BPO Continues to Evolve

With financial services-specific expertise increasing among BPO providers, knowledge process outsourcing looks to be the next generation of outsourcing services.

Knowledge process outsourcing, or KPO -- in which service providers take over high-level tasks requiring professional judgment and industry experience -- looks to be the next frontier for the outsourcing industry. Many expect financial services companies to lead the way in KPO, and there's data to support such a view. For example, 45 percent of financial services executives who participated in a recent InformationWeek Analytics survey said they see the industry knowledge of their business process outsourcing (BPO) providers significantly improving. That's more than any other area of improvement.

Another reason is that there's a notable "strategic minority" of companies, according to the InformationWeek Analytics survey of 372 business technology professionals, including 110 in financial services, that see BPO as a road to competitive advantage, with goals such as transforming processes and increasing revenue, not merely cutting costs and meeting short-term goals. In financial services, that strategic group is about 15 percent (with another 24 percent responding that BPO is "more strategic than tactical"). These are the companies that will push beyond the concerns that sometimes fence in today's BPO industry.

Yet the top concerns about BPO revealed by the survey will only be magnified as financial services companies consider KPO, which might be used for insurance functions such as market segmentation analysis and data mining to aid in underwriting and to identify new business opportunities, or for capital market functions such as equity research in support of domestic analysts. It takes a high degree of trust to transfer custody of customer data, share tacit knowledge and work as a single team. Yet the No. 1 concern financial services companies have about BPO is data security, according to InformationWeek Analytics, a sibling property of Insurance & Technology. No. 2 is the difficulty of managing BPO, followed by tension between employees and outsourcers, the difficulty in reversing deals and reduced flexibility to change processes.

Where's the Innovation?

There's also the question of whether outsourcers have the innovation capability needed for KPO. Just 10 percent of financial services companies surveyed gave BPO providers high marks for innovating process change. Only 16 percent of financial services respondents said they see improvement in vendors assigning quality people for their projects. Companies that aren't getting bright ideas and top people on everyday projects won't likely rush those vendors up the knowledge stack. Such data suggests that only a few vendors, and their most sophisticated clients, will embrace this model initially.

All signs point to companies' use of BPO continuing to grow, however. The InformationWeek Analytics survey finds 28 percent of companies plan to increase the use of BPO, about four times more than those planning to decrease the use of outsourcing. Yet cost cutting through additional outsourcing only goes so far. Given that outsourcing is a mature phenomenon -- with organizations having made significant investments in offshore BPO capabilities, particularly in financial services -- any significant increase in the amount of outsourcing has to press beyond self-imposed limits and barriers with which companies have become comfortable. Market pressures -- from troubles within the financial services industry to rivals successfully tapping these strategies for a competitive edge -- may compel companies to push those limits into areas such as KPO.