Wednesday, June 13, 2007

Move over traditional outsourcing

I have been watching the outsourcing market with interest for some months and am somewhat bemused by the conflicting stories one reads about firms' appetite for outsourcing, particularly offshore outsourcing.

As the initial hype around outsourcing has died down and firms that were early adopters have had the chance to learn from and share their experiences, there is no doubt that some of the lustre has gone off outsourcing in terms of the initial 50% cost savings some firms touted and the "hidden costs" that have emerged when it comes to the need to actively manage and monitor offshore outsourcing relationships.

Data privacy concerns have also been raised following allegations that offshore call centres were selling customer data. Eager to preserve its reputation as a major outsourcing and offshoring centre, India recently announced the formation of the Data Security Council of India (DSCI), a self-regulatory member organisation that will be run by the Indian IT and software association, Nasscom.

Arguably the Council's formation is a long overdue measure that recognises the concerns of foreign firms outsourcing customer data to India. The National Outsourcing Association says concerns have grown over the past few years over data security lapses that have occurred, fuelled by 'mud slinging' by the British tabloid press about alleged security breaches.

Although the NOA says that security breaches are few and far between it stated that the Indian government - and the governments of other offshore and nearshore destinations - needed to openly demonstrate that they recognise the problems around data security and are actively doing something about it.

Securing data that is outsourced or offshored to a third party provider is even more important now that the next wave of outsourcing is encompassing content and document management, as well as “knowledge process outsourcing” or KPO.

According to EquaTerra research, KPO, which encompasses a broad range of processes such as market research, financial analysis, M&A due diligence and related M&A legal work, is gathering momentum.

While the Indian market may be suited to this form of outsourcing, with some major investment banks outsourcing financial analysis and research to India in recent months, KPO is a surprising trend given banks' general reluctant to outsource data, which is the lifeblood of most companies.

John Boyle, EquaTerra’s managing director, Financial Services, says:

“The growth in KPO is intriguing because it involves work that was traditionally viewed as too strategic to outsource, or where outsourcing was not viable because candidate services providers lacked the skills or experience required to perform the work. But these perceptions are changing. While in most cases KPO today involves rote work and number crunching, the breadth and depth of work being performed is expanding as buyers gain comfort with the model and suppliers’ skills and levels of context improve."

However, instead of directly outsourcing KPO work to an offshore third party provider, Boyle says financial services firms still prefer to manage the process themselves by establishing captive operations to perform KPO and related work in offshore locations. Increasingly it seems traditional outsourcing models are being challenged by alternative approaches such as captives and shared service operations.


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