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Author: Carlos Sanchez

The Risks and Benefits of Knowledge Process Outsourcing

Many organizations now consider Business Process Outsourcing (BPO) as a viable option to increase operational capacity, access specific business process knowledge and reduce costs.

The evolution of BPO is Knowledge Process Outsourcing (KPO), the outsourcing of process requiring analytical thinking and judgement. Embarking on an outsourcing effort is not for the faint of heart. There could be negative repercussions on employee morale and public opinion, and the probability of failure is high. This article describes some of the benefits, challenges, risks and program management aspects you should know before evaluating a process outsourcing effort specifically around KPO.

KPO at Home and Abroad

Business Process Outsourcing reached mainstream management thinking in the late 90s and it is no longer exclusive to large corporations; small and medium sized companies are also taking advantage of the BPO opportunity to augment their capabilities and allow them to focus on revenue growth. Since 2003 business process outsourcing has shifted from outsourcing back-end, non-core, and repetitive processes such as accounts payables and accounts receivables to outsourcing core processes that require analytical-intensive thinking and judgement like market research and data analysis. This shift has created what is now referred to as Knowledge Process Outsourcing. KPO vendors are typically located abroad in places like India and Singapore usually referred to as off-shore locations. Other countries like Mexico and Chile are providing KPO services and are referred to as near-shoring locations because of their shorter travel times, time zone alignment and culture similarities. Some KPO vendors have operations in the same country as their clients and they are referred to as on-shoring.

Trends in KPO

KPO is predicted to grow to anywhere between $10 and $17 Billion (USD) globally by next year [2010]. Areas that are experiencing growth in the KPO arena include: data search, data integration, market research, project management, remote education, radiology, medical transcripts preparation and legal processes. Some of the factors driving the growth in KPO include the adoption of global standards for qualifications, access to a large pool of skilled and experienced professionals abroad and improved remote project management capabilities due to improvements in telecommunications and other enabling technologies. The way decisions are made about outsourcing is also changing. KPO decision making will move from the CIO and COO level to divisional business managers and board of directors.

Benefits of KPO

While the main attraction of BPO was improved efficiency and cost reduction, the main attraction to KPO is increased revenue and improved competitive advantages as a result of having access to a large pool of skilled professionals in knowledge intensive industries. Other benefits of KPO include cost savings, converting fixed costs into variable costs, flexibility for companies to add or reduce personnel based on business cycles and the continuous execution of work by taking advantage of different time zones.

KPO Challenges

The challenges of pursing a KPO strategy are both external and internal. External challenges include finding a suitable KPO vendor that can offer the necessary skills in a scalable manner. Protecting intellectual property is a challenge since it will have to be shared with the vendor. For some industries, protecting data and privacy as well as abiding to legal and compliance requirements are challenges to overcome. The physical location of the KPO vendor creates challenges from a language and time zone perspective. Internal challenges stem from adapting the organizational and management mindset from managing internal resources to managing the KPO vendors resources situated in a remote location. The definition of quality and performance metrics can pose a challenge since some of them may not exist. Internal processes and managers usually do not have quality metrics in place and will need to be defined before outsourcing the process. In some cases, the outsourcing effort exposes inefficiencies and weak areas in the process and a decision needs to be made to outsource the process as is or to optimize it before outsourcing. Technical challenges can also arise so the information technology department must be involved to ensure the infrastructure, applications and data is in place and well protected, and that the KPO vendor is using the data and applications as it was contractually agreed.

Risks of KPO

Process outsourcing is a risky initiative. The main risks include the impact on employee morale, key talent retention, outsourcing a core competence, negative public opinion, unfavourable currency exchanges, poor program management, poor project management, political instability in the KPO vendor’s location, terrorist attacks, taxing structures, security, privacy, salary inflation, service interruption, technical issues. These are just some of the risks to be considered. Also consider that KPO vendors may experience a labour shortage or may be unable to attract key talent and skills needed and can eventually go out of business. Poor program management, lack of executive support, poor vendor selection, lack of understanding of the company’s core competencies, undocumented processes and procedures are also risks to be considered from within the organization. Based on the business strategy, organizations considering a KPO strategy must first conduct a thorough analysis of their core competencies, process efficiencies and risks. The impact to employee morale and human capital is a significant risk and needs to be managed appropriately.

Program and Project Management Considerations

To increase the probability of success, organizations must use a structured approach to managing the [KPO] outsourcing opportunity. Organizations can pursue a KPO strategy directly without any prior BPO experience, although organizations with BPO experience will have a shorter learning curve and less risk. Outsourcing efforts should start by forming a team that will identify opportunities to outsource as KPO. This team should perform a thorough analysis of the organization to identify opportunities for outsourcing and it should represent all relevant functions of the business. The team must be aware of the organization’s strategic intent and the objectives of the outsourcing effort. The project manager should be someone with prior experience in outsourcing projects and a high level of empathy given the human aspect of the project. In some organizations a central group is created to oversee the outsourcing efforts. This group can provide consistency in the way outsourcing projects are managed, evaluate adherence to outsourcing methodologies and monitor the on-going performance of the vendor. KPO vendor selection must be based on whether the vendor can provide a significant competitive advantage and must be able to provide the required talent and skills. Selecting the process or function to outsource should also be done on a phased approach from lowest risk to highest risk. During the first phase only simple processes can be considered. A second phase can include processes with low cross functional dependencies. A third phase should deal with the more complex processes.

Conclusion and Recommendations

Knowledge Process Outsourcing can provide value and allow companies to focus on increasing revenue growth while providing challenging and progressive positions to employees that want to move into supervisory and monitoring roles. KPO offers a great opportunity to outsource analytical intensive processes that contribute to the development of new products, evaluate new markets and offer new services. KPO continues to grow and is becoming a core option for business strategists. Large and small organizations can now take advantage of the KPO model since it requires deep knowledge and not the high volume transactions associated with BPO efforts. To increase the probabilities of success, a phased approach to selecting the outsourcing candidates must be performed using a program and project management approach with executive buy-in and cross-functional representation. Standard project management methodologies must be followed and most importantly a two-way communication with the KPO vendor must be maintained throughout to ensure on-going success.

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Carlos Sanchez, MBA, PMP, CMC is a consultant at SPM Group. He has over 10 years of experience working in a variety of consulting projects both technical and business. His area of expertise includes Operations, Process Improvement, Project Management, and Supply Chain Management. Carlos holds a BSc in Mechanical Engineering from the University of Toronto and an MBA from the Rotman School of Business. He is an active member of the Project Management Institute and is a certified Project Management Professional (PMP) and a Certified Management Consultant (CMC).