Introduction: What is Robotic Process Automation?
Robotic process automation (RPA) is the use of “digital robots” and software to complete repetitive and time-consuming tasks in an automated method. Notably, RPA does not involve the use of a physical robot and instead, uses a “digital robot”, in which a user can teach and train a digital robot to complete a task after given a template. RPA differs from artificial general intelligence (AGI) in that RPA digital robots do not have a digital cognitive brain of their own in order to intuitively learn and adapt over time on their own without human involvement. RPA reduces time, increases efficiency, and enhances labor productivity. RPA is commonly used to complete enterprise business processes that are repetitive, high volume, labor-intensive, and use structured data.
Benefits of RPA
While many employees inside companies may not see applications of artificial intelligence in their everyday job, benefits of RPA include:
Improve an employee’s productivity
Improve employee happiness by reducing time spent on repetitive and burdensome tasks
Enhance accuracy of completed tasks through software
Improve corporate productivity by allowing employees to focus on high-value priorities instead of being consumed by repetitive tasks
Sample metrics to measure the improvement of corporate productivity and corporate efficiency include the following:
Better customer NPS scores
Better net dollar retention
More revenue per employee
Fewer expenses or reduced expense growth on the income statement
Increase in gross margins, contribution margins, and EBITDA margins
Better accuracy with fewer errors and mistakes
Improved compliance and standardization with monitored tasks
Reduced carbon footprint
RPA Example:
Suppose the following scenario: A business analyst is manually gathering data from public government documents in PDF format and then converting the data into a machine readable format for analysis before sending the data to the business analyst’s manager. A RPA robot can be trained to learn this task and automatically complete this manual activity in an automated manner. The use of a RPA robot in this scenario is a quadruple win:
The company saves costs by hiring fewer employees to do manual data gathering, and employees are more productive by focusing more time on generating insights from analysis rather than spending the majority of their time in data processing.
Employees are happier because they are focusing on more meaningful work as opposed to repetitive data processing activities.
Customers are better served in a quicker timeline.
Shareholders of the company are happier because improvements in efficiency and productivity lead to margin expansion, higher revenues, and higher customer satisfaction, which all can drive the stock price higher.
4 Phases in Implementing RPA
Planning Phase: state the repetitive tasks and processes that can be automated
Development Phase: create a template and workflow for these repetitive tasks, and then train a digital robot to automatically complete these repetitive tasks
Testing Phase: test the productivity and loss ratios of the RPA model and improve the RPA model when bugs are discovered
Maintenance and Support Phase: RPA models should be updated as business processes and needs change, and RPA models should be updated when new use cases or bugs/defects are discovered
RPA Market Share by Application & Industry Use Cases
Banking, financial services, and insurance (BFSI) captured the largest market share for global RPA in 2019 according to Grand View Research (1).
Significant Economic Impact
Unlike complex AI/ML systems that may take years and millions of dollars to create, develop, and implement inside non-technology organizations in order to create noticeable and measurable outcomes, RPA has been proven to have high measurable impact and high feasibility, thereby reducing “time to value”.
Grand View Research estimates that the Total Addressable Market (TAM) for RPA was $2B+ in 2020 and could rise to $25 billion by the year 2027, representing a near 40% CAGR in RPA’s TAM (3). A rising TAM speaks to the rising importance and further growth of companies in that market.
Accenture estimates that RPA could reduce manual processing costs by up to 80% and reduce average handling times of repetitive manual tasks by up to 40%. (2)
McKinsey & Company estimates that at least 30% of employee activities in about 60% of occupations could be automated. (3)
Notably, these estimated growth rates and cost savings are not trivial nor incremental; they are potentially positively transformative for companies that adopt RPA and detrimentally disruptive to legacy companies that do not adopt digital transformation techniques in the coming decade ahead.
Disruptive Technologies, Innovation, and the “Innovator’s Dilemma”
At Drawing Capital, we share the viewpoint that disruptive innovation fuels future growth opportunities. We feel that RPA can appropriately be classified as a “disruptive innovation” that answers “yes” to the following five questions:
Does the technology-enabled innovation follow a declining cost curve per unit of value creation?
Is the innovation a significant enhancement beyond incremental improvement that creates outcomes that are 5x or 10x better than the existing norm?
Does the specific innovation impact multiple sectors?
Is the innovation a launching pad for future innovations?
Does the innovation advance society forward and improve human outcomes?
Pioneered by author Clayton Christensen in his book titled, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail, the term “disruptive technology” refers to a new company creating something that is faster, cheaper, and more convenient to the consumer compared to the incumbent’s suite of products or services to such as degree that it disrupts the economics of the incumbent.
While many people equate innovation with “new and different” and disruption with “disturbing the world order”, a key component of disruptive technology is the concept of the “innovator’s dilemma”. If an incumbent company ignores a startup, then the startup gains market share over time; if the incumbent company attempts to compete with a disruptive startup, then it may wreck the company’s existing short-term economics and financials, which leads to other issues at the incumbent company. This is why competing with disruptive companies with transformative innovations is difficult.
Why Now?
Digital transformation is a wave of innovation that started years ago and has accelerated in adoption due to the coronavirus crisis. Companies are increasingly scrambling to adopt modern enterprise tools, understand their enterprise data, improve their cybersecurity protocols, increase digital engagement with customers, adopt cloud computing platforms, and both improve their cost structures and organic revenue growth in order to drive margin expansion and operating leverage. The following chart from McKinsey & Company summarizes the estimated proportion of tasks that can be automated (5):
The following three charts from McKinsey & Company highlight both the expanded nature of digital customer interactions and a changing focus by many corporate executives to pursue a digital transformation strategy as part of their DNA for ongoing business operations (6):
Examples of Private and Public Companies that Focus on RPA
Examples of Recent Acquisitions and Fundraising for RPA Companies
Recent Acquisition and Fundraising Announcements:
SAP announces acquisition of Contextor in November 2018
Microsoft announces acquisition of Softomotive in May 2020
Automation Anywhere fundraised in November 2019 a $290M Series B financing round from Salesforce Ventures, SoftBank, and Goldman Sachs at a $6.8B valuation
Appian announces acquisition of Novayre Solutions SL in January 2020
IBM announces acquisition of WDG Automation in July 2020
Hyland announces acquisition of Another Monday in August 2020
UiPath, a leader in RPA, fundraised in February 2021 a $750M Series F financing round from Coatue, Alkeon Capital, Altimeter, Dragoneer, Sequoia, Tiger Global, IVP, and others at a $35 billion post-money valuation. UiPath’s S-1 Filing for an IPO was published and became publicly available in late March 2021.
Top-Funded RPA Companies, according to CB Insights:
Conclusion
Overall, we are attracted to the creativity of new technologies and remain committed to seeking multi-year growth opportunities with a tech-focused lens that enables scalable growth. Well-informed investors continue to seek investments in growing businesses and disruptive innovation in an effort to generate significant performance alpha in the coming decade. Drawing Capital is of the view that robotic process automation (RPA) is an incredibly interesting industry that is also a “disruptive innovation”. The total addressable market for RPA is a growing opportunity set that benefits multiple stakeholders, such as employees, employers, and shareholders.
References:
"Robotic Process Automation Market Size & Share Report, 2020-2027." https://www.grandviewresearch.com/industry-analysis/robotic-process-automation-rpa-market. Accessed 10 Feb. 2021.
"Cut your processing costs significantly with RPA | Accenture Capital ...." https://capitalmarketsblog.accenture.com/cut-processing-costs-significantly-rpa. Accessed 10 Feb. 2021.
"The future of work in America - McKinsey." 1 Jul. 2019, https://www.mckinsey.com/~/media/McKinsey/Featured%20Insights/Future%20of%20Organizations/The%20future%20of%20work%20in%20America%20People%20and%20places%20today%20and%20tomorrow/The-Future-of-Work-in-America-Full-Report.pdf. Accessed 10 Feb. 2021.
"Disruption 2020: An Interview With Clayton M. Christensen." 4 Feb. 2020, https://sloanreview.mit.edu/article/an-interview-with-clayton-m-christensen/. Accessed 10 Feb. 2021.
"Driving impact at scale from automation and AI - McKinsey." https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/McKinsey%20Digital/Our%20Insights/Driving%20impact%20at%20scale%20from%20automation%20and%20AI/Driving-impact-at-scale-from-automation-and-AI.ashx. Accessed 10 Feb. 2021.
"COVID-19 digital transformation & technology | McKinsey." 5 Oct. 2020, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-covid-19-has-pushed-companies-over-the-technology-tipping-point-and-transformed-business-forever. Accessed 10 Feb. 2021.
"Microsoft acquires Softomotive to accelerate and expand its Robotic ...." 19 May. 2020, https://www.softomotive.com/microsoft-acquires-softomotive/. Accessed 10 Feb. 2021.
"Appian Acquires Robotic Process Automation (RPA) Company ...." 7 Jan. 2020, https://www.appian.com/news/news-item/appian-acquires-robotic-process-automation-rpa-company/. Accessed 10 Feb. 2021.
"Hyland acquires RPA software provider Another Monday." 21 Aug. 2020, https://news.hyland.com/hyland-acquires-rpa-software-provider-another-monday/. Accessed 10 Feb. 2021.
"IBM to Acquire WDG Automation to Advance AI-Infused Automation ...." 8 Jul. 2020, https://newsroom.ibm.com/2020-07-08-IBM-to-Acquire-WDG-Automation-to-Advance-AI-Infused-Automation-Capabilities-for-Enterprises?utm_content=buffere6a05&utm_medium=social&utm_source=facebook.com&utm_campaign=buffer. Accessed 10 Feb. 2021.
"Automation Anywhere hits $6.8B valuation amid a bot boom ...." 21 Nov. 2019, https://pitchbook.com/news/articles/automation-anywhere-hits-68b-valuation-amid-a-bot-boom. Accessed 10 Feb. 2021.
"Robotic process automation platform UiPath raises ... - TechCrunch." 1 Feb. 2021, https://techcrunch.com/2021/02/01/robotic-process-automation-platform-uipath-raises-750m-at-35b-valuation/. Accessed 10 Feb. 2021.
"UiPath's Valuation Soars To $35B As It Preps To Go ... - CB Insights." 10 Feb. 2021, https://www.cbinsights.com/research/uipath-valuation-ipo-rpa/. Accessed 3 Mar. 2021.
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