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The prediction from professional services organisation KPMG International shows that KPO – seen as the third generation of the outsourcing process – may now be considered a bona fide, mainstream outsourcing option.

KPO involves outsourcing more highly skilled processes than has previously been the case with other outsourcing methods, basing its appeal on intellectual arbitrage rather than the cost reduction potential of its counterparts. 

Within the financial sector, KPO has already been used to handle – amongst other things - credit scoring, loss protection calculations and fraud analytics.

KPMG’s view of the potential within this market was revealed in a White Paper launched at the NASSCOM outsourcing industry event in Mumbai.

Exponential increase 

Edge Zarrella, global head of IT advisory within KPMG’s advisory practice, and a partner in the Australian member firm, says that just a few years ago, talk of KPO seemed far-fetched, especially as businesses were still struggling to come to terms with what the earlier forms of outsourcing could do for them.

He points out that now, depending on who you believe, it is set to be worth between $10 billion and $17 billion in just two years’ time.

KPMG’s research suggests that KPO in the financial sector alone could be worth $5 billion by that time.

“KPO may still only represent a small percentage of the total outsourcing market but, with the financial sector demonstrating just what it can be used for, I think that all of these numbers are set to increase exponentially,” Zarrella says.

To better explain KPO, Zarrella cites the hypothetical example of a Wall St equities research firm which is faced with spending $250,000 to cover a specific stock when the most it can hope to achieve in revenues from that research is $200,000.

If that research can be outsourced to a KPO provider at a cost of $100,000, however, the operation suddenly returns to profitability.

As well as the profit uplift, more of the home office analyst’s time is freed up and can be put to use on even more high-value activities.

High-end activities 

The KPMG paper claims that the concepts which were just pipedreams a few years ago could now be very real outsourcing options – and they now represent the third iteration of outsourcing.

Outsourcing began with IT Outsourcing (ITO) in the 1980s, when strategies were put in place for third parties to manage IT systems’ maintenance, development and application.

This was followed in the 1990s by Business Process Outsourcing (BPO) which focused on relatively elementary and standardised processes.

Shamus Rae, partner in KPMG’s sourcing advisory practice, points out that one of the most surprising aspects of KPO is that it focuses on the high-end activities which were traditionally considered part of a company’s competitive advantage.

He explains that this marks a major stepping stone for the outsourcing industry, moving from being at the periphery of the enterprise to the very heart of it. Now it is there, Rae believes that the possibilities are endless.

Legal and compliance departments 

Endless they may be but – as with any fledgling enterprise – teething problems still abound.

Foremost on the horizon, considering the geographical concentration of KPO providers in India, is the weakening of the US dollar against the Indian rupee which is reducing the Indian industry’s competitiveness.

Of more long-term concern however may be the apparent shortcomings in the KPO providers’ legal and compliance departments – which could place valuable intellectual property at risk – and the escalating battle for talent.

Due to the highly specialist skills which it offers, there is not the same enormous talent pool available to KPO providers as is the case for BPO or ITO.

KPO providers may quickly need to adopt recruitment and retention strategies, therefore, which reflect its qualification and skill set requirements. The intellectual property concern is unlikely to go away any time soon.

Major barrier to future growth potential 

The relevant departments – particularly those concerned with insider trading, conflict management and professional indemnity liabilities – can often be severely under-resourced and inadequately empowered, especially among third party providers.

This represents a major barrier to KPO’s future growth potential. If – or when – KPO does realise its full potential, Zarrella reckons that India is unlikely to be the sole player.

He explains that India is by far the dominant force in this area but that other countries like Canada, Australia, Singapore, South Africa and parts of the UK are now competing for a piece of the action.

Zarrella says that the current weakness of the dollar against the rupee may help them in this regard but the key factor in locating KPO operations will still be the availability of appropriately qualified and experienced professional staff.

“Without those talented people, KPO simply cannot exist. Such people – in appropriate locations – will become extremely sought after,” he concludes.

Related links

• KPMG
• Full report