Outsourcing of Knowledge Services Creating New Realm of Management Challenges, Finds...

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
NEW YORK & DURHAM, N.C.--(Business Wire)--
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 Matt Mani, senior associate 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 Vikas Sehgal, principal, Booz & Company. "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.

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."

Methodology

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.

About Booz & Company

Booz & Company is a leading global management consulting firm,
helping the world's top businesses, governments, and organizations.

Our founder, Edwin Booz, defined the profession when he
established the first management consulting firm in 1914.

Today, with more than 3,300 people in 57 offices around the world,
we bring foresight and knowledge, deep functional expertise, and a
practical approach to building capabilities and delivering real
impact. We work closely with our clients to create and deliver
essential advantage.

For our management magazine strategy+business, visit
www.strategy-business.com.

Visit www.booz.com to learn more about Booz & Company.

About Duke CIBER

Duke University's Center for International Business Education and
Research (CIBER) was established in 1992 by the Fuqua School of
Business and has been directed by Professor Arie Y. Lewin since 1995.
The Offshoring Research Network (ORN) was conceived as a multi-year
initiative focused on understanding the relationship between
offshoring and American competitiveness.

There are 30 CIBERs located throughout the United States that are
funded by the U.S. Department of Education under Title VI through a
competitive bid process. Duke CIBER collaborates with other CIBERs to
carry out projects and engages in outreach activities with other
centers and departments at Duke as well as other colleges and
universities, businesses and communities.

Booz & Company
Karen Guterl, 212-551-6516
karen.guterl@booz.com
or
Duke University:
The Fuqua School of Business
Chris Privett, 919-660-8090
chris.privett@duke.edu
or
Makovsky + Company
David Rosen, 212-508-9690
drosen@makovsky.com

Copyright Business Wire 2008