BY FRANK J. CASALE

Outsourcing and offshoring are more robust than ever.

Dell Computer's recent pledge to double its employee count in India over the next three years is further confirmation.

The same holds true for Business Processing Outsourcing (BPO). However, as Arun Jethmalani points out in our 2006 BPO Trends story, BPO is evolving to different functions and being delivered in different ways.

One reason: Rising competition and smarter customers have commoditized many traditional BPO processes in CRM, transcription, data entry and transaction processing.

However, last year the successful offshoring of a variety of knowledge services has helped attract the attention of new entrants as well as existing vendors desperate to move up the value chain, we point out."The small beginnings in areas like financial research, risk modelling, market research, R&D, data mining, telemedicine, actuarial services, engineering services, legal services and many others, have shown the way ahead," Jethmalani writes.

So, given the rising weight of knowledge services in the outsourcing industry, the authors predict 2006 will mark a major milestone in the industry's transition from low-end, commoditized, process driven services to one where knowledge becomes a key differentiator.

In fact, Adam Larkey in "Up The Value Chain We Go... Again", goes as far as saying "the next wave in the evolving dynamic outsourcing markets" is Knowledge Process Outsourcing (KPO). He calls this the process where businesses outsource high-end knowledge or judgment services such as investment banking research, sales and marketing research, IP/patent research, R&D, legal research and case writing and even animation design.

With KPO, a provider must have an educated, skilled work force able to think independently and provoke their own free thought behind any research criteria. "KPO involves a high degree of execution risk as providers look to create and combine complex levels of process, technology, and services," Larkey explains. He points out countries such as India, China, Russia and Israel have the necessary resources to provide these services.

As Ron Krueger's article, "Money or The Gun" points out small and large businesses can focus on what they do best by outsourcing non-core functions such as debt recovery.

Getting back to Jethmalani's article, he also asserts that falling unit revenues driven by intensifying competition and the rising share of offshoring are responsible for two opposing yet complementary trends: towards scale and specialization. On the one hand, an increasing number of players will try to differentiate themselves by way of specialized services and domain knowledge, rather than scale.

At the other end of the spectrum, large, multi-service providers will look to aggressively add new verticals, service offerings and geographies.
Also, look for consolidation and fragmentation. Acquisition activity reached new highs in 2005, and 2006 figures to be busier.
On the other hand, the hype around offshoring is attracting hordes of new entrants. In fact, Jethmalani says to expect offshoring to continue what he calls "its relentless march,' as more and more companies seek labor cost savings. He predicts that by 2007, almost every major BPO contract will include an offshore component.

Tell me what you think, e-mail me any other comments, suggestions or questions at fcasale@outsourcing.com.

Regards,

Frank J. Casale

Frank J. Casale
Founder and CEO
The Outsourcing Institute