Knowledge process outsourcing

Also called: KPO · Topic: Tertiary, Quaternary and Quinary Activities · NCERT: Class 12, Ch 6 "Tertiary and Quaternary Activities"

Meaning

Knowledge process outsourcing (KPO) means a firm hands high-skill, information-driven work to an outside agency. This is work that needs expert judgement, such as research and development (R&D), e-learning, business research, intellectual property (IP) research, legal work and banking services. KPO matters because it is the higher-value end of outsourcing. It needs highly skilled workers, adds more value and creates more business opportunities than BPO. That makes it the next step for countries like India as they move beyond routine call-centre work.

Explanation

How outsourcing leads to KPO

• Outsourcing (also called contracting out) means a firm gives part of its work to an outside agency instead of doing it itself.
• Why firms outsource:
• to raise efficiency, because the outside agency is a specialist in that job;

• to cut costs, because the agency does the job more cheaply.

• Offshoring means outsourcing to another country.

• Outsourcing asks who does the work: an outside firm.

• Offshoring asks where it is done: abroad.

• Outsourced work falls into two levels:

• BPO (business process outsourcing): routine, rule-based work that needs less skill;
• KPO (knowledge process outsourcing): knowledge-based work that needs analysis and expert judgement.

What KPO work looks like

• Research and development (R&D): designing and testing new products or ideas.
• E-learning: making and delivering courses online.
• Business research: studying markets, companies and data to help clients decide.
• Intellectual property (IP) research: checking patents and trademarks (the legal ownership of ideas and brand names).
• Legal work and banking services.
• Who does it: highly skilled workers such as engineers, lawyers, analysts and PhDs.

Conditions KPO needs

• Skilled, English-speaking labour on lower wages:
• many developing countries have staff who are IT-skilled and speak English;
• their wages are lower than in the USA, UK or Japan;

• so the client pays much less for the same expert task.

• Lower overheads: office rent, electricity and other running costs are lower, which adds to the saving.

• Comparative advantage (a country does best to specialise in work it can do at a lower relative cost than others, and then trade):
• NCERT names this as the main reason outsourcing continues;

• India and the Philippines have this edge in skilled, low-cost service work.

• Time-zone advantage:

• when it is night in the USA, it is daytime in India (about 9.5–10.5 hours ahead);
• work sent in the US evening comes back finished by the next morning;

• this makes a 24-hour work cycle possible.

• Good telecom links: the work moves only through computers and networks, so it is not tied to raw materials.

Why KPO is the higher-value activity

• Value added: BPO adds less value. KPO adds more because its output is analysis and expert advice, not routine handling.
• Business opportunities: KPO creates more business opportunities than BPO.
• Risk from AI and automation:
• AI and automation now threaten routine BPO tasks such as answering standard calls and entering data;
• KPO faces lower risk because it needs expert judgement;

• so Indian firms are moving up the value chain, from BPO towards KPO and Global Capability Centres (GCCs, which are offshore units fully owned by a multinational that do its tech, R&D and analytics work in-house).

• Activity type:

• BPO is linked to tertiary activity (delivering services);
• KPO is linked to quaternary/quinary activity (knowledge work and decision-making work).

Where it occurs

• India: the leading outsourcing hub. Its hubs are Bengaluru, Hyderabad, Chennai, Pune, Mumbai, the National Capital Region (Gurugram, Noida) and Kolkata.
• Philippines: Manila and Cebu.
• NCERT example of offshore knowledge work: a firm in Hyderabad (Telangana, India) or Manila (Philippines) does a GIS project (Geographic Information System: digital mapping and analysis of spatial data) for a client in the USA or Japan. Even Botswana (southern Africa) takes such work.
• Other countries where outsourced service centres have opened (NCERT): China, Eastern Europe, Israel and Costa Rica (Central America), along with India and the Philippines.
• India's scale (IT-BPM, which covers both BPO and knowledge work):
• in 2020-21, India's IT-BPM industry earned US$ 149.1 billion from exports and US$ 28.9 billion from domestic sales [2][3];
• the USA gave US$ 92.1 billion (about 62%) of export revenue and the UK gave US$ 25.2 billion (about 17%) [2][3];
• the sector added 1.38 lakh employees in 2020-21 (provisional estimate) [2][3].

Don't confuse with

• BPO (business process outsourcing): BPO covers routine, low-skill work such as call centres, customer support, back office and data processing. KPO covers high-skill knowledge work such as R&D, legal and IP research. KPO, not BPO, has the better business opportunities.
• Offshoring: offshoring tells you where the work goes (another country). KPO tells you what kind of work is outsourced (knowledge work). KPO can be done at home or abroad.
• Home-shoring: in home-shoring, employees work from home within the same country instead of the work going overseas. It is offered as an alternative to outsourcing, not a type of KPO.
• Global Capability Centres (GCCs): a GCC is fully owned by the multinational and does its own work in-house. KPO hands the work to an outside agency.

Prelims Hooks

• R&D, e-learning, business research, IP research, legal and banking services = KPO. Call centres, back office, data processing = BPO.
• Trap (NCERT exercise 1(vi)(c)): "BPOs have better business opportunities than KPOs" is FALSE. KPOs have better opportunities.
• NCERT names comparative advantage as the main reason outsourcing continues.
• NCERT example: a GIS project for the USA/Japan done in Hyderabad or Manila. Even Botswana takes such work.
• India's largest IT-BPM export market is the USA (~62%, 2020-21), followed by the UK (~17%) [2][3].
• KPO is linked to quaternary/quinary activity. BPO is linked to tertiary activity.

Mains Points

• Locational factors of KPO (GS-I, location of tertiary and quaternary activities):
• The main factors are IT-skilled, English-speaking labour on lower wages, lower overheads, a time-zone gap that allows 24-hour work, and good telecom links.
• Together these give India and the Philippines a comparative advantage.

• Knowledge work is not tied to raw materials, so it gathers in metro tech hubs such as Bengaluru, Hyderabad, Pune and the NCR.

• Moving up the value chain from BPO to KPO:

• Routine BPO is at risk from AI and automation.
• KPO and GCCs (R&D, analytics, legal and IP work) need more skill, add more value and offer better business opportunities.

• This shift needs investment in higher education and digital infrastructure. It also needs hubs to spread to tier-II cities.

• Effects on host and client countries:

• Host countries gain jobs and foreign exchange: India's IT-BPM exports were US$ 149.1 bn in 2020-21 [2][3]. Good jobs at home may also mean fewer people need to emigrate.
• Client countries save costs. But job-seekers in the USA and UK resist outsourcing because they feel the work has gone abroad.
• The USA and UK supply about 79% of India's IT-BPM exports (2020-21) [2][3]. This leaves India exposed to their recessions and to visa or protectionist policies.

Related concepts

• Outsourcing
• Offshoring
• Business process outsourcing
• Home-shoring

Read more

• Outsourcing, offshoring, BPO, KPO and home-shoring