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Patricia Hill thought outsourcing only applied to what big organizations did to help them save on their operations costs. So, in addition to being surprised, Ms. Hill was most delighted when she signed up for an online tutoring service for her son. Instead of paying $40/hour in California, where she lives, she now pays $100/month for high-quality, unlimited tutoring to an outsourcing company in India. Monsters and Critics report the full story here.

Yes, there’s no doubt about it – the outsourcing industry has matured over the years. In the past, outsourcing bascially meant farming out non-core business activities like voice-based call centers or medical transcription work. But today, organizations can outsource work which requires a fair amount of high-level intelligence, like research and development. This type of outsourcing work has come to be known as Knowledge Process Outsourcing (KPO).

Knowledge Process Outsourcing

KPO involves offshoring of knowledge intensive business processes that require specialized expertise, thus delivering high value to organizations by providing business expertise. Examples of KPO are online teaching, patent filing, legal and insurance claims processing, valuation research, investment research and media content supply. Business Process Outsourcing (BPO), on the other hand, involves a pre-defined, highly regimented way to handle a business process which is taught to agents or employees. BPO services normally include transaction processing, setting up a bank account, selling an insurance policy, technical support, voice and email-based support. As most of us know, there are currently thousands of companies in India, Phillipines, China, Russia, etc who are providing these BPO services.

Examples of KPO Success Stories

Patent application processing is an expensive affair in the U.S. Cost savings from offshoring even a portion of the patent drafting process can easily save up to 50 percent of the cost for the end client, according to Alok Aggarwal, chairman of Evalueserve. In order to take advantage of this savings opportunity, law firms such as Patent Metrix, Cantor-Colburn and Schwegman, Lundberg, and Woessner & Kluth have established offices in India.

Similarly, large pharmaceutical and biotechnology companies are offshoring R&D to India. For example, AstraZeneca and GlaxoSmithKline are operating offshore drug discovery centers for significant cost advantages.

Another area for KPO is chip design and embedded systems. Most of the major design companies like Motorola, Intel, Analog Devices, National Semiconductor, Cisco, etc are designing offshore to save more than 50% per engineer on their payroll costs. You can read more about this at Rediff.

Trends

It is evident from all the above examples that big businesses are benefiting hugely from the intellectual workers in the offshore destinations. Is this an example for small businesses to follow? Very possibly, I think.

My previous post, Small Businesses are riding the Offshoring Wave too, cites many examples of small businesses taking great advantage of BPO. With their success in outsourcing low-skilled work, will these businesses worry as much as they might have in the past about the risk of outsourcing high-skilled work? I don’t think so. I think BPO was somewhat of a testing ground for outsourcing and it has set a credible path for KPO to follow. I believe those who have succeeded in BPO will be more open and optimistic about trying their luck with KPO – especially those businesses who have not been able to afford specialized workers in their home countries due to high wages. Cost savings for high-value added service will definitely lure more and more small businesses to at least explore shipping KPO-type work offshore.

Challenges

As optimistic as I am about what KPO can offer to small businesses in the U.S. and elsewhere, the ultimate success of KPO hinges upon the right combination and supply of knowledge workers, infrastructure support, and risk management. That’s a bit scary, of course, as we are already seeing a short fall in the talent pool for BPO work around the world. The same shortfall trend in KPO will be detrimental to its survival as a viable industry in the years ahead.

Any thoughts on KPO, and its future success potential?