Knowledge Process outsourcing sector

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Abstract

The objective of this paper is to understand about Knowledge Process outsourcing (KPO) sector and to find out if India can have the competitive advantage to emerge as a leader in the area of Knowledge Process Outsourcing in future.

Keywords

Business Process Outsourcing, Knowledge Process Outsourcing, Information Technology, Talent Crunch, Information Technology Enabled Service, Value Chain, Domain Specialization,

Methodology of the study

This research paper is based purely on secondary data. The data used for the study is from organizations like NASSCOM (National Association of Software and Service Companies), the reports published online by them, and other reports and statistics available from the database resources which include EBSCO & FACTIVA and also the Internet. The get conceptual understanding the books written on outsourcing, journal articles related to the topic of study and newspaper articles were also used.

Outsourcing - The Concept

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In today's environment, building and maintaining competitive advantage is becoming a challenge for corporate around the world. Competitive advantage in the market place is derived basically through two means. One is by providing better customer value for equivalent cost (Differentiation) or equivalent customer value for a lower cost (low cost). The ultimate situation to be in will be to provide better value at a lower cost 1. This made businesses to focus on reducing cost and also to maintain or enhance customer value. As an outcome, it became imperative for organizations to focus on their "core competencies"2. The term "core competence" was used by Prahalad and Hamel 3 to deal with capabilities within diversified firms. Several measures have been proposed how to identify unique resources and capabilities4-9. Once the core competencies have been identified, organizations wanted to focus only on their core competencies and withdrew from everything else. Outsourcing as a tool has taken shape based on this principle. The concept of taking internal company functions and paying an outside firm to handle them is called Outsourcing. Outsourcing is done to save money, improve quality, or free company resources for other activities.

Organizations outsource processes to leverage on the fact that outsourcing service providers could do the same job at a fraction of what it costs the organization to run a in-house department and thus resulting is cost saving. Based on this, organizations have built inter-organizational arrangements with organizations with complementary resource capabilities10-13 or sometime even with competitors14-15.This inter-organizational arrangement is not limited to geographical boundaries, but are even made with organizations in different countries. The numbers of such arrangements have been on the increase, specifically with reference to the latter16-17.

Profiling Outsourcing Operations

The value chain of Outsourcing Operations in India is explained below. It is called the BPO ladder. The adjoining figure depicts the various levels of the value chain18. The first level of operation in the value chain is data entry and conversion. Call centers and medical transcriptions fall under this category of operations. The second level of the value chain is Rule-set processing. In this the worker makes judgments based on rules set by the client (Awarding points to frequent fliers of an airline). The third level of the value chain is problem solving. At this level of operation, the worker is given freedom to use discretion in taking decisions. Approving insurance claims and altering credit card limits are some of the operations that fall under this category. The fourth level in the value chain is direct customer interaction. In this, the worker directly handles the customers of the clients. Providing on line service tips and sorting out customer complaints on line are some of the operations that come under this level of the chain. Finally, the fifth level of the value chain is where workers are able to give expert knowledge services for their clients. In this level high-end services like research and analysis are outsourced knowledge. The companies providing services at this level latter refuse themselves to be called BPOs they call themselves as KPO (Knowledge Process Outsourcing) companies.

Fig 1.1

Knowledge Process Outsourcing - Defined

It's not just a 'B' in BPO replaced by a 'K'. KPO is involved in services like Valuation & Investment Research, Patent Filing, Financial Research, Market Research and Financial Services, Media Processing, Publishing & Database Management, and Corporate Planning of large Fortune 500 companies etc.

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The new phenomenon can be defined as; the off-shoring of knowledge-intensive business processes that require significant domain expertise is KPO. Unlike conventional BPO where the focus is on process expertise, in KPO the focus is on knowledge expertise. The difference lies in domain specialization. A BPO employee, generally, does not require knowledge of a special field. For instance, all that a customer cares executive at a BPO needs is knowledge of English, ability to articulate well and basic computer skills. On the other hand, an employee of a KPO that is into equity or financial analysis, should possess high-end knowledge of accounts and finance. He or She should be a Master of Business Administration in Finance or Charted Accountant. Hence KPO is knowledge-driven, BPO is process-driven; KPO needs specialized expertise, BPO can do with plain graduates or even undergraduates who have just good command over spoken English. KPO employees require not just domain specialization, but also good knowledge of English and Information Technology. A Charted Accountant may be very good at accounts but if he is not proficient in English or lacks Information Technology skills, he is unfit to deliver services to a knowledge process outsourcing company. People with all three qualities- Domain Specialization, English Proficiency and Information Technology skills are the best fit to take up a job in KPO.

The KPO -Fact File

According to NASSCOM, the global KPO market is expected to grow at a Cumulative Annual Growth Rate (CAGR) of 46 per cent, from $1.2 billion in 2003 to $17 billion by 2010 19. Comparing this with the prediction for the low-end outsourcing services market, the BPO is expected to have a CAGR of 26 per cent, from $ 7.7 billion to $39.8 billion in the same period.

According to a report by GlobalSourcing now, the Global Knowledge Process Outsourcing industry (KPO) is expected to reach USD 17 billion by 2010, of which USD 12 billion (almost 70%) would be outsourced to India alone. Indian KPO sector has already taken steps in employing highly educated and talented people and number of KPO professionals is expected to cross more than 250,000 by 2010 compared to the current figure of 25,000 employees. Fig 1.2 suggests that expected Growth in Global BPO and KPO Markets (2003-2010)

Fig 1.2

KPO - The Critical Success Factors

The main advantage for India to remain a fore runner in the BPO arena is its location advantage, cheap and abundantly available English speaking labor. The business model was a cost centric model. The factors like location advantage, cheap and abundantly available English speaking labour are necessary but not sufficient for India to be successful in the KPO sector, as the other factors that are critical for success include Domain Specialization and Information Technology Skills. Looking at the rate at which the KPO sector is growing and looking at the estimates reported by GlobalSourcing, it is very clear that there would be dire need for professionals with all skills listed in the critical success factor of KPO.

The Fig 1.3 shows the number of professionals employed in the ITES Sector from 1999 to 2006. The data shown is considering the entire ITES sector, which include BPO and KPO. Looking at the growth rate during this periods, there an average growth of 30% in the number of people employed in the ITES sector. According to GlobalSourcing, the number of KPO Professionals employed is approximately 25,000 during 2004-05 and the expected KPO Professionals needed by 2009-2010 is around 250,000, which is a tenfold increase in a span of five years. The next question is will India have the required eligible professionals to be employed he KPO sector?

KPO Professionals

Table 1.3

Will abundantly available qualified manpower exist for KPO?

Cheap and abundantly available man power was one of the crucial factors for India success story in the BPO's sector. Low cost manpower who are qualified and have the required domain expertise and technology skills are the critical for the KPO's success. Table 1.4 and Table 1.5 gives an idea that about the Knowledge capital of India.

Table 1.4

Table 1.5

Considering the Table 1.4 and Table 1.5 and also considering the fact that only a small fraction of the qualified labour force can be considered suitable for employment in companies operating in the global arena (Neha Kaushik, 2006) it is revealed that the number of jobs in India are growing faster than the total employable workforce. Looking at the statistics of the graduates from the B schools, it has been found that all the 2,000-odd IIM and top 10 B-School graduates are employable, while less than half the 84,000 graduates from Tier-II B-Schools would make the grade and the reason being poor cultural fit and communication skills. (Shalini Singh, 2006)

Conclusion

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The conclusion is for sure knowledge process outsourcing id going to be the next big wave and India can cash on the next big opportunity provided high levels of quality standards are maintained in education which can enable India to produce talent with a proper cultural fit and with excellent communication skills. Also investment in infrastructure has to be done on war footing with enhanced risk management strategies, which can enable India to cash on the next big wave KPO.