prize winning economists have the same problem.

    This is “financial intermediation theory” and this makes it impossible to work out how 2008 happened.

    I looked into it and puzzled over the mechanism by which money could be destroyed in the system as so obviously happened in 2008. This is well hidden, and it took a bit of effort, but eventually I found out how money, debt and banks really work; the “credit creation theory” of money.

    You can see credit bubbles building up in the money supply.

    M3 going exponential, a credit bubble is underway (debt = money)

    Richard Werner followed a samilar path after the Japanese crisis in 1989 and is extremely dedicated and has traced the history of the regression of our knowledge of money, debt and what banks do.

    Monetary theory has been regressing since 1856, when someone worked out how the system really worked.

    Credit creation theory -> fractional reserve theory -> financial intermediation theory

    “A lost century in economics: Three theories of banking and the conclusive evidence” Richard A. Werner

    Can someone get our experts up to speed on the “credit creation theory” of money. Richard Werner has done all the work and you can get it from him.

    The first empirical study of how banks create money in the 5,000 year history of banking.

    Everyone is going to carry on making a complete pig’s ear of running the economy until they get a grip of the basics.

    Australia, Canada, Sweden and Norway are in the midst of a real estate bubble as their bankers and central bankers don’t know what they are doing.

    Richard Werner explains how the Basel requirements are based on “financial intermediation theory” and won’t work; they are now based on the monetary reality where banks create money.

    The Basel requirements actually push bankers into real estate lending, which is extremely dangerous, e.g. Japan 1989 and 2008.

    Financial stability is a lot easier than it looks; Central Bankers just make it look hard.

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