Analytics Summary: BPO Survey

KNOWLEDGE IS POWER
KPO encompasses high-level business processes requiring professional judgment. Compared with BPO activities such as handling customer queries, applications, and orders, KPO can't be easily codified in set processes with instructions for just about every possible situation.

Instead, KPO tasks require judgment and industry experience. Think finance and accounting functions, like risk management and tax strategy decisions affecting the capital position of the company, that are typically performed by in-house financial professionals. We're also seeing such banking functions as market segmentation analysis and data mining to identify new business opportunities, compliance to meet anti-money laundering and anti-terrorist financing regulations, and initiatives to bolster the ability to use sophisticated internal ratings-based frameworks for Basel II risk management compliance.

These examples demonstrate that the financial services client and the outsourcing firm must share a high degree of trust to transfer custody of customer and enterprise data. Given that most survey respondents cited data security as the leading disadvantage of business process outsourcing, KPO providers will be challenged to demonstrate their ability to maintain security, not only over customer information, but over proprietary business practices as well.

They'll also be challenged to prove they can innovate, not just implement. Knowledge process outsourcing requires a combination of market knowledge, specific industry knowledge, research skills, communications ability, and insight. Yet just 14% of survey respondents say they've seen significant improvement in innovation from their BPO partners over the past two years.

From this standpoint, the burden of proof is on KPO providers.

Also of concern is the level of commitment: Outsourcing usually gets framed as a "make vs. buy" decision, but the close ties of KPO means it works more like a hire, or even a merger, where you're taking on an entire department in a single stroke.

Finally, as with a new hire, watch for conflicts between in-house personnel and the outsourcer's staff. Respondents expressed serious concerns over regular employees being let go because of outsourcing, and some said the trend to outsource is destroying innovation.

These are the same people indicating that their companies intend to continue to outsource at an increasing rate. If the past is any guide, the next wave of knowledge process outsourcing will be overhyped as a cure-all by its promoters, overplayed as a trend to be feared by those directly impacted, and overadopted by companies that haven't yet figured out how to make it work.

As with any period of innovation, this will create both disruption and opportunity for business managers. To make KPO work, client companies will need to have highly evolved relationships with outsourcers. Since this inevitably means financial institutions must contribute intellectual capital to their BPO/KPO ventures in emerging markets, they should evaluate their business partners as they would merger partners, more than just as vendors.

Even though the initial interest in outsourcing typically comes from the desire to cut costs, successful outsourcing relationships often evolve into comprehensive partnerships. Clients that recognize the full life cycle from the start will be better prepared as outsourcing relationships evolve.

Ivan Schneider is leading the upcoming launch of EcoTech, a Web site on TechWeb focused on the intersection of green technology and financial services. Write to him at [email protected].

Photograph by Jupiterimages