Outsourcing of Knowledge Services Creating New Realm of Management Challenges, Finds Duke/Booz & Company Report

India, China and Russia Are Leading Providers of Offshore Engineering, Design and Research Services

Dubai, UAE – September 16, 2008 – The number of knowledge-based outsourcing service providers has nearly doubled since 2000, creating new challenges for companies who must manage a greater number of service providers to fully close their talent gaps, finds a new study from Duke University and global management consulting firm Booz & Company. The survey, which examines the outsourcing industry from the provider’s perspective, finds that India leads the pack with the greatest number of such service providers, followed by China and then Russia.  
“The uncomfortable truth is that companies simply can’t find enough of the high-end analytical minds they need in their home countries,” said Rabih Abouchakra, Principal with Booz & Company. “This has compelled companies of all sizes to look abroad, generating a global race to lock up the best brains and talent.” Adding to the complexity is the emergence of pockets of advanced expertise among the smaller service providers. “This requires companies to manage more service providers than is practical given their current structures, and new organizational approaches will be needed to contain costs while delivering value.” 
The study, co-authored by the Duke University Offshoring Research Network (ORN) and Booz & Company, is part of a series of reports originated by the Offshoring Research Network (ORN), led by Professor Arie Y. Lewin at Duke’s Fuqua School of Business.  Key findings of the study include:
  • The number of knowledge process outsourcing (KPO) providers has grown 95 percent since 2000, fulfilling talent needs in areas such as engineering, design and research  
  • Among providers offering innovation services, 50 percent are based in India,  followed by China with 28 percent, and Russia at 15 percent
  • When asked about the risks they face in their own businesses, 85 percent of KPO providers cite the availability of talent, 81 percent say financial compensation, and 77 percent identify the need to provide challenging work
“Finding the talent abroad is only the beginning of the process,” said Rabih Abouchakra. “Incorporating the innovation service provider into a company’s infrastructure and product lifecycle is a task that can’t be taken lightly.”  
In order to successfully manage multiple KPO providers, companies need to take a number of complex and often culturally challenging steps. These include:
·         Approaching foreign contractors as privileged collaborators, even when they work with competitors  
·         Distributing decision-making authority globally, assigning the best talent to the location where they’re needed most, rather than being concentrated in a particular headquarters country
·         Creating a culture and workflow model that accommodates a wide range of time zones
Additional highlights of the study include:
Smaller providers are creating “pockets of expertise.”  According to the findings, smaller KPO providers report that it takes them an average of four weeks to hire an employee with a Master’s degree, versus nine weeks at bigger shops. Those differences widen when it comes to PhDs, with an average of a six-week search for small KPO providers and 14 weeks for large companies. Those advantages are showing up in staff composition levels, with 35 percent of employees at small providers holding Master’s degrees, versus 23 percent who can make that claim at mid- to large-sized providers. As offshoring matures, speed of implementation and flexible specialization will only become more important as sources of competitive advantage.
Providers are understating their value. KPO providers tend to underestimate the savings they are delivering to clients. In the area of product development, KPO providers claim that they have generated savings for clients of 29 percent, while clients say they’ve saved 41 percent. When it comes to outsourcing engineering work, KPOs estimate they deliver 32 percent savings, while clients put the figure at 46 percent. KPO service providers charge higher fees for this complex, client-specific support than traditional outsourced services, but the study found the cost savings are still perceived to be worth the price.   
However, client satisfaction is an emerging issue. More educated talent doesn’t automatically translate into client retention. When asked to describe the most common reasons for terminating a contract, 65 percent of respondents cited insufficient service quality. And 38 percent state that their targeted cost savings had not been achieved. Some of this dissatisfaction is reflected in KPO deal renewal numbers, which trail those of traditional outsourcing agreements. Offshore arrangements focused on finance/accounting, and marketing/sales, have an 83 percent renewal rate. By contrast, 68 percent of engineering-focused contracts are renewed, followed by 62 percent of new product development deals, and 61 percent research and development partnerships.
“Innovation and knowledge services are hard to scale because of the high degree of customization needed,” said Dr. Arie Lewin, professor of strategy and sociology, Duke University. “Undoubtedly consolidation will ultimately ease the logistical burden on companies who must juggle multiple KPO service providers. But for the time being, companies will need to find new ways to integrate partners of all sizes into their innovation infrastructures – and do it better than their competitors.”    
The 2008 study, “Offshoring the Brains as well as the Brawn,” surveyed 120 service providers based in the U.S., Europe, China, Brazil, India and other countries, exploring the opportunities and challenges facing innovation service providers, and their impact on multinational companies. This survey complements global corporate surveys on outsourcing and offshoring conducted in 2006 with Booz & Company and in 2005 and 2004 with Archstone Consulting. Of the 120 service providers polled, small companies (those with fewer than 500 employees) made up 48 percent of respondents, 31 percent came from midsized companies (500-20,000 employees), and 21 percent represented large companies (those with greater than 20,000 employees). 
The study can be downloaded at www.booz.com.