Knowledge process outsourcing offers significant growth opportunities

Knowledge process outsourcing represents the next stage in the evolution of the outsourcing market, according to a new report. KnowledgeBoard looks at the key findings.

The maturing knowledge process outsourcing (KPO) market represents a significant growth opportunity for vendors, according to a new report by independent market analysis firm Datamonitor, which analyses how the ongoing global recession will impact on the demand for KPO services and assesses how providers of KPO services can best position their offerings in order to take full advantage of the sector's blossoming potential.

"KPO represents the next stage in the evolution of the outsourcing market," says Ed Thomas, analyst for business process outsourcing (BPO) at Datamonitor and author of the report. “Unlike BPO, which refers to the transfer of mainly transactional, non-core processes to specialist providers; KPO involves the outsourcing of core business processes, for example planning and auditing, which require a high level of domain expertise.”

According to 'Trends in Knowledge Process Outsourcing – Growth Opportunities in High-Level Processes', the origins of the KPO industry can be traced back to the late 1990s, but it was not until 2003 that the market really began to gain traction. At that time, KPO was the subject of a large amount of hype, which led many within the industry to make bold claims about how fast it would grow. The intensity of this hype has now gradually died away and since 2006, a more mature KPO market has begun to emerge. A significant amount of consolidation has taken place with a growing awareness among both vendors and clients of the full extent of what could be achieved through KPO services.

The key findings in the report include:

Offshore delivery has remained a constant feature of KPO

Thomas points out that throughout the evolution of the KPO market, one feature that has remained constant is the leveraging of offshore delivery models. "India has been the focal point for the KPO industry since its inception. Increasingly, however, KPO vendors are adopting a multi-shoring approach to service delivery." Datamonitor has identified eight key locations that have emerged in recent years as viable options for KPO service delivery, including China, the Philippines, Sri Lanka, Hungary, the Czech Republic, Canada, Mexico and Brazil. 

Clients have concerns over the outsourcing of core business functions

Unlike the established horizontal BPO areas, such as finance and accounting outsourcing and human resources outsourcing, which focus on non-core aspects of the client’s business, KPO involves the outsourcing of core business functions. Clients are often reluctant to relinquish control over areas such as planning, auditing, analysis and research and development to third-party vendors, with quality and security being the major areas of concern. Vendors can take steps to alleviate customer worries, such as aligning themselves with established business standards that cover process quality or security capabilities, or by offering services on a short-term, single-project basis.

Thomas notes that KPO enables clients to tap into large pools of talent and leverage skills in niche areas, which otherwise would not be open to them. "By improving efficiencies and freeing up resources within the client’s own organisation, KPO can help to improve customers' time-to-market, a business benefit which goes beyond simply delivering 'your mess for less' services in the style of transactional outsourcing."

The KPO market remains extremely fragmented

Despite recent trends towards consolidation, the KPO market remains extremely fragmented. When the hype around the industry was at its height during 2004/2005, new vendors claiming to provide KPO services would appear on an extremely regular basis. While many of them have not survived, a significant number did, and are still operating.

Thomas says that despite recent consolidation, scale is of lesser importance in KPO than BPO. "Whereas BPO vendors typically harness economies of scale to deliver significant cost savings, the main selling point of KPO is its ability to deliver targeted, domain-specific knowledge, with scale playing less of a part in a vendor’s go-to-market proposition." Niche providers are therefore capable of competing with, and even outperforming, the giants of the outsourcing industry.