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Knowledge Process Outsourcing    [Date Added : 08/19/2005 ]
Marc Vollenweider, writing in The Financial Express, has some interesting observations regarding the emerging markets for Knowledge Process Outsourcing (KPO). The economic success of Business Process Outsourcing is encouraging many firms to start offshoring their high-end knowledge work. The global KPO sector is expected to grow at a CAGR of over 45% to reach US $17 billion by 2010.

India, with its highly qualified professionals and English language skills, is emerging as the location of choice for a wide variety of KPO work. This will help the Indian KPO sector reach $12 billion by 2010, accounting for a market share of about 70%.

The global KPO industry is still in a nascent stage. However, it is growing at a rapid pace. The sectors that are expected to 'shine' within the KPO industry include data search, integration and management services, financial services, research and analytics, technology research, computer-aided simulation and engineering design, and professional services, such as business research and legal services.

Unlike the conventional BPO, where the focus is on process expertise, in KPO the focus is on knowledge expertise and requires service providers to possess advanced technical and analytical skills. Some of the other factors fuelling growth in KPO are:

- Developed economies, including the US, the UK, and countries in Western Europe, are increasingly facing a shortage of highly trained and specialized professionals in various knowledge-intensive high-skill sectors, such as R&D in VLSI, engineering design, IT, financial risk management, etc.

- Buyers of offshoring services save more at the high-end of the value chain, as compared to the low end on a per-job basis.

- High-quality specialized vendors and successful captives have emerged as role models and created awareness for KPO, both in the West as well as in India.

KPO is Not Just About 'Cost Arbitrage'

Players solely based on cost differentials will hardly be sustainable in the long-run. The central theme of KPO is to create value for the client by providing the highest-quality business expertise and superior productivity/effectiveness rather than cost savings based only on geographic cost arbitrage.

KPO services help improve the time-to-market, access to special skills, absorb peak load and enhance organisational effectiveness. Moreover, it simplifies the process and makes it more flexible. Consistent quality is the key word and primarily drives the buying decisions. For example, an error made in a corporate finance valuation model can have a huge financial downside, which is likely to be in factors of 1000+, possibly larger than the savings made by having the spreadsheet produced in India.

Similarly, a patent with badly written claims can damage the protection of multi-million dollar products in global markets. Finally, the outsourcing solutions for high-end processes are usually highly customized, which is an important element of value creation for the client, but also requires the vendors to run multiple customised processes in parallel.

Large Potential for SME Customers

While KPO started initially in captive centers of large companies, moving to specialized vendors, who provide such services to large companies such as investment banks. This sector holds immense potential for the SMEs in the long-term.

There are millions of SMEs which can benefit from KPO; however, their average volumes are much lower). While large companies predominantly use KPO for gaining access to talent and cost reduction, SMEs can further benefit from buying KPO services from specialized vendors by being able to gain access to very large resource pools quickly at no upfront costs.

Additionally, it allows them to vary their cost base in the face of short-term demand swings, which creates the possibility of new business models.

From 'Make' to 'Buy'

With the advent of specialized and high-quality KPO vendors in India, customers will increasingly go the 'buy' route rather than setting up their captive offshore centres. Setting up a captive takes at least one year to stabilize quality, consumes a very large amount of senior management attention, and often ends up with higher operating costs and less management control than working with one or two vendors. This effect is particularly strong in KPO, since most companies do not want to build in-house capabilities in such fields in India due to the lack of critical mass, which is currently likely to be around 200+ professionals.

The US and the UK account for the largest share of KPO due to English language, the widespread NRI community and their existing comfort levels with offshoring services to India and similar destinations. European companies are still far behind in terms of offshoring even BPO processes, but are increasingly opening up to the idea of offshoring higher end work to countries like India. However, this trend is likely to pick up only if issues related to language proficiency and cultural context are handled properly. If addressed appropriately, the non-English segment could become an excellent growth opportunity for Indian companies.

Buyers of offshoring services are increasingly looking for those KPO players which have the necessary expertise, depth and experience in focussed areas of KPO. KPO players need to focus on particular market segments, in terms of services provided, industry verticals, functional skills as well as the type of clients served. Typically, customers look for the skill rather than for the size of a vendor and prefer focused vendors over vendors offering large varieties of BPO, IT and KPO services.

They want vendors who will totally customize their solutions and offer both project-based delivery models as well as dedicated centers. Flexibility and speed are critical. For example, in Business Research, customers are asking vendors to run projects from a few thousand US dollars upwards and expect complex global and multi-lingual research projects to start after as little as 15 minutes after the requests have been made.

Supply Side Perspective of KPO: People, Quality, Differentiation and Marketing

KPO is centered on professionals possessing the right skill sets. Therefore, access to a large, high-quality skill pool is a precondition for successful KPO operations, captive or third party. For this reason, KPO operations are likely to emerge in countries with the highest educational standards, providing a large number of highly qualified professionals (Engineers, MBAs, PhDs, CFAs, Lawyers, etc.) such as India, China and Russia. India is likely to capture about 70% of the market for KPO, but the challenges will be significant.

The ingredients of successful KPO are recruiting and training the right professionals, providing consistent quality over time, improving productivity to or beyond Western levels and successfully marketing the services to sceptical customers.

KPO companies are professional services companies and not white collar factories. Therefore, world-class people development processes are at the root of successful KPOs. Developing professionals faster and better than anyone else will translate directly into better quality, productivity, retention and success in the market place. Meritocracy and true employee care are only a few elements of such a philosophy.

The 'Jack in all Trades' approach is not likely to work in KPO. The work at KPO requires domain expertise and therefore the culture and customer requirement of KPOs and BPOs vary significantly. Hence, it is important that KPOs develop expertise in few areas and excel in them.

KPO companies have the unique opportunity to create new markets, since their price points allow them to offer new types of services simply not available in high-wage countries for cost reasons. However, buyers who offer Innovative services will differentiate successful KPO companies from players who offer cost-arbitrage and will give them a sustainable place in the world markets.

Selling KPO services in the West will require a Western sales force and significant branding efforts in the medium-term. As of now, tapping the SME potential and selling into Continental Europe requires local support. Successful branding will be another necessary ingredient to generate a sufficient 'pull' in the market.

(extract of "KPO: Intellectual Capital, Ahoy!!" by Marc Vollenweider, The Financial Express, July 10, 2005. Copyright 2005 Indian Express Newspapers (Mumbai) Ltd.)
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