2. Common Offshore Outsource Risks
Following are some of the common risks faced by the companies in their offshore outsource initiatives:

* Business Value risks
* Legal risks
* Offshore Personnel risks
* Project risks
* Offshore Vendor operational risks
* Intellectual Property (IP) risks

Some of the risks like IP, Legal risks can be mitigated through outsource contract terms. However, contract alone cannot solve all the offshore outsource risks. You need to manage and monitor the risks regularly during outsource project execution. In the next section, we will explore each risk in detail and present different risk mitigation strategies for each one of them.

2.1 Business Value Risks
Before you start your offshore outsourcing initiative, you need to answer the question clearly.

What is the business value of offshore outsourcing for your company?

It may be innovation, cost saving, operational efficiency, better utilization of in-house resources or all of the above. Without clearly defining the business value, you are in risk of failing in your outsource initiative. Without defining the business value how do you measure the success of your outsource initiative to your company’s management team? You can mitigate the business value risk by clearly identifying the value of outsourcing and figuring how long it will take to achieve it. For example, while working with offshore vendors, you may have to include costs associated with travel, remote project management, in-house and offshore personnel training, etc. This extra cost will increase your offshore budget and this may cause your business value goals not achievable in the short-term but in longer-term you may achieve it. In any case, you need to educate your peers and your executive management team about the business value risks up-front so that they can be aware of the “value model” of offshore outsourcing.

You can also mitigate business value risks in other ways like proper SLA negotiation in outsource contract and monitoring it effectively throughout the outsource project. The outsource project management can also be used as an effective tool in identifying and fixing the value risks as it arises in the outsource projects. For example, the outsource project plan should have specific items to satisfy the SLA and it should make people accountable for not meeting those SLA on the projects. The outsource project plan should have proper escalation procedure and emergency meetings in case the outsourced project value goals are not reached regularly.

2.2 Legal Risks
Numerous legal risks are associated with the offshore outsourcing, there are no clear rules exist to make the offshore outsource firm liable for security breach or other contract violations. Countries differ in their local laws for foreign firms seeking damages from outsource firms. You must work with a law firm specialized in drafting offshore outsource contract and have significant working knowledge with the laws of the country where the outsource work will be performed. As a outsource buyer, you may not get all the legal disputes to be resolved in your country’s jurisdiction. You need to make a compromise with the outsource vendor to use various forums like domestic, international arbitration, etc to resolve the legal disputes. Simple approach to mitigate the legal risks are asking the right questions, working with your legal department to answer the questions so that you can understand the difficulties and educate your management team about it. Following are some of the legal questions you need to understand and find answers for it. Not all the questions might be applicable for your offshore outsource needs. Generally, you need to be aware of these questions so that you can plan to mitigate the legal risks in your offshore outsourcing.

* Who owns the IP of technology developed by the offshore outsource vendor?
* Can the offshore vendor use the technology developed for you to other companies?
* How the IP of the business process and technology is protected in offshore location?
* What are the milestone achievements? How are it measured and what legal actions you can take in case the offshore vendor misses it?
* What liabilities the offshore vendor exposes your company both in your home country and in the country where the outsourced work is performed?
* Is there any export control that needs to be addressed in your home country and where the work is performed?
* Is the outsourced work is performed by the outsource vendor you signed the agreement or the outsource vendor subcontracts the work to different vendor?
* What types of insurances the offshore vendor has and how it protects their work?
* How the disputes are resolved? What laws are used to resolve it?
* Where will the disputes be resolved and who owns the cost of it?
* What are your enforcement options for contract breach, IP, theft, or negligence of trade secretes?
* Will the judgment against the offshore vendor enforceable in your home country or the country where the offshore vendor is located.
* When and how can you terminate the offshore outsource agreement?
* Under what circumstances you can terminate the outsource contract?
* What taxes your company and the offshore vendor’s company is responsible?

By understanding above questions and have attorneys draft the offshore outsource contract; you can protect your company and have proper legal risk mitigation in place for your projects. This will also help you to educate your management team about the legal risks of offshore outsourcing the precautions you have taken to address them.

2.3. Offshore Personnel Risks
Before you start working with offshore vendor, you need to understand the labor laws and other regulations of the foreign country. Even though you may not be directly responsible for labor law violations of the offshore vendor, you may be indirectly responsible for your offshore vendor’s actions. Many foreign countries do not have laws for employees like workplace discrimination, privacy, sexual harassment, etc. For example, India has different laws than US for terminating the employees. In India, you cannot terminate an employee without following a lengthy termination process. Failure to follow the process can result in fines for an employer operating in India. Even though you may not be legally bound to the labor laws in foreign countries you need to understand it so that you can use the offshore resources effectively by restructuring or changing it as it fits your project needs without violating the labor laws of the foreign country.

Offshore personnel risks are mitigated by understanding the offshore vendor’s labor practices, by visiting the vendor’s offshore location offices and meeting with their employees you can understand their HR policies, professionalism in dealing with employees, etc. More over how the offshore vendor treats their employees might be acceptable in their country but may not be acceptable in your country. The most common example is “sweatshop” working conditions, though not common in IT and BPO projects. Nevertheless, you need to do proper due diligence in mitigating the risks by regularly monitoring the HR practices of offshore vendor and putting the minimally acceptable working conditions of the offshore personnel in the outsource contract.

2.4. Project Risks
There are several project risks are associated with the offshore outsourcing like unrealistic cost saving, internal organization readiness, poor planning, improper integration of in house business processes with outsourced business processes, transition time, training, etc. Any new initiative will come with risks; working with offshore vendor is no different. Offshore vendor location, cultural, and time differences make it project management even more difficult in comparison to working with inshore outsource vendor. All the outsource project related risks can be mitigated by assessing the organizational readiness, creating internal organizational structure and having an outsource business champion coordinating the outsource initiative between the internal teams and the outsource vendor.

Many organizations successfully managed the BPO project related risks by creating proper organizational changes to succeed in outsourcing. Executive group, governance group, in house business process group, and outsourced business process groups. Similarly, in IT outsourcing projects, these groups can work together to manage the project risks successfully. These groups manage the risks by working with internal employees; outsource vendor employees, and customers on regular basis. Any time an issue arises in the project; appropriate steps are taken by properly communicating and fixing the issue with all the affected parties.

For BPO projects, you can use the BPO feasibility framework to manage all of the projects related risks successfully. In addition, you can create an offshore project risk matrix and engaging both your internal members and offshore vendor in the process will help you in mitigating the risks.

2.5. Offshore vendor operational risks
Identifying and assessing operational risks of offshore vendor is the most difficult task for you. Offshore vendor business practices vary from country to country. Business practices like bribes and other financial transactions that are questionable in western countries can be a routine in the offshore vendor’s home country. You need to be careful and identify if you violate any regulatory requirements in your home country, for e.g., violating U.S. Foreign Corrupt Practices Act will incur significant fines and other legal ramifications to your company. First step in mitigating this risk is having proper written policies that strictly prohibit any conduct that is considered as a statutory violation. Proper implementation of the policy requires ensuring that you continuously monitor the activities of offshore vendor and take appropriate actions in case of violations of the policies.

Some times offshore vendor may exaggerate their business expertise, process and quality certifications, technical skills, etc. This risk can be mitigated simply by verifying their claims and talking with their existing customers and other industry references. You can also visit their offshore locations, discuss with their employees and assess their internal operational capabilities.

2.6. Intellectual Property (IP) Risks
Organizations have several sensitive business data, proprietary business processes, custom technical solutions, etc, protecting critical business information is a great concern for all businesses. You need to make sure the offshore vendor has proper security policies and procedures in place to protect your business IP from theft by employees, computer hackers, exposure by error or negligence, and corporate espionage. You also need to be aware of legal standards and business practices governing the protection of business data, which varies around the world. For example, Gartner gave Mexico very good, India Good, Brazil fair and China poor ratings for data and IP protection.

You can mitigate the IP risks of offshore outsourcing by assessing their security capabilities, checking if they follow any industry security consortium, security certifications etc. Following are some the industry consortiums and certifications that are popular in various industries.

Some industries like financial institutions have industry consortium, banking Industry Technology Secretariat, BITS have developed several security guidelines and best practices for managing and safeguarding financial business data. BITS also have recommendations for disaster recovery, periodic security audits, lawful treatment of data, etc.

The U.S. government has created Health Insurance Portability and Accountability Act, HIPAA that has exhaustive list of policies, processes, data confidentiality, disaster recovery, encryption standards and other safeguards that is applicable to all health care industries.

The ISO 27001 is a certification that is given to organizations that has strict information security policies and other security controls in their organizations. All the major Indian based outsource companies has secured the ISO 27001 certification.

The SANS (SysAdmin, Audit, Network, Security) is another source where you can find information about security policies and guidelines.

If the offshore vendor follows the industry standards or has certifications then it is a good sign that they have good security policies in place. However, having the security certifications and industry compliance guidelines for security are only the first step; you need to make sure that the security risks you most value are part of the certification process. You also make sure that the offshore vendor follows your industry’s best practices and compliance guidelines of your home country. The industry best practices and certifications cannot eliminate the security breach in your offshore vendor’s company; you need to assess your offshore vendor’s security contingency and disaster recovery plans and procedures.

3. Conclusion
Before you begin the offshore vendor selection process, you must consider the risks of having a business relationship with a vendor in a different country. A good risk assessment strategy is to develop an offshore vendor risk matrix for each offshore vendor in consideration during the vendor selection process. The offshore vendor risk matrix can have outsource vendor industry maturity, market goodwill, access to credit, and financial stability etc.

Offshore outsourcing does not eliminate your business risks; it moves some of the risks to offshore vendor. You need to have proper contingency plans to go back to your old systems and business processes if everything failed with the offshore vendor. Developing a contingency plans and processes might be more expensive than the actual outsource project expenses itself but you must have the fallback plans to protect your company from the offshore outsourcing failures.

Finally, all the offshore outsource risks mentioned in this article can be managed effectively by doing proper due diligence in the offshore vendor selection process and assessing each one of the risks carefully and continuously managing the risks will ensure success in your offshore outsource initiatives.

In this article we will explore the best practices for successfully managing outsource vendor relationship.
1. Organization Changes
In any business process outsourcing initiative, some business processes are outsourced and many are kept in house within the small business itself. If not planned and executed properly, the separation and integration of businesses processes cannot work smoothly. First small businesses should make organizational changes to support the outsource relationship with the vendors. The small business management should create four groups within their organization to support smooth functioning of the outsource relationship.

1.1. Executive Group
This group consists of C-level executives from small business and from outsources vendor’s company. Though this group will not involve in daily outsource operational issues, the group members will oversee all other groups formed to successfully manage and execute the outsource relationship. The main job of this group is to make sure that all the groups have their conscience in making the right outsource decisions that will support the overall organization’s short-term and long-term strategic goals. All other groups will report to this group either directly or indirectly.

1.2. Governance Group
This group is responsible for ensuring contract compliance, performance management, and issue resolution. The main purpose of this group is to take care of any issues arises between the team members of small business and outsource vendor. This group should consist of senior members from both small business and outsource vendor to manage the smooth execution of business processes. The main responsibilities of this group is to enable the executive group to make tactical, operational and strategic decisions that increase the business value resulting from the outsourcing relationships, while reducing the risk associated with using a outsource vendor.

1.3. Outsourced Business Process Group
This group is responsible for managing the business processes that are outsourced to the vendor. The focus of this group is to identify the business processes that are good candidates to outsource and actively involve in the transferring those business processes from small business to the outsource vendor. Generally employees from both small business and outsource vendor will be members of this group.

1.4. Retained Business Process Group
Generally, business processes that are strategic importance and have legal issues are kept in-house within the small business. This group is responsible for redesigning internal business processes based on outsourcing solution so that touch points and handoffs between internal and outsourced business processes are carried out appropriately. This group also responsible for operational planning, policy development, continuous process improvement, process change management etc.

Depending on the size of the small business, above groups can have one or more members be part of the group. By clearly separating the responsibilities of the each group and aligning them with common set of goals, small business can achieve their strategic goals like improved share-older value, increased operational efficiency, etc.

organization

2. Avoiding Common Outsource Pitfalls
Any new company wide initiative will bring uncertainties in organizations, outsourcing is no different to this phenomena. The executive team should align the above groups to take proper decisions to answer following key questions:

* Due to the outsourcing, what are the overall business process changes and who is responsible for executing them?

* How do retained and outsourced business processes relate with each other and who is responsible for integrating them?

* Which groups are responsible for the ownership of the business processes and how do they make sure the smooth execution of them?

* How the in-house and outsourced business processes are measured and how the performance degradation reported to the governance group?

* How long it takes the governance group to address and fix the performance issues.

* How the quality of the outsourced business processes execution measured with the retained business processes?

* How the security of the business critical data managed in, outsource vendor’s location? How the security breach reported to the small business executive group?

By rising above questions in the beginning of the outsource initiative, stage small business executive team can understand the complex nature of outsourcing and giving ownership of the business processes to an outsource vendor. A good solution is to use the small business BPO feasibility framework to answer all of the above questions and have a clear vision for all the outsource initiatives.

The entire small business outsource process does not have to be overly complex, but without the above-mentioned groups small businesses may not achieve their outsource goals. Typically companies wait until they negotiate and finalize the outsource contract and then start planning for the governance group and define the roles of other groups. This strategy will not work and companies often miss the expected outsource benefits and may end up in unsatisfactory service levels from the outsource vendors.

3. Achieving Strategic Outsource Value
Following are the take away points small businesses should consider in forming the various groups to have a long-term success in achieving strategic value in outsourcing:

Senior Management Involvement: The governance group must work closely with the executive group to convey the daily progress of outsource initiative and get feedback from the stakeholders on the outsourced projects.

Organization Involvement: Governance group must reach out all the departments of the organization to educate about outsourcing and get their feedback to achieve strategic business value of the outsource efforts.

Business Process Standardization: The retained and outsourced business groups must create business process standards so that the service performance of the in-house and outsourced business processes can be measured. Without proper measurement, you cannot measure the productivity gains achieved by outsourcing.

Achieving Goals: Achieving the goals of both the organization and the outsource vendor is very important. Organizations want to cut cost and improve the operational efficiency of the business processes. On the other hand outsource vendor wants to increase their revenue and decrease the service delivery cost. Good governance should call for achieving both of these goals so that both the organization and the outsource vendor will mutually benefit from the relationship.

Achieving Synergy: A good governance model should be build upon the needs of both the organization and the outsource provider. This helps both parties to build trust upon which they can resolve future problems that arises in their outsource relationship.

Outsource Contract: Having a well written outsource contract is must, but outsource contract alone cannot help in solving all the problems. Both parties should use the effective governance model to resolve the issues in a timely manner. Also the outsource contract must be updated regularly over the life of the agreement.

Management Transition: The executive group must plan proper management transition so that current team members will be given specific tasks once the outsource initiative begins. For example, senior managers from the outsourced business process group will be the members of the governance group to oversee the smooth functioning of the outsourced business process.

Overall Control: It is important that small business retain overall control of the outsourced and retained business processes. Outsource vendor can make decisions for the outsourced business processes and they will actively participate in the decision but ultimately it is the responsibility of the small businesses to make sure the entire business process value chain is working efficiently and effectively for the customers.

Managing the Risk: Any time organizations engages in new partnership there will be risks associated with it, it is no difference in outsourcing partnership as well. Both the executive and governance groups must work together with other groups to understand and develop proper mitigation mechanisms in resolving it.

3. Conclusion
By creating appropriate groups and assigning proper roles to the team members before starting the outsource initiatives, organizations can achieve their outsource goals. The members of the various groups formed for outsourcing helps both parties to invest time in the very beginning of their outsource relationship so that both parties can mutually benefit from their outsource relationship.

Captive offshore outsource model has been successfully followed by large companies like IBM, Motorola, Texas Instruments, American Express, etc. It is not a popular choice for small businesses mainly due to the cost and management expertise needed to run the operation in foreign country. However, if your small business satisfies one or more of the above criteria then you should consider this model.

Assisted captive offshore outsource model
The assisted captive offshore outsource model is similar to captive outsource model, except it is usually managed by an experienced partner based in the offshore location. In this model, the small business controls the overall management of the offshore facility. The partner will help the small business management in specific tasks like hiring local talent, purchasing or renting office building, IT infrastructure setup, working with local government entities etc. This model is less risky than the pure captive model; in this model the small businesses uses the local partners to manage the risks in setting the offshore location and managing it on a daily basis. The small business still controls the offshore facility’s internal operations through local management team reporting directly to the small business management team.

Joint venture (JV) offshore outsource model
In this model, the small business collaborates with the local business in the offshore location to setup a joint venture. . In this model, the small business either takes an equity stake or creates an independent company in which both the small business and the local company give resources to it. In this model, small businesses can capitalize the strengths, experience of local player, and reduce their risks of owning and managing the offshore branch. The local company benefits from collaborating with global player and has the opportunity to learn and move up the value chain. Therefore, for both parties it is a win-win solution.

Build Operate Transfer (BOT) offshore outsource model
The BOT model has two variations, in the first variation it is similar to JV model in which options will be given to the local company to sell its stake to the small business after a fixed period or after an agreed upon milestones. In the second variation, the local company fully owns the offshore facility on behalf of the small business and in the future, if small business wants it can acquire the full ownership of the offshore facility. The BOT offshore model gives several benefits to small businesses, specifically if small business management team is interested to the learn ins and outs of managing the company in offshore location. In the BOT offshore model, it is also possible to set specific conditions like performance measurement, Quality standards, operational expenses, etc, upon which the small business can acquire the ownership of the company. This significantly reduces the risk for the small business management team in managing the offshore operations.

Offshore Outsource model
The entire offshore outsourcing industry was started from this model. During the Y2K, years Indian based IT outsourcing companies started the trend and still it is the most popular way of outsourcing projects to lower-wage countries. In the offshore outsource model small businesses can outsource their IT and BPO projects to a third party outsource provider. As a small business owner you identify the projects that needs to be outsourced, identify potential offshore outsource vendors, select the best one and give complete responsibility to the vendor to complete the project. The offshore outsource model works very well for both short-term and long-term outsource needs of small businesses.

Offshore outsoure model

Best Small Business Outsource Model
Among all the models described, offshore outsource model is the best choice for small businesses. It is highly cost effective and less risky compared to all other models explained in this article. Small businesses can try a vendor for a brief period and if they like it, can have long-term relationship with that offshore vendor. Therefore, there is no upfront cost involved in setting up the facility in offshore location. In this model through economies of scale offshore outsource vendors can give competitive price than the captive and BOT models. In addition, through economies of scale the offshore outsource vendors can bring in best practices and business process standards and efficiency to the small business outsource projects.

The offshore outsource model offers higher ROI to the small businesses compared to other models. Depending on the outsource initiative total cost of outsourcing varies from project to project, if the small businesses identifies the total cost of their outsource efforts and compare it with ROI, the offshore outsource model gives maximum ROI compared with other models.

Recently research reports are coming that suggests the Indian based captive centers are not performing well due to cost increases and sharp decline in the US dollar value. Recent study from McKinsey consulting and Nasscom, Indian outsource association, found that the captive centers run by US companies are less efficient compared to companies run by outsource vendors that specialize in niche vertical industries. For some captive centers, the cost is 30% higher and the higher in cost not necessarily results in higher quality of work and lower employee turnover.

Conclusion
Bottom line for most of the small businesses offshore outsource model will be the best choice. If small businesses have specific goals of establishing an offshore presence due to reasons like Intellectual Property protection, government regulations etc, in lower-wage countries then they should explore the captive or other models explained in this article.

Credit risk analysis
Banks and other financial institutions started using offshore vendors to perform credit risk analysis on their customer data. Based on their client requirements, financial and statistical professional at the offshore locations create mathematical models to identify potential risk factors in sanctioning loans or credit cards to customers. Using the mathematical models, equations can be formulated to identify high risk and low risk customers in risk analysis.

Supply chain analysis
Logistics and manufacturing companies use supply chain analysis in optimizing Supply Chain Management (SCM). In SCM, various processes of moving goods starting from customer order through the raw materials stage, supply, production, and finally distribution the products to the customer. With the advance of global sourcing companies started extending the supply chain to include global suppliers, partners and other interested parties around the world. So it becomes necessary for companies to outsource portion of their supply chain management to their captive centers in offshore locations like India and China.

Pharmaceutical analysis
Data analytics outsourcing in Parma industry has been growing for several years. Companies like Icon clinical research, Quintiles Transnational, Acunova, etc, have created clinical data management infrastructure in India to provide various data analytics solutions to drug companies in US to reduce drug discovery and approval time. There are also niche players started emerging in pharmacy data analytics market, Marketrx(acquired by cognizant) specializes in marketing and sales analysis in pharmaceutical industry, their custom build data analysis solutions helps drug companies in enhancing sales and marketing processes.

Data analysis outsourcing Trends
Sensing the KPO trends and to leverage the availability of skilled workforce in India, companies like Citibank, American Express, Prudential Insurance are outsourcing several parts of their data analysis work to their captive centers in India. Genpact (formerly known as GECIS) started by GE Capital has been doing data analysis work since 1997. Genpact started working with simple business processes like customer demographic changes in the beginning, due to the cost saving and quality of work Genpact started getting more complex analytics work like credit risk analysis, business opportunity assessment, etc. In addition to captive centers, there are also independent data analytics service providers like iGATE, EvalueServe, Fairisaac, OfficeTiger, Exlservice, etc, are providing various data analytics outsourcing services to their clients. Sensing the opportunities in data analytics outsourcing Indian based software majors TCS , InfoSys, Wipro, and Satyam have started offering various data analytics work to their clients.

Summary
The availability of skilled work force is a critical factor for the data analysis outsources providers in providing higher-value data analysis services. With the vast talent pool of quality workforce both India and China will be huge players in the data analysis outsource market.

To simplify the issues and make the small business owners to understand and evaluate their BPO options we have developed a Small Business BPO Feasibility Framework that consists of four steps:

* Identify the business processes
* Identify outsourcing readiness of the business processes
* Identify sourcing type and location for outsourcing
* Identify the potential value of outsourcing the business processes

2. Small Business BPO Feasibility Framework
The four-step BPO feasibility framework will provide small business owners a simple but effective filtering process to make right choices in their BPO decisions. Each step is built around key set of questions, and the answers will help in making right outsource decisions. The answers for the questions are plugged into the BPO feasibility decision matrix that helps to short list the ultimate solution from the multitude of different business factors in the outsource options.

Small Business outsource Framework

The BPO framework provides an easy way for the small business owners to ask the right question at the right step and the answers will force them to think strategically about the short-term and long-term goals for their small business growth. Any type of small business can use the BPO feasibility framework and it can adapt to changes in technology, business processes, and government regulatory requirements. Moreover, the small business BPO framework helps business owners to make decision based on facts rather then intuition, past experience, or personal preferences.

Step1
2.1. Identify your Business Processes
First, the small business owner need to identify what constitutes a business process in their company, is it activities performed by a group of people in one department or multiple departments. What is the input for the business process and from where it comes? What is the outcome of the business process and who consumes it? Is it people or other business process that consumes the result of the business process? Where are the people and the business processes located? Is it internal or external to the small business?

By asking questions like this, small business owners can identify and understand their business processes. As you perform the business process analysis, it is common to unearth low-level tasks that are happening to support the high-level business processes in your small business. You may notice the scope of your end-to-end business process is vast and you may find one or more business processes are potential candidates for outsourcing.

2.1.2. Identify core Vs non-core Business Processes
Within your small business, you might have business processes that are visible and well defined and understood by your employees. For example, a manufacturing company may have following well-defined business processes for the following activities:

* Get raw materials from suppliers
* Store it in inventory
* Pay Invoices to suppliers
* Use raw materials to manufacture goods
* Sell the goods to customers
* Send invoices to customers
* Collect checks for invoices

These activities are core business processes and you may have many personnel dedicated to understand and monitor it for smooth day-to-day business operations. On the other hand, there might be other business processes needed to support these core business processes. These processes are not well understood or documented by the small business employees. Your employees might have identified and performed the non-core business processes that would have evolved over a period. In the above manufacturing company example, the following activities may be non-core business activates:

* Handling missed invoices
* Identifying late payments
* Tracking the status of invoices

Generally, the non-core business processes are not well understood in small businesses. One of your employees tried a process for the above activities, found success and that becomes the business process for that activity and adopted by the rest of the employees in your small business. The non-core business processes are part of the cost of doing business, and do not add any strategic value to the business. All the non-core business processes can be a potential candidate for outsourcing, and there is a potential economy of scale when the BPO companies perform similar type of activities to other companies potentially reducing the cost for the small business owners.

Step 2
2.2. Business Process outsource readiness
Once you identify your core and non-core business processes, the next step is to identify if any of the identified business processes are ready to be outsourced. The simple approach is to decide to outsource all the non-core business processes and keep the core business processes in-house. However, the simple approach will not work in your outsourcing efforts will fail. Several business factors depend on the business processes. Without analyzing the relationship between the business factors and the outsourcing of business processes, you cannot benefit from your BPO efforts. In short-term you may reduce cost, but in long-term you will have issues with your outsource initiatives. Instead, you should take each business process and find answers for the following questions:

* Can this business process be performed outside of your small business?
* Is there any legal, security, or regulatory requirements, which need to be followed to fulfill the activities of the business process?
* How many different interfaces the business processes have?
* Can you write-down specific instructions on how to perform the tasks in the business process?
* Can you measure the performance of the business process?

2.2.1. Business Process Execution
Some business processes need deep business and technical skills that cannot be found outside of your small business. Your employees have been working on various activities of that business process and it is not possible for someone else to do those activities. Whether it is core or non-core, these business processes may not be outsourced. On the other hand if it can be performed by an outsource vendor as effectively and efficiently as your employee then it is a potential candidate for the outsourcing.

2.2.2. Business Process Interfaces
Any business process does not exist as a stand-alone entity; it takes input from other business processes or people, or both, and then produces results, that are consumed by some other people or business processes or both. As a small business owner, you need to identify where the input is coming from and where the output is consumed. For example, if the input for the business process comes from customers or customer-faced business processes then that business process may not be a good candidate for outsourcing.

2.2.3. Business Process Instructions
Often times if you can write-down the steps for performing a business process then it may be a potential candidate for outsourcing. If a business process is complex or the rules changes dynamically every day then you may not write the instructions for that business processes. If you cannot write the instructions for business processes then it may not be outsourced.

2.2.4. Business Process Performance Measurement
Some business processes are easy to measure the performance and efficiency. For example, number of transactions entered in QuickBooks, number of outstanding invoices collected, number of successful lead generated in a marketing campaign etc. If you can measure the performance of a business process then you can compare how the outsource vendor is performing it compared with your own employees. If you cannot measure the performance of a business process then you cannot measure how the outsource vendor is performing it and you cannot get the true value of outsourcing that business process. Professor Thomas H. Davenport, in Harvard Business Review explains the importance of business process standard s and performance in BPO projects.

By asking these questions, small business owners can short list the potential candidate of business processes that are suitable for outsourcing. At the end of this step, you cannot eliminate the business processes that are not suitable for outsourcing. You need to go through other two steps to identify business processes that are not suitable for outsourcing. For example, if a business process is complex, has many interfaces with other business processes and its efficiency cannot be measured, but gives small business owners maximum strategic value then it may be a potential candidate for outsourcing. In this case small business owners should come up with ways to break-down the complex process into manageable chunks and then consider outsourcing it.

Step 3
2.3. Location and Sourcing Type of Small Business BPO
This step will help the small business owners to identify the sourcing type and location in their outsource efforts. The sourcing type and location goes together and both give the small business owners different choices for outsourcing their business processes. There are two types of sourcing available, insourcing and outsourcing. Most of the time big corporations use insourcing by using their own subsidiaries to do business processes. However, for small businesses outsourcing is the best option. Within outsourcing, identifying the location is an integral part and small business owners must consider several business factors in their decision process.

2.3.1. Location Selection criteria
To determine the location where the business process has to be performed, small businesses should assemble data on a number of business factors:
Cost: First, identify what type of rate structure is appropriate to pay to the outsource vendor. The rate can be, fixed rate (either hourly or monthly) or variable rate based on factors like number of transactions processed, number of new customers acquired, etc. Small businesses must also need to perform a detailed analysis to find out Fixed Cost VS Monthly Cost related to their business they will incur in the outsourcing initiatives.
Availability of Skills: Finding outsource vendors is easy for small businesses if they are outsourcing generic business processes like accounting, data entry, telemarketing etc. However, any KPO type outsourcing like financial analysis, insurance policy verification etc needs careful analysis in finding appropriate outsource vendors.
Environment: Small businesses must also consider the government regulations, time difference, and knowledge in English and business environment in selecting the location. For example, some business processes may not be suitable for offshore outsourcing and in this case, small businesses can consider onshore outsourcing or nearshore outsourcing. Timing difference, business, and political environment may not be favorable to outsource to certain countries and small businesses should avoid these locations.
Risks: Several outsourcing risks are associated with countries and small businesses should perform careful due diligence in assessing the pros and cons of it. Factors like political unrest, crime, terrorism, and IP protection laws have to be considered in assessing the risks of potential locations.
Perform analysis, and gather enough data for the above factors to compare various locations to outsource your business processes. During this process go back to previous two steps outlined in this BPO framework and shortlist the locations that suites your business and outsource needs.

2.3.2. Sourcing Type
Based on the location selection, small businesses have following three types of sourcing strategy to consider:

* Onshore Outsourcing
* Nearshore Outsourcing
* Offshore Outsourcong

Each has its own advantages and disadvantages, small businesses should collect enough data on sourcing types, vendor list and proceed to next step.

Step 4
2.4. Value of BPO for your Small Business
In this part of the BPO framework, small businesses identify the value proposition of outsourcing the business processes. Cost saving is the main reason for small businesses to use BPO. Apart from the cost savings, small businesses should evaluate the value of their BPO efforts to their company.
2.4.1. What is the value proposition of BPO?
Small businesses must clearly understand and identify the value proposition BPO brings to their company. Identifying the value proposition is a complex initiative, and it varies from business to business. In addition, the value of outsourcing is not easily quantifiable just like cost saving in outsourcing. Nevertheless small businesses must identify the value outsourcing brings to their business so they can achieve their long-term strategic goals.

Small businesses should go through previous three steps of this BPO framework to capture the value they get from the outsourcing their business processes. For example, the following is some of the value proposition big corporations have been looking for in their outsourced projects:

* Speed to market
* Profit Increase
* Gain Market Share
* Increased Customer Loyalty
* Increased Process Efficiency
* Improved Management Focus

Above list gives a sample of value factors and it is by no means a complete list, small businesses should come up with their own list based on their strategic business goals.

Once the value proposition is identified, next step is to perform BPO feasibility matrix analysis to find out ideal business processes for outsourcing that gives maximum value to the small businesses.

2.5. BPO Feasibility Decision Matrix
Small businesses can evaluate the best possible business processes for outsourcing by performing the decision matrix analysis for each step and finding the winner among all the business processes. In the decision matrix analysis, you identify the business factors; give weight for each business factor based on the importance of it for your small business. For example, if a business factor has high importance then it will get five as its weight, and the lowest will get one. Then based on your analysis for the business processes give rating value for each one of them. Now calculate the score for each process by multiplying the weight and the rating and put the value in the Score column. Finally add all the scores and put it in the total column.

2.5.1 Outsource Readiness Decision Matrix
List the business processes identified in Step1 as shown in Outsource Readiness Decision Matrix, for simplicity it shows only three business processes. Next list the business factors identified in Step 2 in the first column. Give weight for each one of the business factor based on the importance for the “business process readiness analysis”. For example, if you believe that execution is not important for you and anyone can perform the business process then give lowest weigh. By giving the lowest weight, you are making a decision that the execution business factor plays very less role in deciding the business process readiness. On the other hand, if the “Performance” of the business process is important for you and you want to measure it properly then give higher weight to it. Once you assign weight to each business factor, your next step is to identify individual rating for each business process under the business factor. For example, if the business process “Collecting checks” can be performed easily by an outsource vendor then give higher rating for it. On the other hand, if the performance can be measured easily for “Collecting Checks” then give lower rating for it. The final step in decision matrix analysis is identifying score for each business process. The score for the business process is identified by multiplying the rating and the weight.

Find the sum of all the scores for each business process and put it in the “Total” column. Now identify the business process that has the highest total and it is the winner among all the business processes. In our Outsource Readiness Decision Matrix example, Track Invoices is the winner.

2.5.2 Outsource Type Decision Matrix

2.6.3 Business Value Decision Matrix

Apply the same decision matrix analysis for the other two steps and identify the winner as shown in Outsource Type Decision Matrix and Value Decision Matrix examples. Based on the Outsource Type Decision Matrix and Value Decision Matrix examples “Track Invoices” is the winner. The decision matrix shown are only examples and in typical outsource decisions; you may be using several business factors in each step of this BPO framework.

The business factors presented in this framework under each step are examples only. Small business owners should use this framework as a reference model in coming up with their own business factors that are suitable for their small businesses.

2.6. Conclusion
This BPO framework is designed specifically for small businesses and it is easy to use across all industries. A small business owner can apply this BPO framework to all of the business processes in evaluating the outsource viability. All employees of small business can participate and contribute to the BPO framework and that gives collaborative decision-making in evaluating the outsource initiatives.

The small business BPO framework is easy to manage and administer. The simplicity of this BPO framework allows the small business employees to use it by themselves rather than rely on outside experts and consultants. Also small business employees are more likely to believe in the outsource efforts and the value that brings to the small business when they participate in outsource decisions.

Several other side benefits come with using the BPO framework; by using the steps explained in this framework business owners can document and understand various business processes that are being executed inside their company. As the small business personnel uses the framework they understand all the core and non-core business processes and gives them an opportunity to redesign it for maximum efficiency. Of course redesigning the business process is a separate initiative apart from outsourcing but this framework gives an opportunity for the small business employees to acknowledge the issues that exist in their business processes as they see the individual business processes and how it collaborates with all other business processes.

The small business BPO framework does not make the outsource feasibility analysis easy. However, it makes the entire outsource feasibility analysis manageable and facilitates the small business owner to make the right outsourcing decision with their employee participation from start to finish.

1. BPO Contract Negotiation
Any outsourcing project is a collaborative effort between the small business and the outsource vendor, the contract should be negotiated so that both parties can mutually benefit from the outsource engagement. For small businesses owner it will be a first opportunity to understand the outsource vendor’s management and their cultural fit after the pilot project phase. Small business owners should use this opportunity to identify how the outsource vendor’s management is willing or unwilling to accept the terms and conditions of the contract. Both parties should be willing to compromise in their terms and conditions and make it as a win-win outcome based on flexible terms that can be renegotiated overtime.

Small business owners should evaluate their short-term and long-term goals for the project and make sure those are addressed in the outsource contract. Since the outsource vendor’s team is in different country and probably in different time zone, a trust should be established between the small business and outsource vendor’s employees. The outsource contract along cannot guarantee the trust and collaborative effort between two teams nevertheless it should be addressed in the outsource contract. Every small business has its own needs for their BPO projects; it is not possible to have an outsource contract that is suitable for all the needs. However there are certain terms and conditions an outsource contract must have and we’ll explore it in the next section.

2. Common BPO Terms & Conditions
Following are some the outsource terms that should be included in any outsource contract, it is not a complete list, but gives an idea for the small business owners what to look for in their outsource agreement.

2.1. Statement of Work (SOW)
SOW describes what the outsource vendor will do in a BPO project and it is the most important part of the outsource contract. As a small business owner you need to make sure that you clearly describe the responsibilities of the outsource vendor’s team and your own team in executing the project. Rules must be added for the change processes in the project with the clear definitions on “what makes up the change?” You need to specify the changes are due to technology or changes in your business conditions. Attrition rate in BPO industry is high and this is specifically a major issue for the Indian based outsource vendors. Because of attrition rate your outsource vendor may change their team members working in your project. You need to specify what steps outsource vendor will take to ensure the team members continuity and how the responsibilities will be transferred in case if they leave the company. Sometimes it is desirable to specify what not the responsibilities of the outsource vendor are. Your pilot project with your outsource vendor gives you valuable details and you should use it as a reference in preparing the statement of work.

2.2. Pricing
Small business owners can negotiate the pricing in several different ways like variable pricing, fixed pricing, unit pricing, volume of transactions, hourly, and monthly. The choice of fee structure for an outsource contract should be crafted based on the results produced by the outsource vendor according to the “Statement of Work”. Both the small business owner and the outsource vendor must consider unexpected future events in crafting the price structure. Typically for small business owners hourly rate or a monthly rate for fixed number of transactions would be sufficient and if needed can be reworked as the demand increases for the BPO work. This is called as “pay-as-you-go” pricing model. But for some BPO projects it may not be possible to measure the work in advance or the work varies regularly. In this case “pay-as-you-go” model may not work and the small business owners need to come up with other pricing models described earlier.

2.3. Service Level Agreement (SLA)
In SLA you describe the detailed performance the outsource vendor needs to provide in the BPO project and what are the remedies if the vendor fails to meet the specified performance objectives. A well drafted SLA will align the interest of both parties in the outsource relationship. As a business owner you need to understand the outsourcing process in great detail and agree on the ways the finished services will be measured and the results for the failure to meet them. The SLA should also address who is responsible to measure it and how often it should be measured. Typically SLA is measured by both the small business and outsource vendor employees together. The time period between the measurements should be long enough to have meaningful results.

The cornerstone of SLA is to define the outsourced services and key performance indicators (KPI) to measure it. Some examples of KPI are quality, accuracy, reliability, capacity, time, customer satisfaction. For example in accounting outsourcing it could be number checks processed every day and how accurately it tallies with the amount in the bank.
Like statement of work and price the SLA can change over time because of changes in technologies, business processes, regulatory requirements, and volume of outsourced work. Both the small business owner and the outsource vendor should understand and agree the SLA changes and those should be put in the contract.

2.4. Intellectual Property in Outsource Contract
Though Intellectual Property (IP) is a must in KPO, in BPO projects depending on the business process, IP protection may be necessary in the outsource contract. IP laws varies around the world, several countries are signatories of the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). But the implementation and interpretation of the laws varies from country to country. If your business needs the IP protection then you need to consult legal help to draft your contract.
Countries like India have strong IP protection laws that have been used by several outsourcing firms in sending work to India. But as a small business owner you must perform proper due diligence before considering a country to outsource the business processes. It is necessary to specify measures to be taken by the outsource vendor to continuously protect and monitor work performed by the outsource vendor’s employees. It is also necessary to provide proper clauses in the outsource contract to notify you the business owner in case of any breach in your Intellectual Property Rights.

2.5. Outsource Governance
Governance in outsource contract describes how the outsource process is administered and monitored to serve the interest of small business owner and the outsource vendor. The governance section of the outsource contract helps the small business owner and the outsource vendor to mange the changes in scope of work, SLAs, and Pricing. Monitoring outsource contract will be a challenging task for the small business owner, it is better to identify employees from their own company and the outsource vendor to be responsible for it. For simple outsourcing tasks governance may not be necessary. For large and complex outsourcing projects, governance of the contract helps both the small business owner and the outsource vendor to manage the overall contract continuously throughout the lifetime of the outsource relationship.

2.6. Outsource Contract Termination
This part of the outsource contract focuses on various reasons under which the small business owner can terminate the outsourcing relationship. A small business owner can terminate the outsourcing contract either for “no reason” or for a “specific reason”. It is desirable for the small business owner to have the flexibility to terminate the contract without giving specific reason to the outsource vendor. Of course in this case the small business owner will pay a nominal fee to the outsource vendor with the contract termination. Generally the outsource service provider is not allowed to terminate the contract for “no reason” just like the small business owner. But sometimes the outsource provider may insist on termination on “no reason”, the termination fee from the outsource vendor to the small business owner should be drafted in the outsource contract.

The outsource contract can be terminated by the small business owner for a “specific reason” and all the reasons like Material Breach, Nonmaterial Breach, Anticipatory breach, and fundamental breach should be specified in the contract. Both the small business owner and the outsource vendor must use the SLA and Statement of Work to specify parameters that constitutes a breach of the agreement.

Though it may not be necessary for small business outsourcing, sometimes it may be necessary to tie the termination with the retention of key outsource vendor’s employees working in the outsourced project. These are important measuring levels for the outsource vendor to provide quality work in the outsourced project. High turnover levels in outsource vendor’s organization shows the outsource vendor has problems in their managements and that may place the small business owner at risk in getting quality and timely service from the outsource vendor.

Finally, termination for “Specific Cause” should include changes in management of both the small business and the outsource vendor. Change control in outsource vendor’s company may result in changes in the management team in which the small business owner placed the trust in establishing the outsourcing relationship. The new management may provide the same services to competitor of the small business and that may create Intellectual Property risks for the small business owner. Management changes in the small business may also create problems in the outsource relationship. The new management in the small business may not want to outsource or they may not be comfortable with the current outsource vendor, or the small business may not like to do business with the new management. For these reasons the outsource vendor will have the right to terminate the outsourcing contract. In either case contract termination is an important clause in the outsource contract and both parties must understand agree on all the possible reasons for the termination.

2.7. Force Majeure
Just like any other general contracts outsourcing contracts should have clauses for force majeure that excludes the outsource service provider from providing services due to natural disasters like fire, flood, and earthquake. However the small business owner should have a clause in the contract that links the force majeure with disaster recovery plans and business continuity plans. Sometimes outsource vendor may put war and terrorism may in force majeure, here again the small business owner should make sure it is linked with the business continuity. Force majeure is applicable to small business owners also, they should list all the reasons under which they can’t continue to outsource the work.

2.8. Outsource Transition
If the outsource relationship fails and if either the small business owner or the outsource vendor decided to terminate the contract then the small business owner will bring back the outsourced process or find a new outsource vendor. In either situation detailed transition plan of the business process must be clearly mentioned in the outsource contract. Small business owners should go through the pilot project phase to identify steps and tasks that are carried out in sending the work to the outsource vendor, use that as basis to draft the transition plan to bring back the work from the outsource vendor. Small business owners must identify all the documents, procedures, tools and software created by the outsource vendor, those should be listed in the transition section of the outsource contract. Also specify a general clause that entitles you to be the owner of the work produced by the outsource vendor employees and they need to help in the transition process. Consider any time a termination of the outsource contract will make the outsource vendor unhappy and it may not be their best interest to help you in the transition process. So it is better to outline a detailed plan to be followed by the outsource vendor in the transition process.

2.9. Outsource Dispute Resolution
Outsourcing contract is a living document which needs to be referred by both the small business owner and the outsource vendor any time if there are serious issues arises in the outsource relationship. At that time the dispute resolution process starts with the governance and if it couldn’t be solved then the small business owner has to start the dispute resolutions process. Though it is not a good situation for both the parties, in the contract negotiation phase both parties should agree for an amenable dispute resolution process and those should be captured in the outsource contract. Dispute resolution may be started with binding arbitration. During contract negotiation if the parties agreed to use the arbitration process then the rules and procedures for the arbitration must be drafted in the outsourcing contract based on the arbitration rules set by International Chamber of Commerce. If the outsource vendor has an office in US then for US based small business owners can use the arbitration rules set by American Arbitration Association.

2.10. Outsource Regulatory Concerns
Depending on the nature of the business process that is outsourced small business owners must address the regulatory issues in the outsource contract. Suppose if your outsourcing involves health care information then your outsource contract should address the HIPAA rules and regulations which includes the steps and procedure outsource vendor should follow to satisfy HIPPA. These procedures include internal audit, incident reporting, and data protection policies must be drafted in the outsource contract. If the small business owner outsource financial related information then GLB Act should be specified in the outsource contract. The outsource vendor must implement a comprehensive outsource security infrastructure and those should be documented and it should be linked with governance and termination clauses of the outsource contract.

3. Conclusion
Developing an effective outsource contract is an important step for the small business owners to maintain a long relationship with the outsource vendor. Small business owners should not take this step easily and they should actively participate with the outsource vendor in the contract negotiation so both parties can understand and accept the conditions drafted in the contract. Both the small business owner and the outsource vendor can use this article as a reference to understand the outsource contract negotiation process. Not all the terms and conditions described in this article might be needed in all the small business outsource contracts. But as a small business owner you need to know all these details and pick what is needed for your outsourcing relationship with an outsource vendor. Finally this article gives an overview of small business outsource contracts and as always you should consult an attorney and get legal help in drafting and signing your outsource contract.

1. KPO vs. BPO
KPO is fundamentally different from BPO; in BPO mostly noncore business processes are outsourced to offshore locations. But in KPO core businesses processes are outsourced to offshore locations where highly educated professionals perform the KPO tasks. The fundamental reason for BPO is to save money. But in KPO it is not about saving money. Knowledge workers scarcity is the main reason for the companies offshoring KPO work. Typical KPO projects are performed by professionals found in different parts of the world where the work and responsibility is shared among all the workers. But in BPO within a business value chain one ore more steps are striped, sent to offshore locations, performed and integrated back into the business value chain. There is less involvement between the onshore and offshore teams. Most of the work is performed by the offshore team based on the predefined set of rules and instructions given by the organizations. On the other hand knowledge outsourcing projects are highly collaborative in nature between offshore and onshore teams. The knowledge process team members in offshore locations have strong technical, analytical skills; they use their judgment and subjective analysis skills in performing the knowledge work.

2. Characteristics of KPO projects
Companies are outsourcing several KPO projects to countries like India, China, and Russia, it varies in nature and scope and the result varies from company to company. Following are some of the general characteristics of the knowledge work that are been outsourced:
Business Processes are performed based on domain expertise, interpretation, and individual intellectual capabilities. There are no set rules on how to perform the tasks and professionals need to use their intuition and creativity in solving the problems on a day-to-day basis.
The responsibilities of solving a KPO problem lay in the organization and the KPO vendor; both parties collectively share the success or the failure of the projects.
Risks Identification and mitigation in KPO work is complex in nature, not like BPO work where automatic rules and technology will mitigate the risks. Individual professionals must use their technical and judgment capabilities in mitigating the risks at the right time.
KPO project management is complex and it is managed in global basis in which teams are located in different countries and mostly in different time zones. So Communication and coordination between the teams are utmost important for the success of the KPO projects.

2.1. Succeeding in KPO
Nature and type of knowledge work is complex and companies must consider several factors before outsourcing knowledge work. Following are some of the factors companies should pay close attention while deciding in their KPO efforts:

Process Fragmentation:Organizations must identify if a process can be easily sliced into smaller unit of works that can be transferred to offshore locations. If not it is impossible to offshore the knowledge work.
Global Project Management:Any type of KPO work needs global project management skills as the work is carried out in different countries and possibly in different time zones. Some type of knowledge work is not possible to manage globally and those types of projects should not be offshored.
Intellectual Property Rights (IPR):Several vertical industries like Equity Research, Pharmacy R&D, Software Product Development; Engineering R&D needs works that are protected by Intellectual Property Rights. Protecting IPR should be one of the key considerations for companies to consider the countries before outsourcing knowledge work.
Legal Issues:Some knowledge work like Medicine, Law, and Accounting limits the scope of services that can be outsourced to other countries. The litigation environment that surrounds these works further makes it difficult to perform the work in other countries. This type of knowledge work may not suitable for outsourcing to other countries.
Skills Availability: For BPO work, availability of skills in different countries can be easily identifiable based on the number of graduates and English speaking population. But for knowledge work it is not the general skills that are needed to perform the job but the availability of certain domain expertise that is needed to successfully complete the knowledge work. Companies should pay close attention in choosing the countries before sending the knowledge

3. KPO Opportunities
The KPO market is still in its early stage and it is poised to grow rapidly in the next couple of years. Following is not the complete list; these are the type of KPO work that has been currently outsourced by the companies to offshore locations.

3.1. Financial Analysis & Equity Research: More than 60% of KPO work that is being outsourced falls in this category. Most of the KPO work is going to India which has large number of graduates with MBA and CA degrees. With their degrees and strong foundation in Mathematics and Statistics have skills to perform KPO work that are listed in this category. Companies like Lehman Brothers, ABN Amro, and JP Morgan have captive centers in India to do financial BPO work.
Following are some of the tasks that are being outsourced in this category:

* Corporate Budgetary & Decision Support
* Corporate Financial Modeling
* Credit Risk Analysis
* Company Valuation
* Tracking of Stock Market Research and Analysis

3.2. Market Research & Business Intelligence: With global competition, increases in wage and production cost organizations are realizing the market research is an integral part or the success of their business.
Following are some the tasks that are being outsourced in this category:

* Research Report preparation for various markets
* Data mining and data processing analysis
* Customer sensitivity and pricing analysis

3.3. Engineering Research & Development: Several companies like Boeing, Airbus, and Caterpillar, Intel, Texas Instruments have setup captive centers in India and have been outsourcing engineering and research work.
Following are some the tasks that are outsourced:

* Very Large Scale Integration (VLSI) Design
* Chip Design and Development
* Automobile Design
* Aircraft model prototype design and development

3.4. Pharmacy R&D: More than $40 billion are spent on new Drug research and development, pharma companies are having tough time in finding quality people to speed-up their research and development. Generally it takes about 14 years for a new drug to come to market, the drug companies are in constant pressure to cut down their time to market. Because of this drug companies are now considering offshoring their drug research and development to countries like India and China. These countries offer unique advantage to western drug companies in clinical studies with their vast pool of diverse and multicultural patients to carry out the work successfully. Following are some the tasks that have been outsourced in this category:

* Clinical Trial Management
* Clinical Regulatory Support
* Drug Discovery & Chemical Research
* Electrocardiogram (ECG) Interpretation Services

3.5. Animation Design & Development: Animation outsourcing is in its early stage, companies in India, China, Korea and Philippines are started doing animation work to US based companies. The cost of one hour of animation work in US is around $250K and in other countries it is $60K – 100K. Because of very steep early setup costs not many companies have setup Animation Studios in other countries. Internal growth of animation industry because of TV Networks in countries like India will change this trend. Indian based Companies like Toonz Animation India and Pentamedia Graphics are slowly targeting US based animation industry to get animation work.
These companies are involved in following types of activities:

* 2D Animation
* 3D Animation
* Stop Motion

3.6. Legal Process Outsourcing (LPO): Legal Process Outsourcing is also in its early stage of adoption. India’s jurisdiction has similarities with US and UK; naturally India is leading in LPO. Companies like Oracle, Sun, and Cisco have been outsourcing Patent Research work to India.
Following are some of the works that are being outsourced to India:

* Legal and IP Research
* Reviewing Litigation Documents
Contract Drafting to specific vertical industries

4. Current KPO Market Trends
Current BPO market has been growing by 30-40% for the past three years. It has been predicted the BPO industry will see a double-digit growth for the foreseeable future. Research organizations like IDC and Gartner are predicting similar growth to the KPO market. Many experts estimate the KPO market will reach $15-$20 billion by the year 2010 and India will get a huge share of this market.

KPO Market segment graph

At present most of the KPO work is carried out through captive center operations and pure-play KOP firms. Several companies like Oracle, IBM, Intel, Ford, Motorola, West/Thomson, American Express, Citibank, Lehman Brothers, JP Morgan and General Motors have setup their own captive centers in India and have been sending Knowledge work. Pure-play KPO firms like Evalueserve, NipunaServices, Atlas Legal Research, Office Tiger, WNS Global Services, and Mphasis (bough by EDS) are also doing various KPO type work. Most of the pure-play KPO firms are traditional BPO companies and due the current market demand slowly started offering KPO type of services as well.

4.1. KPO Market Segment
Organizations are finding new ways to offshore KPO projects on regular basis; the graph shows the current vertical market segment for KPO related projects that are being outsourced to India, China, and Philippians. Currently bulk of the KPO work is carried out in the Accounting and Financial space. As the KPO market matures soon there will be a significant growth in Pharmacy and Business Intelligence type works.

5. Conclusion
Though there is significant growth in the KPO market specifically for India in the coming years, there are several issues that may slow the growth of the KPO market.

5.1. KPO Employee Scarcity: Research firm Gartner predicts India’s BPO market will shrink in the coming years because of its infrastructure problems, employee attrition rate and the decline in finding quality personnel. Among this employee attrition is the biggest problem Indian based BPO companies are facing now. However for KPO industry employee attrition may not be a problem as it happens mostly in lower wage BPO jobs not in higher wage KPO jobs. The major problem for the KPO industry is finding qualified professionals. This issue may reduce the growth of KPO market.
5.2. Scaling KPO Operation: One of the main reasons for the success of BPO companies is their scalability factor. In the early 2000 when BPO was started becoming popular, demand for the BPO work increased rapidly. Indian based BPO providers ramped up their employee force with the demand and successfully started serving more and more customers. In KPO it may not be possible for the Indian companies to scale their operations because of employee scarcity. This may significantly lower the growth targets for the KPO market.
5.3. Nature of KPO Services: Most of the BPO projects are lower value tasks and organizations made the decision easily to offshore the tasks, most of the decisions are made by senior mangers and business units. But KPO projects are complex in nature and all most all the projects need the approval from the C-level executives, so it is taking longer for KPO projects to get approval from the upper level management. Because of this pure play KPO players are finding tough time closing the deals which may slow the KPO market growth.

Though there are several challenges facing the KOP market, overall there is a great potential for the growth of KPO market and the organizations are showing strong interest in outsourcing higher value business processes to countries like India, China, and Philippians. The structure of KPO industry and the management of KPO projects are different from the BPO industry. So it is not possible to predict the KPO industry based on BPO industry. Among the countries India with its large base of qualified knowledge professionals will gain significant KPO market compared with other emerging countries like China, Philippians, Russia, and Korea.

BPO contract between the client and vendor is simple, have a specific contract written for the BPO tasks and BPO vendor gets a flat fee for their work. In some cases BPO vendors will be paid based on their performance. The BPO contracts are simple and easy to mange and monitor. On the other hand the BTO contracts are fundamentally different and it is complex in nature. Both BTO vendor and the client must have a mutual trust between each other and often they need to engage in partnerships to share the risks and rewards.

Often time BPO vendors have generic skills in managing the entire business processes or some functions within the overall business process. BTO vendors will have deep vertical business expertise in particular businesses like Accounting, Legal, and HR. Even within Accounting they will have strong expertise in particular industry like retail, manufacturing, and hospitality. By working with several vertical industries BTO vendors will bring in industry best practices and procedures to their client organizations. BTO vendors have the vision for changing business landscape and work closely with their clients to change the entire business process according to the events like external competition, government policy changes and business mergers.

Cost saving is the main reason companies opt for BPO relationships and most of the time senior managers or Vice presidents can directly engage with the BPO vendors to form the relationship. If the BPO vendor doesn’t provide the necessary cost savings, clients can cancel the contract. BTO relationships are long-term and often formed to increase shareholder values by creating new business ventures and partnerships. The BTO relationship is established with strong commitment from the C-level executives in the client company with the BTO vendor.

Risks of BTO
In any BTO engagements there are several risks exist for both the client and the BTO vendor. The BTO vendor needs to get full control of the business process so they can adjust and change it as needed. For the client it may not be easy to give full ownership of the business process to the BTO vendor because of internal structure of the company. The IT systems and technologies of a company have to be properly aligned with their business processes. The client has to give control to their IT systems and the corresponding business processes to the BTO vendor to succeed in their efforts. As the part of their business transformation strategy BTO vendors may change the client’s IT systems and this will be a significant risk to the client employees in managing their regular day today business operations.

For the client companies one of the greatest risks of BTO is the intellectual capital of their business processes that distinguishes it from their competitors. For example if a BTO vendor provides business process transformation services to an electronic retailer say Best Buy and to generic retailer say Target, how the BTO vendor will maintain the intellectual capital for these two clients? It is a known fact that both Target and Best Buy compete for customers and each has its own business strategies in attracting and retaining the customers. In this case how the BTO vendors will mange the relationship without compromising the trade secretes of Target and Best Buy?

There are other challenges in BTO adoption, the policies and pricing models are complex and in most part it is untested. Managing BTO deals are complex and client companies must have proper tools and systems to adequately manage and measure the relationship.

Rewards of BTO
The key advantage of BTO is it enables to transform Client Company’s business with industry best practices so it can compete efficiently in the global marketplace. BTO also helps companies to quickly adopt the changes in the market and this will be the key for companies to survive and thrive in an era of volatile market and shifting customer demands and priorities.

Rapid technology changes only add more challenges to the companies in adopting and integrating them with their own IT systems and to their business partner’s IT services. To a certain extent BTO reduces the challenges and risks associated with the new technologies. For example BTO vendors like IBM and HP can manage entire IT infrastructure with business processes associated with them, in this BTO engagements companies can make the BTO vendors accountable to all the technology and business changes.

In the highly competitive global marketplace, BTO helps companies to focus on their core competency and outsource rest of the functions to the BTO vendors. By focusing on their primary core competency, companies can make the BTO vendor accountable for all the auxiliary but critical business processes required for the core business processes.

Future of BTO
Unlike Business Process Outsourcing (BPO), Business Transformation Outsourcing (BTO) does not have a standard structure yet; each deal is unique in nature and there are significant risks associated with the BTO. But this does not stop companies in signing BTO contracts with major consulting firms like IBM, Accenture, EDS and BearingPoint. The big three Indian offshore consulting companies TCS, Infosys, and Wipro are also started offering BTO solutions.

Need for higher value accounting outsourcing
The finance and accounting function is changing worldwide, today’s business globalization and rapid changes in technologies made the CFO role more important to their organizations. They’re in constant pressure to demonstrate their value to the businesses. CFO office is expected to involve in defining short-term and long-term strategic direction and fostering long-term growth to its shareholders. Because of constant pressure from their upper level management CFOs are started looking their offshore vendors to provide core financial and accounting business services for them. CFOs are started looking into offshore vendors not just to save cost but to add strategic business value by working with their internal account team members.

Companies in US and UK are facing difficult time finding qualified accountants and financial research analysts locally for their strategic accounting and financial projects. It becomes the survival for them to use qualified higher-end accounting professionals in offshore locations using their own captive centers or through offshore vendors.

Finance & Accounting value chain
Offshore vendors specifically based in India have been gaining vertical domain expertise on complex financial and accounting business processes by working with several organizations. They’ve are slowly moving the accounting outsource value chain by providing services that adds strategic value to their clients. For the F&A offshore vendors migrating to higher-end services has been gradual. This is because of several reasons like data confidentiality, regulatory and strict quality requirements expected from their clients. The financial and accounting outsource value chain shows some the lower-value and higher-value accounting services that are offshored to India.

Delivery higher value F&A services require accounting business process insight, ability to analyze the issues and industry dynamics to deliver the solutions. Following are some of the key characteristics of higher-value F&A processes Indian based offshore vendors are slowly learning:

• It is a people collaborative intensive task that requires deep vertical accounting and financial expertise and analysis skills, often the success of the tasks depends on judgment rather than specific accounting rules and procedures.
• Higher-value accounting processes are complex, requiring many steps, performed through rigorous accounting and financial analysis and reasoning processes.
• Only people with advanced degrees like CA, MBA, and PhD can perform higher value F&A tasks. These people work closely with their onshore team to provide the services.
• Both the offshore vendors and their clients need to follow complex F&A process and project management tools and technologies to oversee and measure the progress of the projects. It is not like low value accounting tasks that can be performed at remote offshore locations with less or no interaction between the client and offshore teams.

Success Factors in Offshroing Higher-value F&A Processes
As companies decide which of their higher-value F&A processes to be performed in offshore locations, many factors will influence their success:

Accounting process segmentation
Higher-value financial and accounting processes can be divided into smaller segments that can be performed and managed in multiple offshore, inshore, and nearshore locations. Companies should use complex project management tools and technologies to distribute the work and integrate the finished work.

Legal & Regulatory Issues
Before outsourcing higher value F&A processes companies must understand the legal and regulatory related issues in their home countries and in countries where the work will be performed. As the work is distributed among different countries, companies must pay close attention to make sure all their offshore partners follow US GAAP, International Accounting Standards (IAS) SEC, and Sarbanes-Oxley requirements.

Offshore Intellectual Property Rights (IPR)
All the higher value financial and accounting businesses process are critical and proprietary to their organizations. Organizations must consider IPR in all of their higher value F&A offshore engagements. Even if the offshore contracts are governed by US laws, local laws in the offshore locations may complicate matters. For example, Indian IPR law recognizes the concept of “work made for hire” and the assignment of IPR, but it is significantly different from US IPR laws. So organizations must understand all the IPR legal issues in the countries where the work is performed.

Availability of Skills
Companies should carefully identify the different skills available in different locations and distribute the work accordingly.

Summary
Higher value F&A offshoring is still in its early stage but it is expected to grow because of the need for increased productivity and to use the best F&A talent available in the world. Offshore F&A providers are slowly claiming the F&A value chain in their service offerings to their clients and they are significantly alerting their service delivery model to target higher value F&A projects. Offshoring higher value F&A processes posses significant risks as well as benefits to companies. CFOs need to perform necessary due diligence before offshoring their higher value F&A processes.

As the accounting outsource providers gain accounting business knowledge for a particular vertical industry, now they are started marketing their services to other small businesses on that business domain. For example accountings outsource provider gained significant knowledge on various real estate accounts and financial transactions started marketing to other real estate companies. As they gain accounting process experience naturally they are finding their own niche in vertical business domains to sell their services.

Financial Accounting Integration
Financial accounting business processes integration is another important trend in small business accounting outsourcing started happening. Most of the small businesses have been using more than one software package to mange their financial and other business data:

* Accounting software like QuickBooks, Sage and Netsuite
* ERP systems like Epicor and IQMS
* CRM software like Microsoft Dynamics CRM and Onyx CRM software

Small businesses use many other homegrown software tools and technologies to manage their day-to-day operations. All these software are running in silos, and small business owners have difficult time in consolidating all their business data. They need the integrated view of all the data to produce various reports and to set strategic directions for their company. They’ve two choices to integrate all their financial and account data:

* Upgrade from different software technologies to use enterprise software like SAP or Oracle to mange all their financial data and business transactions.
* Develop custom interfaces using in-house IT team to integrate all their software systems
* Outsource their financial and business data management

Among the three choices, outsourcing is the cost-effective choice for the small businesses. Small businesses are already outsourcing their general bookkeeping, accounts payable, and accounts receivable tasks to outsource vendors. It is logical step to outsource integrating various accounting software systems to a qualified outsource vendor.

Need for Financial Accounting Integration in Small businesses
For decades, most of the small businesses have been developed stand-alone accounting applications to automate specific accounting and financial tasks. This type of stand-alone applications provide benefits only to specific departments within a small business but fails to give a complete picture of their business to the management. For example, the financial transactions in the accounting software package will give the detailed picture of the financial status of the company. But often small businesses need to analyze trends to see where improvements can be made in customer service, sales, and payments. Most of the small businesses are manually mining the data from different software sources to produce the reports for the management.

Following are some of common problems you see in small businesses:

* Change of customer data in CRM but it doesn’t show up in their accounting software
* When orders are taken by the sales department it has to be reentered in the accounting software
* Salespeople couldn’t see how many orders are already shipped to the customer and how many of them are already paid by the customers.

Now this is where the technology savvy accounting outsource providers can step in to help the small businesses in achieving their goals. The accountings outsource providers write custom interfaces to retrieve the data from different sources to produce various financial reports needed for the small business management’s team. Developing custom interfaces may not be cost effective for some small businesses. In this case accounting outsource providers with offshore presence can use their offshore locations to manually key the data from one software to other. This helps the small businesses in achieving their business goals without costly software upgrade or in-house IT team.

Outsourcing in CPA Firms
CPA firms serving small businesses have been outsourcing tax and other general accounting services for some time. Now these CPA firms are considering outsource providers for other higher-value accounting services. CPA firms can leverage their relationship with small businesses and help them in outsourcing their higher value accounting projects. For example projects like real-time accounts integration needs process knowledge specific to a small business, IT skills, and accounting process standardization skills. CPA firms may not have all the skills needed for the real-time account integration projects. They can act as a liaison between the small business owners and outsource providers in outsourcing real-time account integration projects.

CPA firms that partner with outsource providers gain a competitive advantage over those that don’t. By aligning with an accounting outsource provider, an accounting firm can virtually tap into several different small business markets without making a heavy investment of time and capital. This means the CPA firm minimizes its risk while maximizing its potential for significant market gain. Currently many small CPA firms are not embracing these types of projects for their small business customers, but this trend is happing in several big accounting firms. As the need increases for accounting integration projects in small businesses, more small business focused CPA firms will start partnering with accounting outsource providers.

Summary
While cost saving is the major criteria in all the financial and accounting outsourcing deals, other business benefits like accounting process efficiency and innovation can be achieved from the outsource vendors. Accounting outsource providers are highly motivated to drive down unit cost and improve process innovation through technology and accounting process standardization. Small business outsource buyers already started using their outsource vendors for various higher-value accounting projects. Both small business owners and the accounting outsource providers are seeing technology as the key enabler in accounting process innovation beyond tradition cost reduction. As the small business accounting outsource market matures, more CPA firms and small businesses will be use the accounting outsource providers for all their higher-end accounting outsource needs.