Consider this: From negligible size in early 2000 to a current size of between $1.2 and $1.5 billion and growing up to an estimated $15-$17 billion by 2010, the global high-end research outsourced market is growing at a scorching pace.
And though this industry is still at a relatively early stage of development with very loosely defined boundaries, as the market evolves these numbers are likely to change drastically.
This new breed of knowledge process outsourcing (KPO) comprises companies providing higher-end research and analytical based services to overseas clients in a wide spectrum of business areas. These include basic data research, equity research, engineering design, animation, remote education and publishing among other fields.
For those who believed in the venerable Harvard Business Review's stance that outsourcing is one of the most important management ideas and practices in the past 75 years, this hardly comes as a surprise. That low-end tasks can be outsourced effectively for cost, scale and competitive advantage reasons is quite well known. However, outsourcing of high-end, knowledge-intensive business processes was always considered tough.
These processes entail value-creation and are often intrinsic to the business. No wonder, even these projects have been outsourced successfully. Simply put, the question is no longer if high-end research could be outsourced at all. Perhaps, the question now is what else can be outsourced?
Key drivers of financial research outsourcing
As stated earlier, the current understanding of the KPO space includes a wide range of sectors. Financial research is one such sector. According to a 2003 study conducted by the financial services practice of management consulting firm A T Kearney, American banks, brokerage firms, insurance companies, mutual funds and other financial services firms are planning to relocate more than 500,000 jobs offshore -- representing 8 per cent of their workforce -- over the next five years.
Indeed, by end-2005, Deloitte & Touche expects the top 100 global financial-services firms to offshore more than $200 billion of their operating costs and save more than $700 million.
Factors causing this stream to turn into a torrent:
- Huge cost savings of anywhere between 40 and 60%;
- Shrinking stock research margins due to the Internet-aided trades;
- Global research settlement and the resultant need to provide independent research to clients;
- Proliferation of independent research firms due to huge under coverage of small and medium stocks;
- Acute shortage of skills and high personnel costs in the key markets;
- Huge talent pool in outsourced markets;
- Ever-improving information and communication technology;
- Mature process and project management capabilities at both ends due to prior experience of managing BPO engagements.
Building a successful outsourcing relationship
Planning for and managing high-end outsourcing is easier said then done. For, besides the intent of the sourcing company, the outsourced partner must be capable of delivering similar or better quality output at competitive cost. In that sense, a successful outsourcing relationship is as much a function of sourcing company's management skills as it is of outsourced firm's delivery capabilities.
Among the key drivers of high-end outsourcing, cost savings of anywhere between 40 and 60%, is the primary incentive. However, cost alone cannot be the key driver, at least in the case of high-end outsourcing.
In financial research outsourcing what really matters is not a few pounds saved by chasing cost. Rather, it is the capability, rigour, resources, rapid turnaround times and the ability of the
In many cases, outsourcing institutions typically have 'their way' of working and looking at the market. For the outsourced partner, it then becomes imperative to be agile, resourceful and skillful to learn the client's 'way' without impinging too much on the latter's time.
Keeping the learning curves short, ramping up quickly and delivering quantity without diluting quality are the most important attributes for the outsourced partner. In a way it is tricky, but successful outsourcing companies know how to make maximum of client's time and advice. They basically do their homework well. And well in advance.
Not a one-way street
The success of the high-end business outsourcing model depends not only on the execution abilities of the provider but also on the extent of the involvement of the client. If both the provider and the client do not get on the same page, pretty soon outsourcing becomes a big headache for all concerned.
Hence, typically, high-end outsourcing projects that are mostly iterative in nature require high-engagement and active client involvement. This effort must be seen as an investment, for if done well, the benefits are long lasting. Shying away from this would imply lack of seriousness and project is doomed from start.
All outsourced projects involve confidentiality issues; high-end projects, more so. For, chances are, the outsourced partner will be working with the client's proprietary information. In such cases, a mere service level agreement that alludes to respect for confidentiality is not enough. It must be enforced, tracked and monitored for compliance.
India: Now, a KPO hub as well
India is all set to move from being the most preferred BPO destination to a KPO destination. A paper prepared by the Confederation of Indian Industry has revealed that KPO would grow at 46% to reach a staggering $17 billion by 2010. Besides, the study points that the growth of services sector would be 8%+ and its contribution to India's GDP would be 51%+, affirming that India's transition from being a BPO destination to a KPO destination is imminent.
As a country, India enjoys several unparalleled advantages among all other destinations. Among the major ones includes the knowledge pool. India is said to have the largest number of chartered accountants in the world with over 100,000 certified chartered accountants and 200,000 apprentices. A large number of finance MBAs pass out each year. Both courses produce talent that is strong on finance and use of IT.
Perhaps, this is one reason why a large number of international investment banks and brokerages have come in droves to set up a shop in India. Several Wall Street firms are discovering the value proposition of operating in India. US financial services major Lehman Brothers, JP Morgan, the investment banking arm of JP Morgan Chase, Morgan Stanley, ABN AMRO, Citibank, GE and HSBC have also set up research bases in India.
Here to stay
From providing back-office support to complementing marketing efforts to high-end work, outsourcing has come a full circle. In countries such as India, the culture of outsourcing has matured considerably.
From a lot-to-know to a lot-is-known, the journey has been littered with great successes and some spectacular failures. All successes shared some common commonsensical traits highlighted above. Those that did not, fell by the wayside.
Hemendra Aran is the CEO of Aranca and is based in London. He holds an MBA from London Business School and a BE in Civil Engineering from IIT-Madras.
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