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WITH the rise of globalization and the rapid spread of ICT, many companies have been turning to 'Offshore outsourcing'. This has led to massive redistribution of work around the world. The offshoring of service sector work such as software programming and back-office functions has raised the possibility that new swathes of the economy will become internationally tradable.
Until recently, global service outsourcing has largely evolved into two forms; namely Information Technology Outsourcing (ITO) and Business Process Outsourcing (BPO). After ITO and BPO, Knowledge Process Outsourcing (KPO) has now emerged as a new player in the global outsourcing scenario.
The growth and maturity of the BPO sector has given birth to this new wave in the outsourcing landscape. The unprecedented expansion in BPO to India in particular and the developing world in general has prompted many firms to initiate outsourcing their high-end knowledge-based services. Unlike BPO, KPO requires significant domain expertise and the prime goal of offshoring of knowledge-intensive business processes is to generate value for the client by providing business expertise rather than process expertise. Hence, KPO entails the shifting from simple execution of standardized processes to carrying out processes that demand advanced analytical and technical skills as well as decisive judgement. KPO services can enable enterprises to reduce design-to-market lead times; manage critical hardware efficiency; provide research on markets, competition, products and services; enhance organizational effectiveness in business administration; and help in dealing with rapidly evolving business scenarios.
Evalueserve, a leading Business research intelligence, has identified some key factors that have fuelled the offshoring transition from BPO to KPO. First, buyers of offshoring services save more at the high end of the value chain, compared to the low end. Therefore, many of the current low-cost destinations will become a rational choice for companies for offshoring their high-end processes. Second, developed economies such as the US, the UK, and the Western Europe have been facing a shortage of highly trained and specialized professionals in some high-skill sectors, such as research & development (R&D), engineering design, IT, financial risk management and so on. One way to mitigate this skill shortage is to source talent from low-wage developing countries, which produce highly educated scientists and professionals. Third, the evolution of present low-end destinations to the higher end of the value chain, aided by the maturity of the processes, will result in organizations moving up the value chain to provide KPO services.
Indeed the list of high-end services for the KPO sector is long and includes equity, financial, and insurance research, intellectual property research, paralegal content and services, data search, integration, and management, data analytics and data mining services, research and information services in human resources, business and market research, engineering and design services, design, animation, and simulation services, medical content and services, remote education and publishing, pharmaceuticals and biotechnology, network management, and decision support systems. Evaluserve's (2004) projection shows that by 2010, data search, integration and management (29%) will dominate in the KPO market followed by biotech and pharmaceuticals (18%), engineering and design (12%), R&D (12%), remote education and publishing (12%), market research and intellectual property (9%) and animation and simulation services (8%).
Unlike BPO or other types of outsourcing, the weights of cost-saving is not very high in case of KPO, however, still cost factor is one of the many reasons behind the disappearance of white-collared knowledge based services jobs from the US or Western Europe to India and other offshoring destinations. For instance, in the United States a typical patent application may cost as much as USD 10,000 to USD 15,000, whereas an intellectual property (IP) specialist in an offshore location can do the same job, saving 50 per cent of the total cost. IP asset management, IP landscaping of technology domains, IP licensing, IP docketing, and IP commercialization services are some of the other services that can be offshored in a similar manner.
These services can be provided not only for patents but also for trademarks, copyrights, and other Intellectual Property. Similarly, by offshoring data mining, analytics, and inventory management work to low-wage countries, companies can save as much as 60-70 per cent. The available evidence shows that destinations such as Russia and India are ideal for these services, as these countries produce a large pool of engineers and PhDs and the cost differential between a PhD in the Sciences and Engineering in the US and in India can range between USD 60,000 and USD 80,000, respectively. Consulting Resources Corporation's (CRC), a US-based consulting firm, analysis suggests that moving R&D operations offshore might reduce the putative cost of developing a new drug in the USA from the current cost of between US$ 700 million and US$ 1 billion down to US$ 250 million.
However, cost is not the only determinant of outsourcing of knowledge-embedded service jobs. For example, analysts believe that Singapore is more competitive than India when it comes to high-end requirements KPO. The city-state enjoys high-end outsourcing destination advantage owing to its superior telecommunications and IT infrastructure, one of the globally top-ranked financial centers, transparent legal regime, and the availability of a strong pool of middle and senior management personnel. All of these can substantially offset Singapore's higher wage levels.
Singapore's huge investment in the R&D, bio-technology and pharmaceutical sector might give the island an edge over India and China in highly technical and knowledge-based KPO such as Offshoring R&D in pharmaceuticals and biotechnology. Numerous companies, including Glaxo Smith Kline, Novartis and Eli Lilly have already established a presence in Singapore, and biotech companies are following.
However, India is also not far behind in R&D, high-end bio-technology or Pharmaceutical sectors. According to a paper by the Confederation of Indian Industry (CII), the Indian pharmaceutical industry too has achieved self-sufficiency and global recognition as a low-cost producer of high-quality bulk drugs and formulations. The paper outlined that Indian firms are now offering custom synthesis services at 30 per cent to 50 per cent cost savings compared to global costs and this advantage could turn India into a preferred destination for outsourcing.
Available data and information indicate that despite controversies surrounding the impact of globalization on the US economy, it is almost certain that companies will intensify outsourcing in future due to definite cost and other advantages. Henceforth, the BPO, ITO and KPO market will grow continually in coming years. Currently, the US alone accounts for 60 percent of the KPO work outsourced to low-cost destinations, while UK and Canada account for 20 per cent, and the rest comes from Europe. Estimation by GlobalSourcingNow, shows that the revenue from the global KPO market was USD 1.2 billion in FY 2003 which is expected to grow to USD 17 billion by FY 2010, implies a cumulative annual growth rate of 46 per cent, of which USD 12 billion would be outsourced to India. In addition, the Indian KPO sector is also expected to employ more than 250,000 KPO professionals by 2010, compared with the current figure of 25,000 employees. Apart from India, countries such as Russia, China, the Czech Republic, Ireland, and Israel are also expected to join the KPO industry. The same report predicted that the low-end BPO outsourcing services will grow globally from USD 7.7 billion in FY 2003 to USD39.8 billion in FY 2010, which implies a cumulative annual growth rate of 26 per cent. The National Association of Software and Service Companies (Nasscom) estimation shows that the total global offshoring market opportunity by 2008 will be as much as $141 billion.
Forrester Research estimates that US employers will transfer about 3.3 million white-collar service jobs and $136 billion in wages to low-cost countries by 2015. This equates to over US 750 jobs a day transferring to offshore locations. In fact, the offshore market is still at an early stage, as among the world's 1000 largest companies, some 70 per cent have still not outsourced any business process to lower cost countries (Forrester, 2004).
The anecdotal evidence shows that KPO offers huge opportunities for India and other global players. However, it poses formidable challenges too. These processes require advanced analytical and specialized skill of knowledge expertise and technical know-how. Besides high-quality human capital, KPO domain demands state-of-the-art infrastructure, higher level of control and confidentiality and higher amount of physical capital. Evaluserve's research team has identified another key challenge in the management of KPO which is identification of 'performance criteria'. This involves setting the right expectations with the end client, as well as its professionals; continuous assessment and monitoring, constructive feedback, appropriate coaching and mentoring, and identification of the right career path for the company's professionals.
India currently holds one of the highest numbers of IT workforce and the consultancy outfit McKinsey predicts that by 2008 India is expected to stock 2.2 million IT workers. Study shows India has witnessed 45 per cent growth in R&D investment during 2002-04, positioning the country as the third most favorable destination for R&D investment. With 38 labs and 80 polytechnology transfer centers, the Council of Scientific & Industrial Research (CSIR) has the largest R&D network in India. India's 380 universities produce 6,000 PhDs every year. All these factors make it a favorable cost-effective location for research and development. Already 100 multinational corporations (MNCs) have set up R&D facilities in India.
India with its well educated population with diverse professional expertise like chartered accountants, doctors, MBAs, lawyers and research analysts and home-grown outsourcing giants like TCS, Wipro and Infosys will continue to retain its position as top global KPO destination. In order to leverage its strength and opportunities on a global scale India needs to undertake significant reforms and investments in building education and skills and strengthening its innovation system. However, Indian's disadvantage mostly lie in its relatively weak physical infrastructure vis-a-vis other offshore centres. Further, other Asian countries like China, Singapore, Israel, Malaysia and the Philippines have been slowly but steadily catching India up in service offshoring.
The current phase of world economy is truly knowledge -based where ideas are more important than physical assets. Knowledge has evolved as a basic form of capital and knowledge is now the key driver of economic growth. It is no longer geography that picks the winners. In the global hierarchy, idea-driven innovation cycles in the knowledge economy determine an economy's fortune. It is undeniable that the more innovative and knowledge-abundant a business location is, the higher is its position in the ladder of global trade, finance and investment. With no or very little natural resources, for the last few decades the dynamic economies of East Asia and currently China in the manufacturing sector and India in service sector have achieved an extra-ordinary economic growth through their dynamism and innovation. Consequently, these economic forces have turned Asia into the fastest growing continent on this planet.
The global KPO industry is still at a nascent stage. However, it is growing at a rapid pace in the fields such as Biotechnology & Pharmaceutical research; Intellectual Property and Financial & Data Analytics. It is expected that knowledge-based offshoring will continue to surge in India and other parts of Asia. These high-end white-collared assignments will not only generate employment and revenue in Asia, they will also drive amalgamation of ideas, knowledge and other expertise that will in turn transform this region into the epicenter of the global economy.
This write-up is based on a paper presented by the writer who is Adviser, SAARC Chamber of Commerce & Industry and a former president of Federation of the Bangladesh Chambers of Commerce & Industry at a seminar -- INFOCOM 2005 held in Kolkata
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