The transformative benefits of knowledge process outsourcing has led many organizations to offshore their core functions to high-talent, low-cost locations like India, the Philippines, China, Eastern Europe and Latin America. While cost reduction continues to play a pivotal role in outsourcing endeavors, an increasing emphasis is placed on strategic advantages and value for those seeking to leverage knowledge process outsourcing benefits.

Benefits of Knowledge Process Outsourcing

Potential Cost Savings of Outsourcing Knowledge Processes

By offshoring knowledge-intensive activities to a third-party in a cost-effective location, companies can achieve substantial savings, often ranging from 40 to 50 percent. Research has shown that countries such as India, China, and Russia boast a significant pool of STEM professionals, including a noteworthy number of PhD holders, who command annual salaries approximately one-tenth of those in Western countries. For instance, the cost disparity for science and engineering PhDs alone can amount to between $60,000 and $80,000 per year.

Based on a study, the cost breakdown for a typical management consulting firm based in the U.S. is divided into 20 percent fixed costs, 60 percent variable costs, and 20 percent profit margins. After outsourcing, the cost breakdown shifts to 18 percent fixed costs, 30 percent variable costs, and 20 percent profit margins. This transition results in a notable 32 percent value creation for purchasers of Knowledge Process Outsourcing (KPO) services.

KPO presents a substantial opportunity for cost savings in absolute terms due to the relatively higher average expenses associated with knowledge process resources as compared to IT or Business Process Outsourcing (BPO) resources. A case in point is financial services modeling conducted in India by professionals with 1-2 years of experience. The comprehensive annual compensation for an Indian employee in this role is approximately $150,000, encompassing yearly salary, bonuses, social security, and medical benefits. In contrast, the compensation for a U.S.-based professional possessing equivalent skills and qualifications would amount to around $200,000 to $250,000 annually. This U.S.-based figure encompasses expenses such as office space, HR and administrative overheads, database leasing, and other infrastructure.

Comparable cost efficiencies can also be observed in the automotive sector. Numerous companies have outsourced research and development as well as specific design tasks to offshore professionals holding master’s or doctoral degrees in engineering, computer science, materials science, metallurgy, and polymer science. In the U.S., these roles are fulfilled by experienced employees with yearly salaries averaging approximately $200,000.

KPO services providers further lower costs, charging about $50,000 to $60,000 a year for chartered accountants, financial analysts and MBAs with 1-2 years of experience, according to a 2008 study. Even lower labor costs can be found in the Philippines, Chile and Mexico as these countries increase competition and drive prices down.

Access to Highly Specialized Labor with KPO

The success of the KPO industry hinges not only on the presence of talent but also on the presence of specialized and distinct talent. This necessitates a specific educational foundation and a profound comprehension of the client’s industry, as training new recruits without prior experience can prove both costly and time-intensive.

A study predicted that demand will outpace supply of skilled labor in the U.S., with excess demand of 5.6 million. Offshoring is expected to fill the gap partially by contributing 1.3 million jobs. As developed countries face shortage of skills in knowledge-intensive activities like financial risk management, research and development, design, IT, and engineering, KPO becomes an even more attractive proposition.

Because domain expertise is the key factor in KPO, strong contenders are those locations that produce large numbers of physicians, lawyers, engineers, STEM graduates and postgraduates, MBAs, certified financial analysts, certified public accountants, and other knowledge-intensive professions. For example, India produces about 441, 000 technical graduates and over 300, 000 post-graduates every year, which makes up about 30 percent of the available talent supply in all low-cost countries. Besides India, key KPO destinations include China, Russia, Poland, the Philippines, Hungary, and many areas in the Soviet Union.

Better Human Resource Management

Companies that have one or more offshore centers dedicated to knowledge-intensive or core processes have more flexibility in terms of time and human resource management. KPO enables companies to tailor their workforce to changing business needs and avoid the monetary and emotional costs of laying off in-house employees. KPO also allows 24/7 production and collaboration between local and offshore teams due to time differences across the globe.

KPO Challenges

Limited Economies of Scale

According to a recent study, 75 percent of financial services KPO firms have less than 500 resources, and 40 percent of financial services KPO firms have less than 100 resources. KPO firms in other verticals tend to have similar small, niche capabilities. Large-scale KPO operations are thus unlikely to be the norm, limiting economies of scale that are easily achievable in the IT-BPO sector that employs thousands of people. Most KPO services are also fragmented within departments in an organization and across different geographies. This makes it difficult to consolidate processes and further limits the scale and the scope of services that can be offshored.

A reliable outsourcing company in the KPO sector understands the limitations of economies of scale due to the specialized and niche nature of KPO services. To address this, they focus on providing targeted and specialized expertise to clients, emphasizing quality over quantity. By maintaining a team of highly skilled professionals, they ensure that clients receive in-depth knowledge and insights. Moreover, they may explore collaborations or partnerships with other specialized service providers to enhance the range of services they can offer.

Limited Process Portability

Knowledge processes are usually fragmented within an organization and business groups, making it more difficult to break down KP activities and bundle them into segments. Service providers must have offshoring maturity and sophisticated frameworks to support an efficient KPO model.

A reputable KPO outsourcing company approaches the challenge of limited process portability by investing in thorough process analysis and understanding the intricacies of their clients’ operations. They develop customized strategies to break down knowledge processes efficiently and identify segments that can be offshored. This involves close collaboration with clients to adapt processes to offshoring models while maintaining quality and efficiency.

Security and Intellectual Property Issues

Due to the strategic nature of knowledge-intensive processes, intellectual property protection is even more important. Retaining core activities in-house mean better control of sensitive information and equipment protection. Offshoring core activities can increase security risks if the third party does not provide ISO certified or qualified professionals. Organizations also risk low-quality work and delays if the quality of employees is poor, thus forfeiting the main benefit of KPO, which is intellectual arbitrage.

To address security and intellectual property concerns, Sourcefit places a strong emphasis on data security protocols and intellectual property protection. The company implements robust information security measures, including ISO certifications, data encryption, secure networks, and stringent access controls. Sourcefit’s recruitment process also ensures the hiring of qualified and skilled professionals to prevent quality issues and security breaches. Additionally, the company establishes clear contractual terms that outline intellectual property protection and confidentiality agreements to safeguard clients’ proprietary information.

About Us: Sourcefit is a widely recognized US-managed business process outsourcing company based in Manila, Philippines. We proudly serve over 100 clients with a workforce of more than 1,300 employees. Our global centers can serve multiple markets, and our staff is highly proficient in English, Spanish, French, and Portuguese. Whether you need a few or many employees, we can help you achieve your business goals and build high-quality offshore teams.

Latest Awards

Sourcefit’s commitment to excellence has been recognized through numerous industry awards and certifications.

We recently received the Fortress Cyber Security Award from the Business Intelligence Group. Sourcefit was also honored with the prestigious recognition of Best Outsourcing Solutions Provider in the Philippines during the 2023 Business Excellence Awards.

Other awards include: FT ranking of 500 high-growth Asia-Pacific, The Marketing Excellence Awards, Inquirer Growth Champion,  HR Asia Awards, among others.

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