Knowledge Process Offshoring (KPO)

"…any job that can be delivered over a wire will be offshored …"

Source: Nandan Nilekani, CEO Infosys, quoted in "The Outsourcing Debate: A Tale of Two Cities, Who Loses and Who Gains from U.S. Jobs Moving Overseas?" by Kerry A. Dolan and Robyn Meredith in www.Forbes.com on March 30, 2004.

This prediction is high on the agenda for many manufacturing and engineering companies. Having accepted that Business Process Outsourcing (BPO) makes strategic sense, the financial pressure to make use of low cost regions is inevitable. Increasingly, companies are overcoming quality, flexibility and responsiveness issues that can arise in remote operations. This track record is the basis for the next step - from Business Process to Knowledge Process.

So, just what is this escaped genie called KPO?

KPO is not just high value BPO. KPO describes a state of affairs where business knowledge, creativity and intrinsic domain expertise are mandatory to fulfil business processes such as research, design and engineering, without regard to the location where the processes will be performed. BPO requires business process expertise, KPO requires domain knowledge expertise.

Using an example from the Process Manufacturing industry, the creation and maintenance of Piping & Instrumentation Diagrams, which show connections and relationships between process units in manufacturing plants, is considered a high value task which requires technical and analytical skills in conjunction with engineering judgement. These creative tasks are generally performed within the environs of an Engineering, Procurement and Construction (EPC) company. Today EPC companies that previously performed these tasks exclusively in Europe and the USA claim 40 to 70 per cent cost savings by offshoring the work to India.

The main business drivers for offshoring high value engineering tasks are couched in terms such as competitiveness, time-to-market and productivity. Are these terms simply another way of saying the cheapest possible labour? Where lies the right balance of job protection, environmental protection, intellectual property protection, innovation and thought leadership?

Changes over the last 15 years

Before 1991 those of us working for Digital Equipment Corporation had to pass an annual examination to illustrate our understanding of the Comecon (Council for Mutual Economic Assistance) regulations before we could qualify for a pay rise. The understanding was based on ensuring that unauthorised computer equipment, database products and knowledge could not find their way to the old Eastern Bloc to be used 'against' the West. Effectively it was a prohibition order on the sale or transfer of technology to Russia, China, et al, at any price. Later, a free-market approach to trading was adopted and, in January 1991, it was agreed that Comecon should be disbanded.

In the ensuing fifteen years, there have been many changes. For example, consider the way Boeing Corporation has developed its global supply network. Craig Johnstone, Boeing International Relations vice president for Europe, when discussing U.S.-based multinational companies looking at labour or production costs, said:

"Clearly, American companies that do not engage in efforts to find the lowest-cost, highest-quality producers will be at a competitive disadvantage. In some cases, it's job creation overseas rather than moving jobs overseas. Sometimes, your offshoring gives you the opportunity not to move U.S. jobs overseas, but to keep U.S. jobs. That tends to be the rule rather than the exception. It may not be a legal requirement, but it helps to get the job done. It's also important to be able to access lower costs that may be found in non-U.S. countries. You will maintain a core of jobs in your company and hence, in the United States. If you have products at uncompetitive prices, no one has a job."

There are now over 3,500 Boeing airplanes, nearly one third of the Boeing world fleet, that include major parts and assemblies built by China. Over the last 15 years, (since the cessation of Comecon?) teams of Boeing manufacturing, quality, tooling, engineering and planning experts in China have provided on-site training for building Boeing parts and assemblies.

Boeing is a leading provider of commercial jetliners, military equipment and aircraft to the Japanese Defense Agency, and a significant customer of, and partner with, the Japanese aerospace industry. Mitsubishi Heavy Industries (MHI), Kawasaki Heavy Industries (KHI) and Fuji Heavy Industries (FHI) participated in developing the 767 supplying fuselage panels, aerodynamic fairings, landing-gear doors and inspar ribs, which are equal to approximately 15 percent of the value of the 767 airframe. MHI, KHI, and FHI are also program partners on the 777, participating in designing, manufacturing and testing of portions of the 777 airframe structure and now supply about 20 percent of airframe. MHI, KHI, and FHI are also program partners on the 787 Dreamliner and will supply about 35 percent of airframe.

Boeing is currently undertaking Computational Fluid Dynamics (CFD) work in Russia and IT development work is being carried out in India.

The message seems to be that it's good to be in offshoring mode.

Meanwhile, in the auto industry …

The Wall Street Journal of December 6, 2005 carried an article entitled 'A Portrait of My Industry' in which the Chairman and CEO of the General Motors Corporation, Rick Wagoner said:

"There are those who ask if manufacturing is still relevant for America. My view: You bet it is! Manufacturing generates two-thirds of America's R&D investment, accounts for three-fourths of our exports, and creates about 15 million American jobs. And the auto industry is a big part of that, accounting for 11% of American manufacturing, and nearly 4% of U.S. GDP. Together, GM, Ford and Daimler-Chrysler invest more than $16 billion in research and development every year - more than any other U.S. industry. And GM, alone, supports more than one million American jobs."

The whole article, from which this quote is taken, related to the news that GM has lost a lot of money in 2005 and plans to cease production at 12 North American manufacturing facilities, eliminate 30,000 jobs and trim $1 billion in net material costs in 2006. Reasons suggested for this sorry state of affairs included increasing health-care and raw material costs, law suit abuse, and international trading practices, especially in relation to exchange rates.

The very next day we read headlines that Ford is to cut up to 30,000 jobs and close at least 10 manufacturing plants by 2011.

The message seems to be that keeping jobs in the USA has cost the auto industry dear.

Do we understand the side-effects?

What is not clear is the effect of moving design and engineering disciplines to countries with a lower cost base and incidentally, with a high output of engineering graduates. Traditionally, engineering managers came up through the ranks and understood the complete company engineering value chain. They made friends along the way and many 'C' level engineering executives, when faced with an intricate engineering decision, still seek advice far lower down the corporate ladder, from their knowledgeable and trusted engineering colleagues.

These colleagues will have come from a common culture, with the same educational structure, and probably be in the same country, if not still in the same company complex. It is not so easy to discuss an esoteric engineering point with an engineer from a completely different culture, education and company understanding, however good an engineer he or she may be. In some cultures it may even be seen as a sign of weakness for managerial staff to discuss issues with those lower down the company hierarchy.

Will the C-level execs continue to make optimum decisions when their sources of advice are no longer available as their tasks have been moved offshore?

It is also unclear how the companies actively engaged in accelerating KPO make risk and contingency plans. Change is not always good and change is always a risk. Change must be viewed with 20/20 foresight and as much wisdom, received or otherwise, as is available. Business and knowledge processes that are proven and have served companies well are under threat. Before making changes, a severe and challenging change management assessment must be performed.

For example, questions to be answered could include; "following the discovery of a flaw in a product already in the market, would the cost, time to recall, and time to fix, be adversely affected?"

Of course, this forecasting is error-prone, even when the underlying assumptions on labour costs, tax regimes and local productivity are correct. And of course, these factors could be eclipsed by an unforeseen change in the political direction of the region concerned.

So what should we do?

Analysis of a business process - including a knowledge process - rarely identifies the side-effects of communication of know-how to other parts of the business. If this know-how is significant to the business, its loss may negate the cost advantages of offshoring. But this is supremely difficult to quantify!

Perhaps the gut-feel of the business leader and entrepreneur is the vital balance to the accountants' spreadsheets.

The single key question is whether the process being offshored contributes a differentiator of any sort to the business. If so, this is a signal that careful and critical review of the possible changes in the flow of know-how should be high on the agenda in the decision making process.

Ian Wallace

First appeared in the EAReport, January 2006.

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