Outsourcing's latest trend: Companies should give KPO a chance

End of recession holds hope for knowledge process outsourcing

Knowledge process outsourcing has failed to live up to its potential. So is it doomed to fail? Or does hope lie ahead? The National Outsourcing Association's Martyn Hart has the answers.

Knowledge process outsourcing (KPO) has reached something of a revered status over the past year or two, hailed as the exciting progression of business process outsourcing (BPO) into better and brighter arenas. But it often feels like the sector isn't as well developed as some would have us believe.

At last year's NOA Sourcing Summit, for example, a speaker asked the audience how many delegates could call their existing relationships KPO. Out of a room of 300, only two put up their hands. This doesn't bode well for the sourcing industry's next big thing.

In brief, KPO is generally described as the next step for BPO as traditional outsourcing climbs the service value chain. In KPO suppliers in the field are expected to have deeper domain knowledge and the ability to carry out much more complex tasks, moving closer and closer to a company's 'core' business functions.

Until now outsourcing professionals have always been told to hang on to core business functions. In this sense, KPO represents a real evolution in outsourcing rather than a simple transition.

But does it work? In theory, by using skilled workers that were not previously available to them, organisations can enable new services they might not have been able to offer previously.

Extending existing services in this way is where much of the KPO success is coming from. An example is expanding claims processing BPO into more complex fraudulent claim investigation. This method of climbing the value chain has a lot of potential for growth.

The benefits for outsourcing buyers looking into KPO are obvious. Accessing increasingly skilled workers at reasonable costs is, of course, very attractive. When skills are scarce domestically, certain types of KPO are likely to become increasingly popular. It is also clear that the high levels of service from a KPO provider can rarely be matched by an oft-distracted internal department.

Those companies dealing with KPO services also stand to benefit from the increasing complexity of tasks. The more complex and challenging the task, the more likely workers are to be mentally engaged - and thus the more able companies are to attract high-quality staff. For those companies expanding out of traditional BPO, KPO would naturally increase the opportunities for career progression and reduce attrition as a result.

Looking at KPO in such a positive light, it is difficult to see why it has not taken off more forcefully. In 2005 Nasscom predicted Indian KPO would grow from $1.2bn in 2003 to $17bn by the end of this year. According to a new Nasscom report, released in January this year, the Indian KPO market currently stands at $4bn. Even accounting for the recession, this is still significantly wide of the mark.

Though the skills are most certainly there for KPO to take off, something is clearly holding companies back. A central stumbling block seems to be the 'don't outsource your central business' aphorism. Many companies are still unwilling to engage in these kinds of relationships for fear of giving too much away.

The other important hindrance is that companies may be unable to transition to this new outsourcing model. Where existing suppliers push back, it can be easier to hand over higher-value services. But entering into new KPO relationships is a much bigger step.

The governance time involved in KPO can also increase quite significantly which can be a shock for the unprepared. Worries also persist about data, infrastructure and continuity issues, especially when looking offshore.

With existing apathy towards KPO the outlook often appears bleak but the potential is great. The supplier market is currently populated by a large amount of niche players looking for specialised opportunities. But this looks set to change going forward as some consolidate and more established BPOs get in on the act. When you consider the global BPO market may grow to $450bn by 2012, according to predictions by analyst NelsonHall, there is clearly a big opportunity for up-sell.

Now the recession looks to be ending (double dips permitting), the opportunities for companies to grow and enhance through KPO look much more achievable. All that's left is for suppliers to keep pushing and end-users to work at overcoming their qualms. Advisors, analysts, associations and suppliers all have a part to play here; and though it's a long road, KPO will make it in the end.

Martyn Hart is chairman of the National Outsourcing Association.