Outsourcing moves to the core

The next generation of outsourcing will include porting knowledge-based business functions offshore

A new form of outsourcing is suddenly sweeping across the U.S. and European enterprise landscape. No, I’m not first discovering BPO (business process outsourcing) or ITO (information technology outsourcing). What I am talking about is called KPO, aka knowledge process outsourcing.

[ For more on recent trends in outsourcing and offshoring, see The ins and outs of outsourcing and offshoring ]

Don’t misunderstand; cost savings remains the key driver of outsourcing, according to Peter Brudenall, partner at Hunton & Williams, an international law firm with global technology, outsourcing, and privacy practice groups.

However, Brudenall backed up a report published only last month by KPMG’s global sourcing division titled “KPO: unlocking top-line growth by outsourcing ‘the core,’ ” pointing to KPO as the next generation of outsourcing, focusing on knowledge-based skills.

We’re talking about financial services companies going outside their borders for company valuations, feasibility analysis, fraud analytics; health care facilities having doctors in India read x-rays — you name it. No one is immune.

If I can sit in my home office in snowy Vermont writing about high-tech trends, I see no reason why a wordsmith sitting at his desk in Bangalore can’t do the same.

But until they come for me, let me tell you a bit more about KPO and what industries are opting in and why.

First off, let’s face it. Outsourcing has gained credibility among most all the organizations that have employed the staffing strategy for so-called commodity skills, begging the question: How much longer before outsourcing providers gain the respectability necessary to take on core business functionality?

According to the KPMG report, led by Egidio Zarella, global partner-in-charge of KPMG’s IT advisory group, and Pradeep Udhas, global partner-in-charge of KPMG’s sourcing advisory group, insurance companies are already outsourcing product design and profit testing. And in the U.K., legal firms are outsourcing due diligence research to India, Brudenall adds.

Legal research, financial modeling — what can be more “core” than that?

For due diligence, Indian lawyers have access to an extranet through which they review all the documentation. Whereas that would be done by a junior lawyer in Great Britain for 150 to 200 pounds per hour, says Brudenall, in India you would get a senior lawyer charging out at 50 pounds an hour.

Of course, the Indian legal system is based on the British system of law, so Indian attorneys are familiar with the concepts and legal frameworks.

Years ago, a SAP executive told me one of the rationales for opening research and development labs worldwide was because talent is worldwide. Doing so also takes SAP out of its comfort zone, giving it a new way of solving problems.

As for the first wave of KPO, the financial services sector appears the most intent on moving beyond the bounds of the organization. Insurance and actuarial, equity research and investment banking, corporate credit, structured and project finance, and retail banking and marketing are buying in to the new knowledge-based outsourcing paradigm.

KPMG identifies seven countries — India, Canada, Australia, Singapore, South Africa, Ireland, and Wales — as places with abundant talent, cost savings, and low political risk, where KPO can be done efficiently.

As opposed to being spurred exclusively by cost-consciousness, the KPMG report states in a 32-point pull quote, that “decisions about outsourcing will be accelerated to preserve and increase competitive advantage.”

The first time my eyes scanned the quote my brain read:

Decisions about outsourcing will be accelerated to preserve and increase “cognitive” advantage.

At the end of the day, I think that’s what it is all about.