Friday, August 17, 2007

TPI Forecasts Steady Growth in Knowledge Process Offshoring

Interest in knowledge process offshoring (KPO) is growing and steadily accelerating in India, according to a research report by TPI, the leading sourcing advisory firm. The comprehensive report — Knowledge Process Offshoring: A Balanced View of An Emerging Market — was conducted by TPI through primary and secondary research between January and April 2007 based on a review of 73 service providers and 45 captive centers in India performing business process outsourcing (BPO) or KPO activities.

In an effort to understand the growing rate of adoption of KPO and its true potential, TPI executed an extensive research exercise to develop an objective and balanced analysis of the KPO market in India. The report, which focuses on the offshoring of skills-intensive work processes through either outsourcing or captive operations, reveals that the growth rate is likely to yield annual levels of spend of US$10 billion - $12 billion in India by 2010. Factors that most significantly influence the rate of growth include availability of trained workers, complexity of services, intellectual property concerns and security issues. The report also provides a clear definition of the parameters of KPO — addressing the marketplace definitions about what exactly constitutes KPO; critical success factors in offshoring knowledge work; current market dynamics for KPO; KPO service providers; and the key factors affecting the growth of the KPO industry, among other key considerations.

“TPI believes that the demand growth path for KPO services will be similar to that of the outsourcing domains for information technology (IT) and other business processes, fueled by Global 2000 firms that form the bulk of offshoring buyers of outsourcing,” said Indy Banerjee, project director, TPI. “Global corporations are increasingly looking to incorporate offshoring as part of their forward-looking strategies rather than employing it as a reaction to cost pressures, and as such we have seen the rise in interest of KPO as a viable and obtainable sourcing solution.”

Report Conclusions

KPO is distinct from information technology outsourcing (ITO) and business process outsourcing (BPO) as it involves more high-level, value-added work, often relying upon subjective analysis and interpretation for successful performance. Typically, outsourced work processes are highly standardized, dependent upon automation and delivered in quantity. KPO functions, such as investment research and prototype development, are people-intensive, and the end product is arrived at through rigorous methodologies.

Due to the fact that KPO requires a sophisticated level of judgment, subjective analysis and interpretation, the end result can vary for each client, as opposed to BPO, where a similar output is generally garnered each time. Also, unlike BPO, where an entire process is often offshored, KPO entails offshoring part of a larger process such as financial research and analysis, engineering and design services and pharmaceutical research outsourcing.

As organizations determine which of their critical and strategic functions can be performed in an offshore environment, a number of factors will influence their experience with KPO. These factors include the ability to divide knowledge work into smaller, more manageable segments, to locate available talent with domain knowledge, specialized educational background and differentiated skills (that aren’t already being used by their own domestic markets), and to account for security concerns such as legal issues and protecting intellectual property rights (IPR). Traditional barriers to entry employed by professions such as medicine, law and accounting limit the extent of services that can be offshored, as there could be licensing implications to processes being offshored.

The goal of KPO goes beyond simply cost savings – although the projected savings could total a significant 40 percent to 70 percent – to more global implications enabling clients to obtain access to world-class talent around the globe. The research concludes that the triumvirate of cost, quality and capacity are the decision drivers for a KPO strategy.

Currently, India-based workers perform the widest range of KPO activity, especially in the areas of finance and accounting, and this work comprises 80 percent of KPO performed worldwide. The financial services industry is responsible for more than 60 percent of the KPO performed in India, and KPO services, although in the beginning stages, have expanded to other industries such as pharmaceuticals, marketing and research, and legal services. The report reveals that firms in the financial, banking and insurance industries were early adopters of KPO (going back about five years), for high-end analytical work.

Based on prevailing security concerns, many companies prefer to keep knowledge processes that include core intellectual property and sensitive data in-house rather than outsourcing those functions to a third-party provider. Therefore, most knowledge processing leads to captive, or company-owned, offshore operations or the in-house offshore development center of a company, as opposed to utilizing third-party vendors, because they potentially provide enhanced competitive advantage protection and help build institutional knowledge for future expansion. In addition to captives, pure-play KPO firms and established IT/BPO players that are expanding their offerings to include KPO make up the KPO industry today.