Consider the Source

KPO: The VSOP of Outsourcing

More companies in all industries are looking into Knowledge Process Outsourcing – that is, outsourcing highly-skilled jobs. And they’re finding out that KPO is quite different from “traditional” outsourcing.

When buying outsourced services, organizations frequently hear about the benefits of scale and standardization. The idea is that a resource serving only a single client can’t be as efficient as one that is used by multiple clients. Supply and demand play a role in this value proposition, of course, but that preceding pitch is the essence of outsourcing’s business promise.

In KPO, the motives frequently transcend those of scale. What we’re seeing, instead, is the tendency to pursue KPO for purposes of capacity.  It’s all about gaining more capability – at favorable prices, sure, but the access to skilled professionals is the driver of these deals.

When companies have a hard time attracting and retaining skilled technicians to perform analytics, research, engineering, legal or marketing tasks, KPO can be the answer.

And more often than not, the pursuit of a KPO solution leads to captive offshore operations, which tend to start small and grow over time. Why captives? Because these models better protect the competitive advantage of a KPO and help to build institutional knowledge for future expansion.

My colleagues, Indy Banerjee, Jui Narendran and Rukmini Priyadarshini just published a great piece of research on the offshoring component of this topic, Knowledge Process Offshoring (KPO): A Balanced View of an Emerging Market.  It’s worth a read.

 

The Optimus Primes of Outsourcing

Parents of young, robot-obsessed children will recognize Optimus Prime as the chief hero of the good guys in the Transformers line of toys, comics and the blockbuster movie now in theaters (other brand extensions hitting your pocketbook soon).

There's a neat synchronicity here: The most visionary companies are starting to recognize transformation as the hero of outsourcing, with the best service providers filling out the ranks of the good guys. This is no small vision, as the tide today is taking a great number of companies toward the offshoring model, as I wrote last week.

Part of what's great about the buzz about transformation in outsourcing is what it's not: "Transformation" has long been bandied about as "consultant speak," but the transformation that we're hearing more about is something bigger – and we're hearing it from clients and contacts, not consultants.

I've written previously about the increasing use of outsourcing to drive change around the scope of the deal itself – and beyond it: When services are outsourced, with attendant standardization and consolidation, that process serves as a catalyst to enhance how all the work that touches those services is organized and delivered. Clients are factoring these derivative benefits into their cost evaluations and giving the best service providers an opportunity to create broader benefits for the clients.

Now we're also seeing the truly visionary, ambitious clients look to outsourcing as a way to migrate older operations – systems, applications, and processes – to Brave New World models. In this new world, the contract is less about defining which assets are affected and more about capturing the emerging capabilities of BPO, software-as-a-service, and other models for improved efficiency.

For these firms, the essential make-versus-buy question is swinging toward "buy," because the alternative of carrying forward legacy operations increasingly is untenable: Can I modernize myself, or should I outsource – and structure the contractual terms accordingly – to produce real, fundamental change and to pay for services in a very different manner?

The Transformers – the companies and organizations really seeking fundamental change – are stepping up, looking to move beyond complex, costly, and confused legacy applications. They look like heroes to me, and I'm betting their own customers will come to feel the same way.

Frost's Conundrum

Almost a year ago we saw the first evidence that the outsourcing industry was changing, as our clients and other organizations seemed to be feeling less positive about the promises of outsourcing.

Sure, the outsourcing business model had proven its value time and again – and continues to do so: By our count, there are over 1,900 active commercial outsourcing agreements of at least $50 million each in place today. These agreements rarely get terminated. They usually get renewed.

But along the way came offshoring – or, to be more precise, the ability to contract for effort rather than outcome. The outsourcing industry was built on the promise of “defined services at defined prices.” That's another way of saying that outsourcing is focused on the quality of results rather than just getting the job done.

As I mentioned in a recent blog, many clients tell us that their managers are really not comfortable operating in an outcome-oriented setting. They’d much prefer to manage a given business process or function in terms of the resources devoted to it. So they opt to offshore rather than outsource.

As indicated in the results of TPI's 2Q Index, with the rising tide of labor-based contracting through offshoring, many organizations have come to the conclusion that the fastest, easiest way to get the promised benefits of outsourcing is in fact to NOT to outsource, but rather just buy people at lower prices through offshoring.

So we've arrived at a crucial inflection point for this industry, just as the poet Frost was confronted by the choice between the two roads. Does a company jump on the lower-cost bandwagon? Or does it demand a more holistic solution through outsourcing, one in which it can seek to control a variety of outcome variables – be they productivity, quality, or whatever? And, might the first route actually be a journey to second?

The service providers almost all show their hands in this game. They need to play in the labor-arbitrage game because it has taken flight so quickly.  But many also are trying to offer transformational services.

Can both strategies survive?  How much time will our industry spend in the realm of cheaper labor?  What are the catalysts that will move the industry and its clients definitively toward progressive and value-creating outsourcing? 

We think the industry must innovate to survive. Now.

Indian Providers: Those Things in the Forest are Called Trees

We recently hosted a roundtable with senior sourcing executives from some major companies. The discussion was far-reaching  and quite provocative. One topic really brought out the passion: These executives just don't see eye to eye with Indian providers.

I’ve written previously about the conversations I’ve had with most of the leading executives of the major India-based providers. To a person, and to a company, they cite their firm commitments to quality-based relationships geared around productivity.

The earful I got at the roundtable suggested that is lip service. The senior sourcing executives voiced an escalating level of impatience with the offshore providers on the essential question of the business model. They said they saw no evidence that Indian providers are willing to be measured by objectives such as service levels and output.

I’ve long held the view that the deeper entrenched the India-based providers become in a model that is focused almost exclusively on lower labor costs, the harder it will be for them to “mature” to what clients really seek. Indeed, several of the senior executives at our roundtable said the deadline had already passed, so they are moving on to do business with providers that are willing to commit to true outsourcing, with true service measures.

Sounds like the race for bodies is giving way to a race for services.