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Fri 2 May 2008 04:00 AM

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Time to embrace KPO

In the last seven years, Business Process Outsourcing has grown hugely to become $150bn-plus global industry.

In the last seven years or so, Business Process Outsourcing has grown hugely, and is now a vibrant US$150bn-plus industry across the globe.

Traditionally, the focus of the outsourcing industry was to move the low value 'grunt work', also known as the non-core activities, out to a cheaper location either through a captive unit or by partnering with a low-cost provider.

This came to be known as Business Process Outsourcing (BPO). The drivers for the growth in the BPO industry were the availability of telecom infrastructure, maturity of underlying technology and of course availability of lower cost labour. In summary, the BPO industry flourished to take advantage of the labour arbitrage.

Unlike its poor cousin, the KPO industry is not driven by labour arbitrage but by intellectual arbitrage.

Times are changing; organisations are exploring if they can outsource some of their core activities known as Knowledge Process Outsourcing (KPO). The boundaries between what is outsourceable and what was thought as not are blurring.

Organisations that have high maturity in BPO are looking at developing either their own captive units to source their core activities to or for boutique providers.

Independent researchers estimate the annual value of KPO will reach at least US$10bn. The drivers for the rise in the KPO concept has broadly been the lack of high-end quality professionals and the increasing sophistication of the financial sector. Unlike its poor cousin, the KPO industry is not driven by labour arbitrage but by intellectual arbitrage.

To appreciate what is happening in the world of KPO, picture this: a Wall Street equity research firm has made the investment decision not to spend US$250,000 a year to cover a specific stock listed on the New York Stock Exchange.

The reasoning behind not investing this money is that the revenue generated by covering this stock would total no more than US$200,000. As a result, this Wall Street equity research firm would in fact lose money if they covered this specific stock.

Now, take a moment to imagine how the situation would change if the same Wall Street equity research firm could obtain the same high quality analysis of the stock for a cost of US$100,000 a year. It now becomes a viable investment decision to cover this stock.

These types of decisions are now a reality. KPO is the key. In our example, the Wall Street equity research firm will generate an additional US$100,000 in revenue by outsourcing the analysis of the stock in question to a captive or third-party KPO provider.

It gets even better. As more financial models develop and even report writing is sent offshore, US-based analysts are free to spend more time developing relationships and communicating their insights directly to investors, in the process boosting the organisation's top line revenues as well.

The BPO industry is beginning to evolve in this region. However, it is fair to say that it is still in the early stages of growth and offers significant potential.

The Knowledge Process industry in the Middle East is a relatively new concept. This region is in a unique position to embrace KPO. There is a strong correlation between corporate finance and transactions activity (mergers and acquisitions) and the potential to use KPO providers.

One estimate suggests that if oil maintains its current levels, the Middle East will be accumulating in excess of $1trillion per annum - this capital will need to be invested and with the rise in number, quality and complexity of initiatives and projects, the intellectual arbitrage in the form of KPO offers interesting commercial opportunities.

Rajeev Lalwani is partner, IT advisory at KPMG.