A look at how knowledge based services are replacing offshore business processes.

In light of the recent shift, from organisations outsourcing and offshoring business processes (BPO) to take advantage of the lower cost of labour in developing countries, towards more knowledge-based services (KPO) that sit far closer to the core business, Vijay Rangineni, CEO of Mahindra Satyam BPO explains why organisations need both BPO and KPO to address the current challenges of the global economic slump.

The BPO factor

The outsourcing of business processes by organisations is not a new phenomenon. Business Process Outsourcing (BPO), a form of outsourcing that involves the contracting of the operations and responsibilities of a specific business process to a third-party service provider, has traditionally been used to create a leaner organisation without compromising on service quality and to enable organisations to benefit from lower cost labour in developing countries such as India or China.

In the early days, BPO mostly consisted of outsourcing processes such as payroll, before growing to include employee benefits management and customer contact centres. These days, BPO encompasses a number of functions key to the customer’s business strategy. This is a sure sign of IT-BPO services providers and pure-play BPOs gaining in terms of customer confidence. In light of the increased scope of BPO, Gartner research recently predicted that BPO would reach $55.9 billion in outsourced operations by 2012 (Gartner on Outsourcing, 2008-2009).

However, following the news that some UK organisations are encountering issues with offshoring – such as customer service agents with poor language skills and lack of expertise – these low-value BPO contracts have run into some severe and well-publicised problems. In the wake of these recent concerns, many organisations are now considering partnering with globally renowned BPOs to leverage a better skill-set to deliver business processes that are much more core to their strategy.

KPO – the next wave

This process, known as Knowledge Process Outsourcing (KPO), a form of outsourcing in which knowledge-related and information-related work carried out by employees in a different company or by a subsidiary of the same organisation, offers higher-value processes that takes advantage of the wider availability of highly qualified talent in developing countries. Analyst firm IDC recently estimated that the KPO market would reach $15-20 billion by the year 2010 (IDC Outsourcing forum 2009).

An example of KPO would be when an insurance company that outsources the data entry of its claims forms (as part of a BPO initiative), also chooses to use a KPO service to evaluate new insurance applications based on a set of criteria or business rules. This work would then require the efforts of a more highly skilled set of workers than BPO.

KPO has several dimensions – market research (consumer behavior, segmentation, market sizing, competitive intelligence), financial research (equity research, business planning, valuation models, portfolio analysis) and business analytics (risk analysis, data cleansing and modeling, credit score carding, consumer loyalty, consumer satisfaction studies). Clearly, this involves a vastly different set of activities from BPO, and can easily be called the next step in the evolution of process outsourcing.

The basic idea is that, by harnessing new knowledge and skill-sets that were not previously affordable or available, organisations can offer new services or capabilities that, in the past, could not be considered feasible, therefore achieving a different outcome from a pure BPO approach.

The recent shift to the KPO approach also has benefits for providers – involvement in these areas of a client’s business brings greater understanding of their business issues and the opportunity to serve clients better. For outsourcing vendors who also offer IT services, there are opportunities to bundle together different services and offer complete packages to their clients, taking increased accountability for delivering business outcomes.

The best of both worlds

However, despite the recent interest in KPO, the significant growth predicted in the coming years and the strategic benefits it brings to customers, cost still remains the overriding factor in outsourcing decisions. It is important that companies first consider a service that helps them stay competitive without compromising on quality.

Especially in the current context, cost management and resource optimisation are critical. So, while BPO can serve as the low-hanging fruit or the ‘bread and butter’ activity of the customer organisation that needs to be undertaken with immediacy, KPO needs to be the end-goal that outsourcing organisations should look at.

Engaging with a BPO service provider of repute can help the customer organisation achieve this objective. A renowned BPO company will dig deep into the customer’s business to understand the multiple opportunities for outsourcing (either BPO or KPO), advise the customer and help them to create a structured roadmap that will enable them to truly benefit from outsourcing.

Selecting a single service provider
 
The most critical aspect in outsourcing is the choice of the service provider. Today’s competitive service provider space makes it almost impossible for companies to evaluate each one of them accurately. It is therefore advised that a company consolidates processes with a single service provider.

While a process such as multi-sourcing – a combination of business and IT services from multiple internal and external providers – may have had its advantages when the focus was more on rapid expansion and leveraging service provider specialisation, adopting a single service provider approach can help organisations to manage costs better and maximize the benefits from outsourcing in the current scenario.
 
More specifically, consolidation can help the companies create a centralised service centre with better best practice sharing and service levels, cut service provider management costs substantially and involve senior leadership of the service provider at key stages. It can also help to create a roadmap for outsourcing more high-end processes over time and, most importantly, lay the foundation for a long term partnership with the chosen service provider that is critical to tap into the true potential of outsourcing.
 
Summary
 
Outsourcing certain knowledge processes and functions is an obvious choice for companies in the UK as well as other countries in Western Europe that are increasingly facing a shortage of highly trained and specialised professionals. In times of economic uncertainty, it is not only just what a company outsources but also who it outsources to, achieves prime importance.

Partnering with a tried and trusted service provider and adopting a structured approach to outsourcing presents an opportunity for all organisations, regardless of where they are based. This is not only so they can cut costs in the immediate future, but also to create a lean organisation that will deliver enhanced customer value and be well positioned to be more profitable when the economy starts to recover.