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Knowledge Process Outsourcing: Overview

Author: Gretel Digo

Posted: July 1, 2015

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Knowledge process outsourcing (KPO) is the transfer of responsibility for an organization's information-related and other core activities to a third party.  KPO belongs under the broad umbrella of business process outsourcing (BPO), with KPO services occupying the top tiers of the intellectual value chain.  In general, business processes are repetitive and rule-based, while knowledge processes typically require analytical thinking skills and deep domain knowledge.  Knowledge processes are often business-critical and give the organization its competitive advantage.  There are a large number of activities that can be classified under knowledge processes, and these activities depend on the company's industry and business focus.

Rapid technological changes and a globalized market has placed pressure on companies to do more with what they have and increase competitiveness.  KPO is one strategy that can help companies drive productivity and realize greater cost savings.  KPO transforms outsourced processes from rule-based to analytical and technical activities.

KPO is a relatively nascent branch of outsourcing.  Unlike the mature BPO industry, KPO is less geographically diverse.  Top KPO destinations rank high on parameters like current and potential talent availability, labor and infrastructure cost savings, and political risk.  The number of attractive destinations for KPO is expected to increase to keep up with market growth and macroeconomic drivers.  China and Russia, for example, can match India's annual production rate of highly-educated and highly-skilled knowledge workers, while alternative locations like the Philippines and Latin America offer low costs and a rapidly growing talent pool.

Knowledge Process Outsourcing & Business Process Outsourcing

KPO is characterized by small-scale and niche offerings from service providers who employ highly-skilled professionals.  KPO allows companies to unlock their top-line growth by outsourcing core functions to a low-cost but talented labor pool.  KPO is a higher-value outsourcing setup.  BPO provides process expertise, while KPO provides business expertise.  The hallmarks of KPO activities are complexity and customization. 

In BPO, processes and methodologies are clearly-defined, the steps are standardized, and the outcome is predictable.  Typical BPO activities include data entry, low-level customer support, invoice processing, rudimentary programming, and IT maintenance.  On the other hand, knowledge processes do not follow rigid rules or steps, and the outcome depends on higher-level analysis, independent judgment, understanding, experience, and qualification.  A knowledge activity is often highly complex and less defined than a non-core business process.  These complex activities are typically hard to automate, and they require technical, analytical, and judgment skills.

KPO may be further classified into role-based and analysis-based models.  Role-based activities are what skilled trade professionals (lawyer, CPA, engineer, programmer) perform regularly.  Examples are physicians making a diagnosis, developers designing and testing a program, and engineers maintaining operations manuals.  Meanwhile, analysis-based KPO tasks are case dependent, complex and dynamic.  At the enterprise level, these activities include market strategy, investment research, competitive analysis, and roadmaps.  Analysis-based KPO involves strategic or high-level corporate decisions that are best carried out by knowledge workers with strong critical-thinking capabilities.

The KPO industry requires very specific skills that focus on educational and other qualifications.  For example, legal services require knowledge of U.S.  or U.K.  laws and legal applications, market research and analytics require statistical tools, database research and report writing, healthcare requires a medical or allied health degree and certification, and research and development requires a graduate or post-graduate degree.  In addition, knowledge workers need basic skills in data and information processing, emotional intelligence, and good communication skills.

KPO as a Strategic Tool

Knowledge Process Outsourcing is a value-driven, strategic activity for many businesses.  Instead of looking for the cheapest prices, managers are looking for best value (KPO Industry Growth Impacted by the Great Recession, 2010).  A well-managed KPO campaign has a transformative effect on an organization.  Like IT-BPO, KPO can open new opportunities and enable firms to respond quickly to changing market needs. 

To gain maximum benefits from KPO, a strategic relationship between the organization and service provider is crucial.  This can be long-term or short-term and differ in scale.  Long-term partnerships have the advantage of providing best value that may be impossible to cover in an ad hoc or short-term project.  Long-term KPO can provide a clearer assessment of the organization's capabilities and a flexible way to build these capabilities.

According to the study Knowledge Process Outsourcing: India's Emergence as a Global Leader published by the Asian Social Science Journal in 2009, both vendors and clients benefit from a strategic KPO model.  KPO vendors reduce their client's fixed and variable cost, and the service providers gain the company's variable cost as revenue, split into gross profits (before taxes), employee costs, and overhead costs.

Beginnings and Evolution

Outsourcing in the information technology sector first began in the 1980s, when companies started to work with entities outside the organization to develop systems and improve internal processes and services (Let's Talk Europe, Business World 2005).  The outsourcing industry and its segments have since evolved and expanded.  Globalization and the need for innovation due to rapid technological changes have increased product, service, and outsourcing lifecycles.  The time was ripe for transformation, and a new form of outsourcing emerged.  Like BPO, KPO has a great potential for growth and profits for businesses across industry verticals.  Market research firms project a market size of about $17 billion by 2015.

The growth of KPO in recent years has been partly due to technology and the need for specialized knowledge and expertise to manage and maintain technology-driven processes.  In a globalized and knowledge-based economy, efficient production depends on the quality of information that organizations possess.  Highly-skilled and well-educated professionals or knowledge workers are the keys to success in any business.  Knowledge workers are highly-educated professionals whose work is the output of their skills (Knowledge Process Outsourcing: India's Emergence as a Global Leader, Asian Social Science Journal 2009).

The shortage of skilled labor and potential for more savings and added value have led businesses to outsource knowledge processes to countries like India, the Philippines, China, and Eastern Europe, locations that are also established BPO destinations.  However, the usual reason for outsourcing knowledge processes goes beyond cost reduction.  According to industry analysts, the strength of adopting a KPO strategy is the added value gained from outside experts, such as improved innovation and sustainable competitive advantage.  An organization may outsource knowledge-intensive processes like market research, statistical and competitive analysis, and legal support to third parties that have specific experience and domain expertise in these areas.

Today, KPO services are still evolving.  It is not required that a vendor has experience in BPO and non-core outsourcing to offer KPO services; in fact, some small companies have established themselves as KPO providers from the outset.  According to analysts, the current KPO industry is a mix of third party providers and captive structures, with multi-sourcing models expected to appear in the future.  These hybrid models are composed of captive units that manage relationships with third party KPO providers.  There are also boutique providers that have created new services and offerings out of the KPO model. 

Knowledge Process Outsourcing in the Philippines

Learn more about offshore outsourcing and the Philippines as an outsourcing destination

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