2005 HSE EMBA

Analysis of Business Model: The Case of Knowledge Process Outsourcing

Kim, Kyeong Ho

Executive Master of Business Administration

Helsinki School of Economics

January 2007

2005 HSE EMBA

비즈니스비즈니스비즈니스비즈니스 모델모델모델모델 분석분석분석분석: 지식지식지식지식 프로세스프로세스프로세스프로세스 아웃소싱아웃소싱아웃소싱아웃소싱 사례를사례를사례를사례를 중심으로중심으로중심으로중심으로

김 경 호

Executive Master of Business Administration

Helsinki School of Economics

2007년 1월

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Executive Summary (English)

Business Process Outsourcing (hereafter called: BPO) is still a big opportunity in emerging countries

because it is cheaper and more efficient. But when the scale of work is large enough, it makes sense for

multinational corporations to set up captive centers in emerging country rather than outsource to smaller

country-owned companies. So, it will be difficult for the small company to break in. At this point, the

small country-owned companies should leverage their own specialized skills to capture a specialized

market. It is being called Knowledge Process Outsourcing (hereafter called: KPO) as opposed to BPO.

This practical research paper is to analyze an innovative business model for KPO business and to identify

what the value and the risk of the innovative KPO business model is in the outsourcing market.

The functions of the innovative business model are to identify a market segment, to articulate the

value proposition, to define the structure of the firm’s value chain, to describe the position of the firm

within the value network linking suppliers and customers, to specify the revenue generation mechanism

for the firm and estimate the cost structure and target margins of producing the offering, and to formulate

the competitive strategy.

Market Segment: Purchasing drivers and demand have been increased due to rapidly changing

external environment, and the non core process service area, which is especially required to have high

degree of difficulty, should be the main target segment, and the market segments have been evaluated as

attractive, but not as good as its good growth rate due to poor industry structural attractiveness. So, highly

specialized services area is the main market segment with the high growth rate, but KPO service

providers should have outstanding competitiveness to survive in the poor industry structure.

Value Proposition: The value innovation is stemmed from a combination of creating new specialized

services, raising service quality and knowledgeable staff, instead of reducing cost competitiveness

relatively and eliminating the effect of economies of scale. So, the main factors to differentiate would be

unique serviceability of specialized knowledge with more competitive cost.

Value Chain and Value Network: KPO service do not cover entire value chain of corporate activities,

instead KPO service providers only provide service value with marketing and sales activity based on their

human resources. The source of competitiveness of KPO service providers in the value chain is

serviceability based on their human resource management to deliver a value to customers.

Competitive Strategy: KPO service providers should maintain relative low cost at least than

customers, but do not have to make cost less than other BPO service providers because they pursue

different service segments. Also, they should offer the highly specialized knowledge services to gain

differentiation competitiveness. So, KPO service providers should have relative cost leadership than their

customers by utilizing highly educated, but low cost labor human resources from emerging countries. The

main competitive strategy for KPO service providers should be focusing strategy.

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Revenue Generation: The revenue will be generated by spending time and providing material based

on each engagement or transaction. The fixed cost of labor for human resources is the main part of the

cost structure and some variable cost additionally. For the cost structure and target margins, at least

double-digit total margin rate should be achieved. And the value for customer should be always greater

than the proposed price and the value created from insourcing by customer themselves. Also, the

proposed price should be less than the cost spent from customer owned process.

The innovative KPO business model is that the market segment is so attractive but highly

competitive, the value proposition is highly specialized knowledge services, the value chain and network

is focusing on service based on human resources, the competitive strategy is focusing strategy on the

highly specialized areas with differentiation as well as relatively lower cost, and the revenue generation is

providing the greater value for customer than the proposed price as well as value created by customer.

Nevertheless, each of business model elements is static and do not create value by themselves. So,

the business model should be viewed in a dynamic point of view. The values of the innovative KPO

business model are apparently created by flow of business ecosystem, which the market segment is based

on customer demand and value proposition is delivered to customer with the favorable circle of revenue

creation mechanism throughout the value chain and the value network under the differentiation and low

cost strategy.

The value of innovative KPO business model is apparent, yet the innovative KPO business model is

exposed to not only deep competition but also several risks during the services engagement. The risks of

the innovative KPO business model in the engagement are the operational risk and the structural risk, as

the engagement of KPO should take higher risk than that of BPO. Especially, high risk is stemmed from

the imprecise and subjective matters. Therefore, the key to mitigate the risk is the right measurement,

which can make KPO service more precise and objective by monitoring closely in real time and

conducting frequent process audits.

The values and the risks of the KPO business model should be both considered, and then the KPO

business model can be established to be innovative and sustainable. So, the critical success factors for the

innovative KPO business model are to maximize the values and to minimize the risks for each elements

of the business model. To maximize the values and to minimize the risks successfully, both should be

treated systemically using the right measurement framework. Hence, the next issues are to strengthen the

current evaluation model to be more precise and to apply the model in the real company. It will be the

foundation of making more successful and solid KPO business model in the future.

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Executive Summary (Korean)

비즈니스 프로세스 아웃소싱은 그 자체로서 보다 저렴하고 효율적이므로, 중국, 인도와 같은 신흥 산업국가에 있어서 여전히 큰 기회이다. 그러나, 비즈니스 프로세스 아웃소싱을 위해 콜 센터를 건립한다는 것은 비용이 많이 소요되고, 지불주기 또한 장기적이며, 치열한 경쟁과 낮은 이익률을 감수해야만 한다. 또한, 업무 범위가 충분히 클 경우 다국적 기업으로서는 소규모 현지 회사에 아웃소싱을 주기 보다는 신흥 산업국가에 자사 전용의 센터를 건립할 가능성이 보다 현실적일 것이다. 인도의 MarketRx사 회장은 비즈니스 프로세스 아웃소싱이 전문화된 시장이 아닌 일용품 시장으로 전락할 것이며, 독립적인 소규모 회사가 이 산업에 뛰어든다는 것은 매우 힘들 것이라도 예측했다. 이는 소규모 회사가 산업에 침투하기가 힘들며, 비즈니스 프로세스 아웃소싱 시장에서 대규모 기업집단과 경쟁할 가능성이 있다는 것이다. 따라서 소규모 현지 회사의 경우에는 특화된 시장을 잡기 위해 자신만의 특화된 기술을 활용해야 할 것이다. 이와 같은 특화된 시장에 대한, 예를 들어 원격 의료 서비스, 법률 서비스, 회계 서비스 등과 같은 전문 아웃소싱 서비스 비즈니스를 지식 프로세스 아웃소싱이라 부르며, 비즈니스 프로세스 아웃소싱과 대칭되는 개념이다. 현재 지식 프로세스 아웃소싱 시장에는 담당 전문가들에게 있어서 막대한 기회가 존재하는 것으로 알려져 있다. 전통적인 비즈니스 프로세스 아웃소싱과 인도 시장에서의 비즈니스 프로세스 아웃소싱의 동향 및 도전과제, 그리고 새로운 개념의 지식 프로세스 아웃소싱에 대해서는 부록에 보다 상세하게 기술되어 있다. 본질적으로 지식 프로세스 아웃소싱은 원가 경쟁력에 기반을 둔 비즈니스 프로세스 아웃소싱과 달리 차별화 전략 및 패러다임 전환의 시각에서 접근되어야 하며, 본 논문에서는 이와 같은 지식 프로세스 아웃소싱의 혁신적인 비즈니스 모델을 분석하고, 아웃소싱 시장에 있어서 혁신적인 비즈니스 모델의 가치와 위험 요소들을 도출하고자 한다. 이를 통해 향후 효율적인 지식 프로세스 아웃소싱 비즈니스 모델의 기초가 마련될 것이다. 본 논문에서는 비즈니스 모델 분석을 위해 혁신적인 비즈니스 모델의 정의에 기초하여 각 비즈니스 모델의 요소 별로 고객 분석, PEST 분석, 산업구조분석, 성장전략, 가치곡선, 가치사슬, 경쟁전략, 고객가치모형, 위험도 매트릭스와 같은 다양한 경영학적 모델을 연구 방법론으로서 적용하였다. 본 논문의 핵심 논제는 아웃소싱 시장에서의 혁신적인 지식 프로세스 아웃소싱 비즈니스 모델의 가치가 무엇인 지, 그리고 동시에 어떤 위험요소가 존재하는 지 검증하는 데 있다. 혁신적인 비즈니스 모델은 기업의 핵심 역량을 경제적 가치로 전환하기 위한 좋은 프레임워크이다. 이를 통해 기업이 기술 혁신 등으로부터 가치를 창조하고 추구하는 방법을 설명할 수 있다. 전통적인 비즈니스 프로세스 아웃소싱과 마찬가지로 지식 프로세스 아웃소싱의 가치 또한 혁신적인 정보기술의 발달로부터 창출되어 왔다. 일반적으로 기업은 세 가지 방법을 통해 기술에 대한 가치를 창출할 수 있는데, 첫 번

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째는 기술을 기존 시장에 적용하는 것이고, 두 번째는 타 기업에 기술 사용 라이센스를 제공하는 것이며, 세 번째는 신규 시장에서 기술을 이용하는 것이다. 이 중 혁신적인 지식 프로세스 아웃소싱 비즈니스 모델은 신규 시장에서 기술을 이용하여 가치를 창조한다. 비즈니스 모델에 대해서는 매우 다양한 정의 표현이 존재하며, 명확하게 정의되지 않은 상태에서 매우 흔하게 사용된다. 여러 다른 정의 표현 방법이 존재하지만, 충분하게 의미가 표현된 비즈니스 모델의 정의는 바로 각 요소 집합과 집합 간의 관계, 그리고 특정 기업의 비즈니스 로직을 잘 표현하는 개념적 도구라는 것이다. 이를 보다 구체적으로 정리하면, 비즈니스 모델의 기능은 목표가 되는 세분 시장을 정의하고, 기업의 가치 서비스를 명확히 하고, 기업의 가치 사슬 구조를 정의하고, 공급자 및 고객 간 가치 네트워크 내 기업의 위치를 기술하고, 기업의 비용 구조 및 목표 이익을 평가하고 수익 창출 메커니즘을 정의하고, 경쟁전략을 명확히 하는 데 있다. 따라서, 혁신적인 비즈니스 모델의 각 요소는 시장 세분화, 가치 서비스, 가치 사슬 및 가치 네트워크, 경쟁전략, 수익창출로 구성될 수 있다. 시장 세분화: 세분 시장 정의를 위해서 지식 프로세스 아웃소싱 서비스를 제공하는 기업은 지식 프로세스 아웃소싱 서비스에 대한 가치를 제공할 수 있는 고객 집단을 정의해야 한다. 또한, 고객 집단 정의를 위해서는 고객 분석과 고객의 욕구 변화를 이해해야 한다. 고객 분석의 출발점은 외부 거시 환경분석을 통한 고객의 행동을 이해하는 것이다.

PEST 분석은 정치적, 경제적, 사회적, 기술적 관점에서의 거시 환경을 분석하는 것이며, 이를 통해 지식 프로세스 아웃소싱 서비스에 대한 구매 요인과 전통적인 비즈니스 프로세스 아웃소싱에서의 충족되지 않은 욕구를 이해할 수 있다. 외부의 거시 환경 분석 결과, 기업 고객의 충족되지 않은 욕구는 인적자원 관리에서의 유연성 문제와 핵심 비즈니스로의 집중이며, 지식 프로세스 아웃소싱 서비스에 대한 구매 요인은 비용 절감 효과와 더불어 고도로 전문화된 지식 서비스에 대한 요구 증가로 귀결된다. 또한, 저 비용의 지식 노동자 수의 증가에 따른 시대적 변화의 흐름과 정보기술의 발달이 이를 촉진시켰다고 볼 수 있다. 고객 분석의 다음 단계는 세분화 변수 정의를 통한 시장 세분화이다. 주요 세분화 변수는 서비스의 난이도와 프로세스의 중요도이며, 각각의 변수에 대한 서비스 포지셔닝 맵을 통해 지식 프로세스 아웃소싱 서비스가 추구해야 할 세분시장이 결정될 수 있다. 시간이 지날수록 비즈니스 환경이 고도화 됨에 따라 저 난이도의 핵심 프로세스에 대한 요구는 점차 감소하고 있으며, 저 난이도의 비 핵심 프로세스는 저 비용의 비즈니스 프로세스 아웃소싱에 의해 처리되고 있다. 그리고, 글로벌 비즈니스 환경에서 지식이 비즈니스 성공의 핵심요소로서 자리잡게 됨에 따라 서비스의 난이도는 저 난이도에서 고 난이도로 옮겨가고 있으며, 이에 따라 고 난이도의 비 핵심 프로세스, 즉 고도로 전문화된 프로세스 영역에 대한 요구는 지속적으로 증가하고 있다. 따라서, 지식 프로세스 아웃소싱 서비스가 지향하는 세분 시장은 고 난이도의 비 핵심 프로세스 영역으로 분류될 수 있을 것이다. 고객 분석의 마지막 단계는 세분 시장의 매력도를 평가하는 것이다. 매력도를 평가하기 위한 변수로는 총 시장 규모, 현재 또는 잠재 시장 규모, 연 평균 성장률, 수익률, 산업의 경쟁구도, 기술적 선행요건, 환경에의 영향, 법률 환경 등 매우 다양하다. 세분 시장의 매력도

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평가를 위해서는 세 가지 조건이 검증되어야 하는데, 첫째는 세분 시장 규모 및 성장률, 둘째는 산업구조 분석을 통한 구조적 경쟁 구도, 셋째는 기술적 선행요건에 대한 내부 역량 분석이다. 첫째, 아웃소싱 전문 리서치 자료에 따르면 지식 프로세스 아웃소싱 서비스의 글로벌 시장 규모는 2003년 12억 달러에서 2010년 170억 달러로 예상되고 있으며 이를 연 평균 성장률로 환산하면 약 146퍼센트이며, 시장 전망은 매우 밝다고 할 수 있다. 특히 각 부문 별 세분 시장을 살펴보면, 데이터 처리 및 연구개발이 주요 부문이며 원격 교육 및 출판과 같은 틈새 세분 시장이 향후 성장 가능한 부문으로 예측된다. 그러나 둘째, 구조적 경쟁 요인 파악을 위한 산업구조 분석 결과, 낮은 진입 장벽 및 구매자의 강한 구매력, 대체품의 강한 위협 등으로 인해 낙관적 시장 성장 전망과는 달리 산업의 본질적인 구조적 매력도는 낮다고 볼 수 있다. 이를 해결하기 위해서는 반드시 지식 프로세스 아웃소싱 서비스 제공 기업이 저 원가 경쟁력과 특정 분야에서의 고도로 전문화된 역량을 바탕으로 한 집중화 전략이 필요하다. 마지막으로 셋째, 기술적 선행 요건은 빠른 정보기술의 발달로 인해 장벽이 되지 않을 것으로 예상되며, 시장 매력도 평가에 반영되지 않는다. 따라서 시장 세분화 관점에서 정리하면, 시장에서의 구매 요인 및 지식 프로세스 아웃소싱 서비스에 대한 요구는 빠르게 증가하고 있고, 고 난이도의 비 핵심 프로세스 영역이 주요 세분 시장이 될 것이며, 시장 매력도는 높은 성장률이 예상되나 산업의 본질적 구조 매력도가 떨어지므로 뛰어난 경쟁력을 지녀야 한다는 것이다. 가치 서비스: 지식 프로세스 아웃소싱 서비스 제공 기업은 고객의 이슈를 해결하고, 가치를 제공할 수 있는 서비스 오퍼링을 창출해야 한다. 이를 위해서는 지식 프로세스 아웃소싱 서비스 제공 기업이 차별화 기반의 특화되고 전문화된 영역에서의 핵심 역량을 보유하고 있어야 한다. 비즈니스 프로세스 아웃소싱 서비스 제공 기업이 규모의 경제 및 원가 경쟁력에 집중하고 있는 것과 달리 지식 프로세스 아웃소싱 서비스 제공 기업은 아웃소싱 산업 내 특정 전략 집단을 관찰함으로써 가치 혁신을 창출할 수 있다. 다시 말하면, 지식 프로세스 아웃소싱 서비스 제공 기업은 고도로 전문화된 지식 서비스 영역에서의 품질 향상과 다른 비즈니스 프로세스 아웃소싱 서비스 제공 기업의 저 원가와 유사 수준의 가격 경쟁력을 동시에 꾀한다는 것이다. 이를 가치 곡선을 통해 살펴 보면, 전문 서비스 분야 영역의 창출과 서비스 품질 및 지식 근로자의 강화, 가 우위 요소에 대한 감소 및 규모의 경제에 대한 효과 제거를 통해 가치를 강화시킬 수 있는 것이다. 가치 사슬 및 가치 네트워크: 지식 프로세스 아웃소싱 서비스 제공 기업은 잠재적 보완 공급자 및 경쟁자를 파악해야 하며, 파트너사와 어떤 활동을 수행할 것인 지를 결정해야 한다. 일반적으로 시장 세분화 및 가치 서비스가 결정되면, 지식 프로세스 아웃소싱 서비스 제공 기업은 가치 사슬을 구성하고 가치 네트워크 내 위치를 파악할 수 있게 된다. 지식 프로세스 아웃소싱 서비스 제공 기업은 기업 활동의 전체 가치 사슬 영역을 포함하지 않고, 대신에 자체 인적자원을 바탕으로 기업고객의 재무분야, 인적자원관리분야, 기술연구지원, 구매 영역 외에도 고객 기업의 본원적 활동에 대한 가치를 제공하고 있다. 기본적으로 이를 위해서는 지식 프로세스 아웃소싱 서비스 제공 기업의 오퍼링이 다른 아웃소싱 경쟁자 또는

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고객 기업 내 자체 기능 보다 더 전문화되어야 하며, 특정 분야에서 최고가 되어야 한다. 경쟁전략: 경쟁전략을 명확히 하기 위해 지식 프로세스 아웃소싱 서비스 제공 기업은 경쟁자에 대한 본원적 경쟁전략을 수립해야 한다. 포터가 제시한 본원적 경쟁전략에는 원가 전략과 차별화 전략이 있으며, 이 외에도 집중화 전략이 있다. 비즈니스 프로세스 아웃소싱 서비스 제공 기업은 일반적인 비즈니스 프로세스 서비스에 대한 원가 경쟁력만 초점을 맞출 수 있다. 그러나, 지식 프로세스 아웃소싱 서비스 제공 기업은 상대적으로 낮은 원가 외에도 차별화 전략의 일환으로서 고도로 전문화된 특정 지식 서비스 영역에 집중해야 한다. 불행하게도 차별화라는 것이 원가 상승을 유발하기 때문에 차별화 전략과 원가 우위 전략을 동시에 추구하는 매우 어려운 일이며, 따라서 대부분의 비즈니스 모델은 원가 우위와 차별화 중 하나를 선택한다. 그렇지 않으면 어중간한 상태로 빠질 수 있기 때문이다. 이를 극복하기 위해서는 고도의 전문 지식 서비스 기반의 차별화 경쟁력과 이를 수행하기 위한 고 수준의 인력을 상대적으로 원가가 낮은 신흥 산업국가로부터 공급받는 형태를 유지해야 한다. 다만, 모든 부문에서 원가 경쟁 우위와 차별화 기반의 경쟁 우위를 점하기 어려울 것이며, 특정 서비스 영역에 대한 집중화 전략이 필요하다. 지식 프로세스 아웃소싱 서비스 제공 기업은 고객 자체 비용보다는 상대적으로 낮은 비용을 유지함과 동시에 차별화 기반의 경쟁 우위를 점하기 위해 고도의 전문 지식 서비스를 제공해야 한다. 다만, 비즈니스 프로세스 아웃소싱 서비스 제공 기업의 비용보다 낮을 필요는 없다. 왜냐하면, 두 개의 다른 서비스의 세분 시장이 각각 다르기 때문이다. 수익 창출: 수익 창출 메커니즘을 명확히 하기 위해서는 지식 프로세스 아웃소싱 서비스 제공 기업이 수익 구조, 비용 구조 및 목표 이익률을 먼저 정의해야 한다. 지식 프로세스 아웃소싱 서비스 제공 기업의 경우 서비스 산업의 특성 상 다양한 수익 모델이 있을 수 있는데, 특별한 경우를 제외하고는 각 프로젝트 계약에 따른 노동 시간 및 산출물 기반의 서비스 비용이 주요 수익 모델이다. 따라서, 제품 기반의 기업과 달리 인건비와 같은 높은 고정 비용에 추가하여 약간의 변동 비용이 존재하는 것이 비용 구조이다. 목표 이익률을 두 자리 이상의 숫자로 가져가기 위해서는 각 인원 당 연 평균 80퍼센트의 서비스 시간이 투입된다고 가정했을 때, 평균 30퍼센트 이상의 이익이 필요하다. 물론 핵심 요점은 지식 프로세스 아웃소싱 서비스 제공 기업의 제안 가격보다 고객이 얻을 수 있는 가치가 반드시 높아야 하며, 고객 자체 수행 프로세스에 따른 비용보다는 반드시 낮아야 한다. 혁신적인 비즈니스 모델의 모든 요소는 여섯 개의 비즈니스 모델 블록으로 분류되며, 각각의 블록은 고객 접점, 서비스 오퍼링, 기업의 인프라 관리, 전략 기획, 재무 관점과 같이 기업의 가치를 대변한다. 각 요소 별로 분석된 혁신적인 지식 프로세스 아웃소싱 비즈니스 모델을 정리하면, 성장 가능성이 높으나 치열한 경쟁 환경이 존재하는 고 난이도 및 비 핵심 분야의 지식 서비스 분야가 세분 시장이며, 원가 절감 대신에 고도로 전문화된 고품질의 서비스가 가치 서비스 오퍼링이며, 고 수준의 인적 자원에 기반한 서비스에 초점을 맞추는 것이 가치 사슬 및 가치 네트워크의 핵심이며, 고도로 전문화된 분야에서 차별화 우위와 일정 수준의 원가 우위를 추구하는 집중화 전략이 경쟁 전략이며, 제안 가격 및 고객 자체 창

ix

출 가치보다 높은 수준의 가치를 창출하는 것이 수익 창출 메커니즘이라는 것으로 요약될 수 있다. 그러나, 각 혁신적인 비즈니스 모델의 요소 자체는 정적이며 단독으로 가치를 창출하지 못한다. 이를 위해서는 가치 창출 흐름을 통해 동적인 관점에서 재 고찰되어야 하는데, 이를 비즈니스 에코시스템이라고 부를 수 있다. 이를 동적인 관점에서 재 정리하면, 집중화 기반의 경쟁전략 하에서 고객의 고도로 전문화된 지식 서비스 세분 시장에 대한 요구 증가에 대해 가치 사슬 및 가치 네트워크를 통해 제안된 서비스가 고객에게 가치를 부여하고 궁극적으로 선 순환의 수익 창조 메커니즘이 창출되는 것으로 요약될 수 있다. 이는 혁신적인 지식 프로세스 아웃소싱 비즈니스 모델의 가치로 정의될 수 있다. 혁신적인 지식 프로세스 아웃소싱 비즈니스 모델의 가치는 앞에서 본 바와 같이 명백하다. 그러나, 다른 한편으로서 혁신적인 지식 프로세스 아웃소싱 비즈니스 모델은 치열한 경쟁 환경 외에도 다양한 위험에 노출되어 있다. 이러한 위험들은 지속적인 경쟁력을 유지하고 수익을 극대화하는 데 있어서 매우 중요한 요소로 작용한다. 혁신적인 지식 프로세스 아웃소싱 비즈니스 모델의 두 가지 주요 위험 요소는 운영적 위험 요소와 구조적 위험 요소이다. 예를 들어 지식 프로세스 아웃소싱 서비스 제공 기업이 학습 곡선을 통해 개선될 때까지 더 많은 오류와 느린 작업 속도를 나타낼 수 있으며, 궁극적으로 낮은 고객 만족도를 일으키는 원인 중 하나이다. 또한, 구조적 위험 요소는 지식 프로세스 아웃소싱 서비스 제공 기업이 인력에 대한 교육 투자를 중지하거나 미 검증된 인력을 투입할 경우 발생될 수 있다. 기업에는 매우 많은 다양한 프로세스가 존재하며, 이는 서비스의 난이도에 따라 운영적 위험 요소와 구조적 위험 요소로 구분될 수 있다. 이를 조합하면, 데이터 입력 및 트랜잭션 처리와 같은 저 위험 군의 서비스는 통상적으로 비즈니스 프로세스 아웃소싱 서비스 제공 기업에 의해 처리되며, 상대적으로 지식 프로세스 아웃소싱은 중간 수준의 위험 군의 서비스를 처리한다. 다시 말하면, 비즈니스 프로세스 아웃소싱에 비해 지식 프로세스 아웃소싱의 경우 더 많은 위험에 노출되어 있다는 의미이다. 아웃소싱 관련 저널의 분석에 따르면 높은 수준의 위험은 불명확하고 주관적인 부분에서 유래되고, 명확하고 객관적일수록 위험도는 낮아지는 것으로 조사되었다. 따라서, 위험 요소를 최소화하는 핵심 방안은 실시간 수준의 명확하고 객관적인 평가, 감사 및 피드백 프로세스에 있다. 결론적으로 혁신적인 지식 프로세스 아웃소싱 비즈니스 모델의 가치와 위험은 동시에 고려되어야 하며, 비즈니스 모델의 핵심 성공 요인은 비즈니스 모델의 각 요소 별로 가치를 최대하는 것과 위험을 최소화하는 것이다. 이를 위해서는 혁신적인 지식 프로세스 아웃소싱 비즈니스 모델의 각 요소에 대한 평가 도구가 도입되어야 하며, 균형성과지표의 4가지 요소와 비즈니스 모델의 6가지 요소와의 맵핑을 통해 평가 및 피드백이 가능하게 된다. 따라서 평가 모형에 대한 고도화 및 실제 기업에 대한 평가는 다음의 핵심 논제라고 할 수 있으며, 향후 성공적이고 견고한 혁신적인 지식 프로세스 아웃소싱 비즈니스 모델의 기반이 될 것으로 기대한다.

x

Table of Contents

Executive Summary (English) ...................................................................................... iii Executive Summary (Korean) ....................................................................................... v I. Introduction................................................................................................................. 1

A. Background ......................................................................................................... 1 B. Research Issues and Purpose ............................................................................. 1

II. Innovative KPO Business Model.............................................................................. 2 A. The Definition of Innovative Business Model................................................... 2 B. The Elements of Innovative KPO Business Model........................................... 3

1. Market Segment ........................................................................................................... 3 2. Value Proposition ........................................................................................................ 8 3. Value Chain and Value Network ................................................................................. 9 4. Competitive Strategy ................................................................................................. 10 5. Revenue Generation................................................................................................... 11

C. The Value of Innovative KPO Business Model .............................................. 12 D. The Risk of Innovative KPO Business Model ................................................ 14 E. The Evaluation of Innovative KPO Business Model...................................... 16

III. Conclusion .............................................................................................................. 18 References...................................................................................................................... 19 <Appendix-1> Traditional BPO and Challenges to BPO Market ........................... 21

A. The definition of BPO and Market Overview ................................................ 21 B. Challenges to BPO Market............................................................................... 22

<Appendix-2> New KPO and Comparison between BPO and KPO ...................... 23

xi

A. The definition of KPO and Market Overview................................................ 23 B. Comparison between BPO and KPO .............................................................. 24

xii

List of Tables

< Table 1 > Environmental Analysis by PEST: KPO service ........................................... 4

< Table 2 > Field Proportion for KPO Market.................................................................. 6

< Table 3 > Six Business Model Building Blocks of KPO............................................. 13

xiii

List of Figures

[ Figure 1 ] Growth Strategy of KPO Business ................................................................ 2

[ Figure 2 ] The Procedure of Customer Analysis ............................................................ 3

[ Figure 3 ] The KPO Service Positioning Map ............................................................... 5

[ Figure 4 ] Industry Structure Analysis with Five Forces ............................................... 7

[ Figure 5 ] The Value Curves in BPO and KPO.............................................................. 8

[ Figure 6 ] The Value Chain and Value Network in KPO ............................................... 9

[ Figure 7 ] The Relationship among Generic competitive strategy, Market share and

ROI............................................................................................................ 10

[ Figure 8 ] The Architecture of the Cost and Revenue.................................................. 12

[ Figure 9 ] The Innovative KPO Business Model Diagram .......................................... 14

[ Figure 10 ] The Map of Risk Evaluation...................................................................... 15

[ Figure 11 ] The Evaluation Model of KPO Business Model ....................................... 16

[ Figure 12 ] Expected Growth in Global BPO and KPO Markets (2003-2010) ........... 24

1

I. Introduction

A. Background

Business Process Outsourcing (hereafter called: BPO) is still a big opportunity in emerging countries,

such as India and China because it is cheaper and more efficient. But setting up a call center is expensive,

payment cycles long, the competition intense and margins small. When the scale of work is large enough,

it makes sense for multinational corporations to set up captive centers in emerging country rather than

outsource to smaller country-owned companies. Subinder Khurana, who is the President of MarketRx

India, said, “I realized that BPO as we knew it was getting to be a commodity business and tough for

independent start-ups to make money in. They had to move up the value chain.”(Chengalvarayan, Senthil,

2003). So, it is going to be difficult for the small country-owned company to break in. If so, is there no

way for the smaller local entrepreneurs with specialized skills to leverage the low-cost labor efficiency?

And is there no way for them to compete against the larger corporations in BPO market?

At this point, the small country-owned outfits should leverage their own specialized skills to capture

a specialized market, such as Offshoring medical service providing, law service providing, accounting

service providing, and so on. For the moment, it’s being called Knowledge Process Outsourcing (hereafter

called: KPO) as opposed to BPO. So, KPO sector has immense opportunities for the Subject Matter

Experts from now on. The SMEs can change their costs as per the short-term demands, which can create

new business model. More details with traditional BPO, trends and challenges to Indian BPO market, and

new KPO are described in the appendix of this paper.

B. Research Issues and Purpose

The issues in this practical research paper are as follows:

1. What is value of the innovative KPO business model in the outsourcing market?

2. Are there any risks from the innovative KPO business model?

KPO should be treated as differentiation and paradigm shifting point of view. And this practical

research paper is to analyze an innovative business model for KPO business. It will be the foundation of

an effective KPO business model in the future. Based on the definition of business model, each of the

elements will be researched and analyzed based on various management analysis models, such as

Customer Analysis, PEST Analysis, Industry Structure Analysis, N-Surf Model, Value Curves, Value

Chain, Competitive Strategy, Customer Value Model, and Risk Matrix in this practical research paper.

2

II. Innovative KPO Business Model

A. The Definition of Innovative Business Model

The innovative business model is a good framework to convert core competence with technological

potential to economic value. It can explain how companies can create and capture value from their

technology innovation. The value of KPO as well as of traditional BPO has been created from the

innovative IT technology enhancement. Firms can create and capture value from their new technology in

three basic ways, through incorporating the technology in their current businesses, through licensing the

technology to other firms, or through launching new ventures that exploit the technology in new business

areas(Chesbrough, Henry W., 2003).

KPO BusinessNew Services

Current Services

New MarketCurrent MarketMarket

Services

KPO BusinessNew Services

Current Services

New MarketCurrent MarketMarket

Services

[ Figure 1 ] Growth Strategy of KPO Business

The innovative KPO business model creates and captures value through launching new companies in

new business areas. [Figure 1] There are many usages of the expression business model. But the term

business model has been widely used, but not clearly defined. The following definition is sufficiently

broad:

A business model is a conceptual tool that contains a set of elements and their

relationships and allows expressing the business logic of a specific firm. It is a

description of the value a company offers to one or several segments of

customers and of the architecture of the firm and its network of partners for

creating, marketing, and delivering this value and relationship capital, to

generate profitable and sustainable revenue streams1

According to a specific and useful working definition developed by Richard Rosenbloom and Henry

W. Chesbrough, the functions of a business model are to identify a market segment, to articulate the value

proposition, to define the structure of the firm’s value chain, to describe the position of the firm within the 1 Ostenwalder, A., Pigneur, Y., and Tucci, C.L., Clarifying business models: origins, present, and future of the concept,

Communications of the Association for Information Systems (Volume 16, 2005), 2005, p.10.

3

value network linking suppliers and customers, to specify the revenue generation mechanism for the firm

and estimate the cost structure and target margins of producing the offering, and to formulate the

competitive strategy(Chesbrough, Henry W., 2003).

B. The Elements of Innovative KPO Business Model

1. Market Segment

To identify a market segment, KPO service providers should define a set of customers to whom the

proposition will be useful and appealing and the purpose for which it will be used. Then, KPO service

providers can understand what they must provide and what customer value in their proposition, KPO

service offering in this case. A customer can value KPO service offering according to its ability not only

to reduce the cost of a solution to an existing labor cost problem, but also to create new possibilities and

solutions.

Understanding Customer Behavior

: External Environments, Purchasing Drivers, An unfilled desire

Feed

back

Market Segmentation

: Segmentation Variables

Evaluating Attractiveness of the Market Segments

: Evaluation Variables

Targeting and Positioning in the Market Segment

Understanding Customer Behavior

: External Environments, Purchasing Drivers, An unfilled desire

Feed

back

Market Segmentation

: Segmentation Variables

Evaluating Attractiveness of the Market Segments

: Evaluation Variables

Targeting and Positioning in the Market Segment

[ Figure 2 ] The Procedure of Customer Analysis2

To define a set of customers, KPO service providers should analyze customer and understand the

changes of customer’s desire. A starting point of the procedure of customer analysis is understanding

customer behavior by investigating external environments [Figure 2].

2 Figure 2 is partially revised to update the figure of the procedure of customer analysis by Shin, Cheol Ho, Long-term strategic

planning and competitive strategy, Seoul: Seoul Economic Business Publishing Corporation, 2002, p.262.

4

< Table 1 > Environmental Analysis by PEST: KPO service

Political

■ With the advent of emerging countries, such as

India and China, a large number of low cost

knowledge workers have appeared on the

market.

■ Due to intensification of global competition,

new challenges and opportunities have been

introduced.

■ National borders have been disappeared on the

market.

Economic

■ It is possible to cut expenses according to

economies of scale and budget constraints.

(The effect of cost efficiency)

■ It is possible to maintain flexibility while

retaining control.

■ It is possible to gain competitive advantage

through KPO.

■ It is possible to have strong positive influences

on the corporate finance since it is not required

to spend a direct cost of purchasing

equipments.

Social

■ Knowledge becomes the key of business

success.

■ Demand of highly specialized services has been

increased.

■ It is required to have new thinking, new

structure, and new way for organizational

operation in a rapidly changing global

organization.

Technological

■ Internet and communication technology have

been developed to support offshore

outsourcing.

PEST analysis looks at the macro external environments in terms of political, economic, social, and

technological forces. PEST analysis also lets us understand purchasing drivers of KPO service and an

unfilled desire from the existing BPO service. Through the macro analysis of external environments from

a political, economic, and social point of view, an unfilled desire by companies has been flexibility of

human resource management and concentration on core business. And the main purchasing drivers for

KPO service is the effect of cost reduction economically as well as increasing demand of highly

specialized knowledge services socially. Also, supply of a large number of low cost knowledge workers

has been increased politically. Of course, the development of internet and communication technology has

made it possible.

5

Low degree of

Difficulty

(e.g Simple Operation)

Outsourcing Market

Segment

Demand for this quadrant

becomes disappeared.

Make or Buy

KPO

High degree of

Difficulty

(e.g High quality

Knowledge Service)

Non-core Process

Core Process

BPO

Own Process

Low degree of

Difficulty

(e.g Simple Operation)

Outsourcing Market

Segment

Demand for this quadrant

becomes disappeared.

Make or Buy

KPO

High degree of

Difficulty

(e.g High quality

Knowledge Service)

Non-core Process

Core Process

BPO

Own Process

[ Figure 3 ] The KPO Service Positioning Map

The next step of customer analysis is segmenting market by identifying segmentation variables. The

main segmentation variables are the degree of services difficulty and process importance. Segmentation

variables can identify which area KPO services should pursue using services positioning map. From

PEST analysis, it is understood that KPO services demand has been increased rapidly with various

purchasing drivers. And as time goes on, demand for the second quadrant becomes decreased more and

more. Instead, its demand moves to the third quadrant, which is BPO market segment. However

knowledge becomes the key of business success in the global business environment and process becomes

more difficult than it was before by degrees. Therefore, every process owner should classify a new highly

specialized process into its own process or KPO. Even demand of highly specialized services has been

increased. Finally, demand for KPO should be increased and segment of KPO service should be in the

fourth quadrant. [Figure 3]

The last step of customer analysis is evaluating attractiveness of the market segments. The variables

of attractiveness are total market size, current and potential market size, annual growth rate, earning rate,

competitive structure, technical prerequisites, environmental impact, legal environments, and so on. To

evaluate attractiveness of the market segments, three conditions should be verified: first the market size of

segment and growth rate, second structural competitive attractiveness by industry analysis and earning

rate, and third internal competency analysis with technical prerequisites.

6

< Table 2 > Field Proportion for KPO Market

Area 2003-2004

Fiscal Year

2010-2011

Fiscal Year

Basic Data Research, Data Integration and

Management

25% 29%

Biotech and Pharmaceutical 24% 18%

Engineering and Design 33.3% 12%

R&D 8% 12%

Animation and Simulation 8% 8%

Market Research 1.3% -

Distance Learning and Publishing - 12%

Others - 9%

Source: Nasscom Strategy Review, 2005, Evalueserve

First, the global KPO market size is US one-point-two billion dollars in 2003-2004 fiscal year and

expected to be US seventeen billion dollars in 2010-2011 fiscal year(Nasscom Strategy Review, 2005),

that is, the average growth rate is expected to be about one hundred and forty six percents per annum. So,

a view of the market is attractive. The proportion for each segment in KPO market shows the demanding

of customers. <Table 2> According to the research result, data processing and R&D are the main parts,

except for biotech and pharmaceutical area, such as being specialized in biotech industry. That is, large-

sized company, which wants to let their non-core specific process outsourced, should be the target market.

Besides, new areas, such as distance learning and publishing, will be a niche segment in the future.

7

Rivalry among existing

competitorsBargaining power of

suppliers

Bargaining power of

Buyers

Barriers to entry

Threat of substitute

Services

Weak

Weak

Strong

Weak

• Own specialized competency

• Easy to penetrate into the industry

by specialized KPO

Weak

• Easy to be replaced by other KPO providers

• Possible to be substituted by MNC owned captive center

• Buyers can have various alternatives

to choose KPO providers

Rivalry among existing

competitorsBargaining power of

suppliers

Bargaining power of

Buyers

Barriers to entry

Threat of substitute

Services

Weak

Weak

Strong

Weak

• Own specialized competency

• Easy to penetrate into the industry

by specialized KPO

Weak

• Easy to be replaced by other KPO providers

• Possible to be substituted by MNC owned captive center

• Buyers can have various alternatives

to choose KPO providers

[ Figure 4 ] Industry Structure Analysis with Five Forces3

Second, competitive structure and earning rate are closed to industry attractiveness. This can be

researched by industry structure analysis with five forces model by Porter, M.E. [Figure 4] It is not so

difficult to establish KPO services provider as vertically integrated enterprise, therefore KPO providers

are always exposed to low barrier to entry and strong bargaining power of buyers, even to strong threat of

substitute services because multinational corporations can establish their own captive center, such as the

case of GE in India. So, the industry attractiveness is not good as its bright future with growth rate. KPO

providers should have low cost leadership as well as focusing strategy with highly specialized

competency.

Third, technical prerequisites do not become barriers any more due to rapidly developed IT

technology. Therefore, it is not applied to evaluate the market attractiveness.

A brief summary of market segment definition and customer analysis is that: first, purchasing drivers

and demand for KPO services have been increased due to rapidly changing external environment, and

second, the non core process service area, but especially required to have high degree of difficulty, should

be the main targeting segment, and third, attractiveness of the targeting market segments has been

evaluated as attractive with one hundred and forty six percents growth rate per annum, but not as good as

its good growth rate due to poor industry structural attractiveness. So, highly specialized services area is

the main market segment with the high growth rate, but at the same time KPO providers should have

outstanding competitiveness to survive in the poor industry structure.

3 Cho, Dong Sung, Strategic management, the third edition, Seoul: Seoul Economic Business publishing Corporation, 2002, p.198

8

2. Value Proposition

To articulate the value proposition, KPO service providers should define the way to create the value

for customers by the KPO service offering, that is, to decide what services they should offer to solve the

customer problem. KPO service providers should have their core competence of skills and knowledge,

which are rare, valuable, inimitable, and organizational fit, so that they can apply them into the process of

creating services offering package. Also they can make their own offering differentiate.

While BPO service providers concentrate on economies of scale and cost reduction to gain a cost

leadership, KPO service providers pursue value innovation by looking across strategic groups within

outsourcing industry. The value curve, which is a graphic depiction of the way a company or an industry

configures its offering to customers, is a powerful tool for creating the value for customers(Kim, W. Chan,

and Mauborgne, Renee, 1999).

High

Low

Relativ

e level

Key elements of Outsourcing service

Economies

of ScaleCost

Competitiveness

Knowledgeable

Staff

Specialized

Service AreaService

Quality

Eliminate Reduction Raise Create

: KPO

: BPO

High

Low

Relativ

e level

Key elements of Outsourcing service

Economies

of ScaleCost

Competitiveness

Knowledgeable

Staff

Specialized

Service AreaService

Quality

Eliminate Reduction Raise Create

: KPO

: BPO

[ Figure 5 ] The Value Curves4 in BPO and KPO

To establish its value curve, KPO service providers should look across strategic groups in the

outsourcing industry by offering service quality of the highly specialized knowledge area and maintaining

somewhat low cost closer to other BPO services. Then, its value innovation can be stemmed from a

combination of creating new areas, such as specialized services, raising service quality and

knowledgeable staff, instead of reducing cost competitiveness relatively and eliminating the effect of 4 Kim, W. Chan, and Mauborgne, Renee, Creating new market space, Harvard Business Review, January-February 1999, p.2

9

economies of scale. [Figure 5] There are many known KPO service segments, such as Secretarial service,

Accounting service, Legal service, Taxation service, Distance Learning service, which are currently

demanded by customer and required to offer highly specialized knowledge service. So, the main factors to

make KPO service offering differentiate would be unique world class serviceability of specialized

knowledge with more competitive cost to solve the customer demand, such as legal service, medical

service, learning service, and so on.

3. Value Chain and Value Network

To define the position of the firm within the value chain, which is required to distribute the offering,

KPO service providers should let them place in the position where the complementary assets needed

within the entire value chain. And to describe the position of the firm within the value network linking

suppliers and customers, KPO service providers should identify potential complementary suppliers and

competitors. And they decide what activities they work with partners. Knowing the market segment and

value proposition, KPO service providers can construct the value chain and position in the value network.

KPO Services

Inbound

Logistics

Operations Outbound

LogisticsMarketing

& Sales

Services

Procurement

Technology Development

Human Resource Development

Firm Infrastructure

Inbound

Logistics

Operations Outbound

LogisticsMarketing

& Sales

Services

Procurement

Technology Development

Human Resource Development

Firm Infrastructure

Support

KPO Services Provider

KPO Services Customer

Inbound

Logistics

Operations Outbound

Logistics

Marketing

& Sales

Services

Procurement

Technology Development

Human Resource Development

Firm Infrastructure

KPO Services Customer

….

KPO Services

KPO Services

Inbound

Logistics

Operations Outbound

LogisticsMarketing

& Sales

Services

Procurement

Technology Development

Human Resource Development

Firm Infrastructure

Inbound

Logistics

Operations Outbound

LogisticsMarketing

& Sales

Services

Procurement

Technology Development

Human Resource Development

Firm Infrastructure

Inbound

Logistics

Operations Outbound

LogisticsMarketing

& Sales

Services

Procurement

Technology Development

Human Resource Development

Firm Infrastructure

Support

KPO Services Provider

Inbound

Logistics

Operations Outbound

LogisticsMarketing

& Sales

Services

Procurement

Technology Development

Human Resource Development

Firm Infrastructure

Support

KPO Services Provider

KPO Services Customer

Inbound

Logistics

Operations Outbound

Logistics

Marketing

& Sales

Services

Procurement

Technology Development

Human Resource Development

Firm Infrastructure

Inbound

Logistics

Operations Outbound

Logistics

Marketing

& Sales

Services

Procurement

Technology Development

Human Resource Development

Firm Infrastructure

KPO Services Customer

….

KPO Services

[ Figure 6 ] The Value Chain and Value Network in KPO

KPO service do not cover entire value chain of corporate activities, instead, KPO service providers

only supply sales and service value with marketing and sales activity based on their human resources to

10

corporate customers. Then, corporate customers have benefits on their support activities, such as in the

financial management area, in the human resources management area, in the technology development

area by R&D support, and in the procurement area. Also, they can have benefits on their part of primary

activities. [Figure 6] The source of competitiveness of KPO service providers in the value chain is

serviceability based on their human resource management to deliver a value to customers in the total

value network. And KPO service providers should make their offerings more specialized than any

outsourcing competitors or in-house corporate functions and be the leader for specialty area.

4. Competitive Strategy

To formulate the competitive strategy, KPO service providers should understand how to gain and

hold competitive advantage over their rivals. Porter’s 1980s research emphasized generic competitive

strategy5, which are two way to have competitive advantage through competing on cost leadership or on

differentiation. And even though it was not addressed in generic competitive strategy by Porter, there is

another way to have competitive advantage through competing on focusing.

Market Share

RO

IStuck in the Middle

(Absence of a clear strategy)

Differentiation Strategy

Focusing StrategyCost leadership Strategy

KPO

Market Share

RO

IStuck in the Middle

(Absence of a clear strategy)

Differentiation Strategy

Focusing StrategyCost leadership Strategy

KPO

[ Figure 7 ] The Relationship among Generic competitive strategy, Market share and ROI6

BPO service providers should compete on low labor cost with the general business process services,

so they only pursue cost leadership strategy to have competitiveness. But, differently KPO service

providers should compete on not only relative low cost but also focusing on their highly specialized

knowledge service, so they should pursue differentiation strategy on their specialized areas as well as cost 5 Shin, Cheol Ho, Long-term strategic planning and competitive strategy, Seoul: Seoul Economic Business publishing Corporation,

2002, p.272, requoted from Porter, M.E., Competitive strategy, The Free Press, 1980, p.39 and Porter, M.E., Competitive

advantage, The Free Press, 1985, p.12 6 Shin, Cheol Ho, Long-term strategic planning and competitive strategy, Seoul: Seoul Economic Business publishing Corporation,

2002, p.285

11

leadership strategy. Unfortunately, it is not easy to achieve differentiation as well as cost leadership

because differentiation usually makes cost increased. Therefore, most of business models choose either

cost leadership or differentiation; otherwise, they can be easily stuck in the middle with low earning rate.

[Figure 7]

Even though it is difficult to achieve both of them, KPO service providers should maintain relative

low cost at least than customers, but do not have to make cost less than other BPO service providers

because they pursue different service segments. And simultaneously, KPO service providers should offer

the highly specialized knowledge services to gain differentiation competitiveness. KPO service providers

can basically have relative cost leadership than their customers by utilizing highly educated, but low labor

human resources from emerging countries, such as India and/or China. However it is really hard to gain

differentiation competitiveness for many market segments. So, the main competitive strategy for KPO

service providers should be focusing strategy to gain their competitiveness.

5. Revenue Generation

To specify the revenue generation mechanism, KPO service providers should define the architecture

of the revenues, such as the way for customer to pay and how much to charge, and should estimate the

cost structure and target margins of their service offering. There are many options for service offering,

including charging by the requested transaction, charging by the materials provided, fixed fee based on

time, annual subscription models, profit sharing, and so on. Except for special cases of subscription

models or profit sharing, the revenue will be generated by spending time and providing material based on

each engagement or transaction. As the value proposition is knowledge processing services for specific

areas, the fixed cost of labor for human resources is the main part of the cost structure and some variable

cost additionally.

12

Cost and Value

of Owned Process

Quantity of

Labor Engagements

Cost

Total

Revenue

Fixed

Cost

Price

Value

Variable

Cost

Total

Cost

Price

Margin

CostCost of BPO

Customer

Value

Cost and Value

of Owned Process

Quantity of

Labor Engagements

Cost

Total

Revenue

Fixed

Cost

Price

Value

Variable

Cost

Total

Cost

Price

Margin

CostCost of BPO

Customer

Value

[ Figure 8 ] The Architecture of the Cost and Revenue7

For the cost structure and target margins, the proposed labor price should maintain thirty percents

margin over the labor cost per each engagement, in case eighty percents of labor is utilized for customer

services. Then, ten-point-four percents of total margin can be achieved. Of course, the value for customer

should be always greater than the proposed price and the value created from insourcing by customer

themselves. And at the same time, the proposed price should be less than the cost spent from customer

owned process. [Figure 8] This is the architecture of the cost, revenue, and customer value. And it is also

growth strategy for KPO business and the way to make an outsourcing contract continuously.

C. The Value of Innovative KPO Business Model

All the KPO business model elements are categorized into six business model building blocks.

<Table 3> Each of the blocks represents the corporate value point, such as customer interface, service

offering, corporate infrastructure management, strategic planning, and financial aspects.

7 Figure 8 is partially revised to update the customer value model

13

< Table 3 > Six Business Model Building Blocks of KPO8

Pillar Business Model

Building Block

Definition

Customer

Interface

Market Segment The segments of customers KPO service provider wants to offer

value to:

Non core knowledge process service areas which are especially

required to have high degree of difficulty. (Very attractive, but

very competitive)

Service Value

Proposition

An overall view of KPO service provider’s bundle of services:

Service quality of the highly specialized knowledge area by

creating specialized services, raising service quality and

knowledgeable staff, instead of reducing cost competitiveness

relatively and eliminating the effect of economies of scale. (e.g

Secretarial service, Accounting service, Legal service, Taxation

service, Medical service, Distance Learning service, and so on)

Infrastructure

Management

Value Chain /

Value Network

The Position of the KPO Service within the value chain and the

network of cooperative agreements with other KPO partners

necessary to efficiently offer and commercialize value:

Sales and service based on human resources for customer’s

financial management area, human resources management area,

technology development area, procurement area, and the part

process of primary activity area in the value chain and network.

Strategy

Planning

Competitive

Strategy

The competitive strategy over competitors for chosen market

segment:

Focusing strategy on the highly specialized areas with

differentiation as well as relatively lower cost than customers by

utilizing highly educated resources from emerging countries.

Financial

Aspects

Revenue

Generation

The monetary consequences of the means employed and the way

KPO service provider makes money through a variety of revenue

flows:

Price proposal with over thirty percents margin and the greater

value for customer than the proposed price as well as own value

created by customer. 8 Table 3 is partially revised to update the table of nine business model building blocks by Ostenwalder, A., Pigneur, Y., and Tucci,

C.L.

14

The innovative KPO business model is that the market segment is defined as very attractive but very

competitive knowledge process service area required for high degree of difficulty, the value proposition is

defined as highly specialized knowledge services by raising service quality instead of reducing cost

competitiveness, the value chain and network is defined as focusing on service based on human resources,

the competitive strategy is defined as focusing strategy on the highly specialized areas with differentiation

as well as relatively lower cost, and the revenue generation is defined as providing the greater value for

customer than the proposed price as well as own value created by customer to achieve over thirty percents

margin rate.

KPO Services Partner

..

KPO Services Partner

Value

to

Customer

Demand

from

Customer

KPO Services Provider

Value Proposition

Value Network

Market Segment

Value Chain

Competitive Strategy

Revenue

Generation

Mechanism

Innovative Business Model Diagram

KPO Services Partner

..

KPO Services Partner

KPO Services PartnerKPO Services Partner

..

KPO Services PartnerKPO Services Partner

Value

to

Customer

Demand

from

Customer

KPO Services Provider

Value Proposition

Value Network

Market Segment

Value Chain

Competitive StrategyCompetitive Strategy

Revenue

Generation

Mechanism

Innovative Business Model Diagram

[ Figure 9 ] The Innovative KPO Business Model Diagram

Nevertheless, each of business model elements is static and do not create value by themselves. Then,

how can the innovative KPO business model create the value for customer? To see the value creation flow,

the business model should be reviewed in a dynamic point of view. It is called as the business ecosystem.

The business ecosystem is represented in innovative business model diagram. [Figure 9] Under the

competitive strategy, the market segment is defined based on customer demand and value proposition is

delivered to customer with the favorable circle of revenue creation mechanism throughout the value chain

and the value network.

D. The Risk of Innovative KPO Business Model

The value of innovative KPO business model is apparent, yet the innovative KPO business model is

15

exposed to not only deep competition but also several risks during the services engagement. The risks in

the engagement are such a critical factor to maintain sustainable competitiveness and to maximize the

revenue. There are two major risks in the engagement, one is the operational risk and the other is the

structural risk. Until KPO service providers move up the learning curve, they make more errors and

execute tasks more slowly than customer’s employees do. This kind of operational risk results in lower

customer satisfaction. And some structural risk arises because KPO service providers can stop investing

in training or employ people who are not as qualified. Then, there can be the issue on the behavior of

service providing(Aron, Ravi, and Singh, Jitendra V., 2005).

Customer Data

Analysis, Market

Research Analysis

Tele-collection,

Technical Support

Data Entry,

Transaction Process

Equity ResearchSupply Chain

Coordination

Insurance Claims

Process, Customer

Support

Pricing, Corporate

PlanningR&D, DesignLitigation Support

Customer Data

Analysis, Market

Research Analysis

Tele-collection,

Technical Support

Data Entry,

Transaction Process

Equity ResearchSupply Chain

Coordination

Insurance Claims

Process, Customer

Support

Pricing, Corporate

PlanningR&D, DesignLitigation Support

Low HighModerateL

ow

Hig

hM

od

erate

Structural RiskO

pera

tion

al R

isk

KPO

Service area

KPO

Service area

BPO

Service area

Captive Center

Service area

Captive Center

Service area

In-house and onshore

Service area

[ Figure 10 ] The Map of Risk Evaluation9

There are a number of different processes in the company. They can be categorized according to the

level of operational risk and structural risk. [Figure 10] Data entry and Transaction processing, which

have low risk, are usually serviced by BPO service providers. Litigation support, Insurance claims

processing, Supply chain coordination, Customer data analysis, and Market research analysis, which have

moderate and high risk, are serviced by KPO service providers. R&D and Equity research, which have

higher risk, are serviced by customer owned captive center. And Pricing and Corporate planning, which

have the highest risk, are serviced directly by customer. The engagement of KPO should take higher risk

than that of BPO. High risk is stemmed from the imprecise and subjective matters, and low risk is 9 Figure 10 is partially revised to update the matrix of evaluated operational and structural risks by Aron, Ravi, and Singh, Jitendra V.

16

stemmed from the precise and objective matters. Therefore, the key to mitigate the risk is the right

measurement, which can make KPO service more precise and objective, by monitoring closely in real

time and conducting frequent process audits.

E. The Evaluation of Innovative KPO Business Model

The balanced scorecard10 is a very good framework to measure the process and the performance to

mitigate the risk in the innovative KPO business model, because it can make KPO service more precise

and objective. Also, it is useful evaluate each value of the elements in the innovative KPO business model.

Because the scorecard cover four different perspectives, which can complement traditional finance

indicators.

Vision and

Strategy

Vision and

Strategy

Market Attractiveness

Customer Satisfaction Index

Market Share

Pricing Index

RatingService of Maturity

Customer Perspective

Market Attractiveness

Customer Satisfaction Index

Market Share

Pricing Index

RatingService of Maturity

Customer Perspective

Market Segment

Quality of Supplier Network

Engagement Performance Index

Engagement Closeout Cycle

Hours with Customers on Work

RatingService of Maturity

Internal Business Perspective

Quality of Supplier Network

Engagement Performance Index

Engagement Closeout Cycle

Hours with Customers on Work

RatingService of Maturity

Internal Business Perspective

Value Chain / Value Network

Quality of Knowledgeable Staff

% Revenue from New Services

Specialized Service Area

Service Quality

RatingService of Maturity

Learning and Growth Perspective

Quality of Knowledgeable Staff

% Revenue from New Services

Specialized Service Area

Service Quality

RatingService of Maturity

Learning and Growth Perspective

Value Proposition

Engagement Profitability

Cash Flow

Forecast Reliability

Return on Investment

RatingService of Maturity

Learning and Growth Perspective

Engagement Profitability

Cash Flow

Forecast Reliability

Return on Investment

RatingService of Maturity

Learning and Growth Perspective

Revenue Generation

[ Figure 11 ] The Evaluation Model of KPO Business Model11

Under the competitive strategy, financial perspective can measure revenue generation, customer

perspective can do market segment, internal business perspective can do value chain and value network, 10 The balanced scorecard was introduced by Kaplan, Robert S., and Norton, David P. and supplements traditional financial measures with criteria that measured performance from three additional perspectives – those of customers, internal business processes, and learning and growth. It therefore enables companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they would need for future growth. The scorecard was not a replacement for financial measures; it was their complement. (Kaplan, Robert S, and Norton, David P., 1996) 11 Figure 11 is partially revised to update the balanced scorecard by Kaplan, Robert S., and Norton, David P.

17

and learning and growth perspective can do value proposition as well as infrastructure of the KPO service

throughout the real time evaluation and feedback process. So, it is so important to build the optimized

evaluation model for KPO service of maturity based on the balanced scorecard with evaluation and

feedback cycle in the financial perspective, customer perspective, internal process perspective, and

learning and growth perspective to specifically minimize the risks and to maximize the values. [Figure

11] Of course, the process of evaluation and feedback should be based on real time, so that it should be

linked with the business process management and business activity monitoring in the future.

18

III. Conclusion

KPO business model has been analyzed by each of the elements based on the definition of the

innovative business model using various management analysis models(e.g Customer Analysis, PEST

Analysis, Industry Structure Analysis, N-Surf Model, Value Curves, Value Chain, Competitive Strategy,

Customer Value Model, and Risk Matrix) until now, and as a result of analysis, the value and the risk of

the innovative KPO business model has been produced and proved that KPO business should be treated

as differentiation and paradigm shifting point of view.

The values of the innovative KPO business model are apparently created by flow of business

ecosystem, which the market segment is based on customer demand and value proposition is delivered to

customer with the favorable circle of revenue creation mechanism throughout the value chain and the

value network under the differentiation and low cost strategy. On the other hand, the risks of the

innovative KPO business model in the engagement are the operational risk and the structural risk, as the

engagement of KPO should take higher risk than that of BPO. Especially, high risk is stemmed from the

imprecise and subjective matters. Therefore, the key to mitigate the risk is the right measurement, which

can make KPO service more precise and objective by monitoring closely in real time and conducting

frequent process audits.

The values and the risks of the KPO business model should be both considered, and then the KPO

business model can be established to be innovative and sustainable. So, the critical success factors for the

innovative KPO business model are to maximize the values and to minimize the risks for each elements

of the business model. To maximize the values and to minimize the risks successfully, both should be

treated systemically using the right measurement framework, balanced scorecard and the real time

performance of KPO business model should be measured throughout the process circle of feedback.

Under the competitive strategy, financial perspective can measure revenue generation, customer

perspective can do market segment, internal business perspective can do value chain and value network,

and learning and growth perspective can do value proposition as well as infrastructure of the KPO service

throughout the real time evaluation and feedback process.

The next issues are to strengthen the current evaluation model to be more precise and to apply the

model in the real company. Of course, the process of evaluation and feedback should be based on real

time, so that it should be linked with the business process management and business activity monitoring

in the future. And it will be the foundation of making more successful and solid KPO business model in

the future.

19

References

Books and Articles

Aron, Ravi, and Singh, Jitendra V. (2005), Getting offshoring right, Harvard Business Review, December,

2005

Barnes, Peter C. (2005), Outsourcing: a review of trends and some management issues, Management

Services, Winter, 2005

Chesbrough, Henry W. (2003), Open Innovation – The new imperative for creating and profiting from

technology, Harvard Business School Press

Cho, Dong Sung (2002), Strategic management, the third edition, Seoul: Seoul Economic Business

Publishing Corporation

Czinkota, Michael R., Ronkainen, Ilkka A., and Donath, Bob (2004), Mastering global markets, Thomson

South-Western

Friedman, Tomas L. (2005), The world is flat, Farrar Straus and Giroux

Griffin, Ricky W., and Pustay, Micahel W. (2004), International business, the fourth edition, Prentice Hall

Kaplan, Robert S., and Norton, David P. (1993), Putting the balanced scorecard to work, Harvard

Business Review, September-October, 1993

Kaplan, Robert S., and Norton, David P. (1996), Using the balanced scorecard as a strategic management

system, Harvard Business Review, January-February, 1996

Kim, W. Chan, and Mauborgne, Renee (1999), Creating new market space, Harvard Business Review,

January-February, 1999

Ostenwalder, A., Pigneur, Y., and Tucci, C.L. (2005), Clarifying business models: origins, present, and

future of the concept, Communications of the Association for Information Systems, Volume 15, 2005, 1-25

Samuelson, William F., and Marks, Stephen G. (2006), Managerial economics, the fifth edition, John

Wiley & Sons

Shin, Cheol Ho (2002), Long-term strategic planning and competitive strategy, Seoul: Seoul Economic

Business Publishing Corporation

Web Sites

http://fecolumnists.expressindia.com/full_column.php?content_id=47935

Chengalvarayan, Senthil (2003), Now, knowledge process outsourcing, The Financial Express

http://www.oobp.org/Outsourcing+News/376.aspx

Vollenweider, Marc (2005), KPO: intellectual capital, ahoy!!, The Financial Express

http://outsourceking.com/BPO/What-Is-BPO.aspx?ref=aw&gclid=CNzs_N-a0ogCFQU8YQodkDu7Rw

OutsouceKing.com Information Portal (2005), What is business process outsourcing (BPO)?

http://www.outsource2india.com/why_india/articles/KPO.asp

20

KPO Services (2005), Knowledge process outsourcing in India

http://www.researchandmarkets.com/reports/c25389

RNCOS Research Report (2005), KPO – the new outsourcing avenue for Indian BPO market

21

<Appendix-1> Traditional BPO and Challenges to BPO Market

A. The definition of BPO and Market Overview

The following definition expresses Business Process Outsourcing (hereafter called: BPO)

sufficiently:

BPO is the act of transferring some of an organization's repeated non-core and

core business processes to an outside provider to achieve cost reductions while

improving service quality12

Because the processes are repeated and a long-term contract is used, outsourcing goes far beyond the

use of consultants. If done well, BPO results in increasing shareholder value. The main difference

between BPO and more traditional IT outsourcing is that BPO offers companies a way of achieving

transformational outcomes much more quickly. In a typical BPO contract, a service provider takes over a

specific corporate function. Effective BPO encompasses much more than just changing who is

responsible for performing the process. In BPO, the outside provider not only takes on the responsibility

to manage the function or business process, but also re-engineers the way the process has been

traditionally done. (OutsourceKing.com Information Portal, 2005) And it is easier to understand the

following definition of BPO:

BPO is the outsourcing of business functions or processes, such as procurement,

to a third party. In these contracts the provider is responsible for performing and

managing the outsourced function or process on behalf of the customer. In order

to qualify under this definition, BPO contracts must involve the provider taking

overall responsibility for the business process and not just supplying IT

applications or services to facilitate the process. Thus applications hosting and

stand-alone IT outsourcing are not regarded as forms of BPO13

BPO has been made possible by improved computing and communications technology.

Unsurprisingly early outsourcing activity focused on routine operations such as transaction processing

like funds transfer – credit cards, mortgage handling, insurance policy administration and electronic

banking helpdesk are prime examples. It is estimated that the global BPO market is worth US $17 billion

with the major contribution from India, worth $12-$14 billion. (RNCOS Research Report, 2005)

Now, India is remarkable for BPO market because outsourcing offshore is an important trend in BPO

with India frequently cited as the overseas destination. India is a major provider of IT-enabled services,

particularly in the call center industry and has seen the level of business grow dramatically over the past

five years. Lower cost and improved quality are purchasing drivers at the transactions end of the 12 OutsourceKing.com Information Portal, What is business process outsourcing (BPO)?, 2005. 13 ICGCommerce.com, Frequently used procurement terms and definitions, 2006.

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knowledge continuum. Labor costs are a fraction of what they are in the UK and the US and India has a

large number of high quality English speaking university graduates.

B. Challenges to BPO Market

A more recent trend has been along what is known as the knowledge continuum and embraces tasks

which are non-routine and nearer the core of a business. For example, the outsource provider Evalueserve,

which is headquartered in Bermuda undertakes projects involving the evaluation of the commercial

prospects of inventions, provides research for hedge-fund databases and industry developments for a

market research firm among others.

Trends in outsourcing show that it is not only for the back offices of banks and insurance companies,

but that to be effective it has to be properly managed and founded on an appropriate relationship between

client and provider. Initially, BPO contracts dealt with narrowly defined transaction processes with the

prime objective being to drive down costs in highly competitive markets. Increasingly however, the

opportunity offered by BPO is in respect of a wider range of objectives beyond those of cost and quality

in relation to routine operations.

There is undoubtedly a realization among BPO companies in India that low value-added back office

outsourcing work, like voice-based call centers or medical transcription, will not continue to fetch the

profit margins they had hoped for. High staff attrition that is leading to wage hikes, coupled with over-

supply of BPO companies in India has lead to downward pricing pressure, so to remain profitable like the

earlier days, India’s BPO companies have to start offering niche services that requires vertical domain

expertise. So, it is not easy for India to maintain sustainable competitiveness of cost leadership for BPO

business because the labor cost is continuously rising. For more details of general BPO knowledge, the

articles of BPOIndia.org and Outsource2India.com can be referenced.

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<Appendix-2> New KPO and Comparison between BPO and KPO

A. The definition of KPO and Market Overview

The following definition expresses Knowledge Process Outsourcing (hereafter called: KPO)

sufficiently:

KPO is a form of outsourcing. It can be said that KPO is one step ahead of BPO.

KPO firms provide domain-based processes and business expertise, rather than

just process expertise. Due to a large knowledge pool and a significant cost

arbitrage, few countries like India, Philippines and China are front runners in

providing these services. The nature of work demands advanced analytical and

specialized skills. In the future, it is envisaged that KPO has a high potential as

it is not restricted only to Information Technology or Information Technology

Enabled Services sectors, and includes other sectors like Intellectual Property

related services, Business Research and Analytics, Legal Research, Clinical

Research, Publishing, Market Research, and so on. (Wikipedia)

KPO is a niche sector in BPO, which it calls for the application of specialized knowledge of a high

level. The KPO typically involves a component of Analysis Process Outsourcing (APO) and Research

Process Outsourcing (RPO). The evolution and maturity of the Indian BPO sector has given birth to yet

another wave in the global outsourcing scene, KPO. The success in outsourcing business process

operations to India has encouraged many firms to start outsourcing their high-end knowledge work as

well. Cost savings, operational efficiencies, access to a highly talented workforce and improved quality

are all underlying expectations in off-shoring high-end processes to India. (KPO Service, 2005)

KPO is the next big opportunity. The economic success of BPO has encouraged many firms to start

off-shoring their high-end knowledge work. However, in addition to cost savings, western companies are

increasingly looking for access to specialized knowledge professionals that are rare in the west. This trend

is now referred to as KPO and involves the off-shoring of knowledge-intensive business processes that

require significant domain expertise.

Evalueserve, an outsourcing provider for market research and intellectual property, said, “By 2010,

the size of the global KPO industry would be worth $17 billion globally, and India is slated capture more

than seventy percents of the global market that represents forty percents of the India’s BPO revenues.”

(United Press International, 2005)

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B. Comparison between BPO and KPO

What is KPO and how does it differ from BPO? KPO involves off-shoring of knowledge intensive

business processes that require specialized expertise, thus delivering high value to organizations by

providing business expertise. Examples of KPO are online teaching, patent filing, legal and insurance

claims processing, valuation research, investment research, media content supply and the likes. BPO on

the other hand involves a pre-defined way to handle a business process which is taught to agents or

employees. BPO services normally include transaction processing, setting up a bank account, selling an

insurance policy, technical support, voice and email-based support.

KPO services can enable enterprises to reduce design-to-market lead times; manage critical

hardware efficiently; provide research on markets, competitions, products and services; enhance

organization effectiveness in business administration all of which help in dealing with rapidly evolving

business scenarios. Revenue from KPO was at least twice that of BPO - $22 per hour compared to $8 to

$11 per hour - while capital expenditure per seat was about the same at $6,000 to $8,000.

Source: Evalueserve Analysis

[ Figure 12 ] Expected Growth in Global BPO and KPO Markets (2003-2010)

Comparing the opportunities in BPO and KPO markets, low-end outsourcing services have an

expected Cumulative Annual Growth Rate (CAGR) of twenty six percents by 2010. In contrast, the global

KPO market is poised for an expected CAGR of forty six percents by 2010. The figure demonstrates the

expected growth in the BPO and KPO markets. [Figure 11] KPO delivers high value to organizations by

providing domain-based processes and business expertise rather than just process expertise. These

processes demand advanced analytical and specialized skill of knowledge workers that have domain

experience to their credit. Therefore outsourcing of knowledge processes face more challenges than BPO

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(Business Process Outsourcing). Some of the challenges involved in KPO will be maintaining higher

quality standards, investment in KPO infrastructure, the lack of talent pool, requirement of higher level of

control, confidentiality and enhanced risk management. (KPO Service, 2005) For more details of general

KPO knowledge, the articles of Outsource2India.com can be referenced.

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Acknowledgements

I would like to thank the staff of Graduate Institute of Management, advanced Seoul School of

Integrated Sciences and Technologies and Executive Education, Helsinki School of Economics for

providing resources and education for my research throughout this EMBA. Also, I wish to thank my

colleagues of IBM Software Consulting Services during post-graduate study while I continue my full-

time jobs.

There are many people to thank for their support and encouragement, with whom this practical

research thesis would have been possible. First, my sincere gratitude goes to my academic advisor,

Professor Jung-Ho Kim, who has provided guidance and counseling throughout the course of this

practical research. His continual support and encouragement have kept me going over the last one year.

Also, I give thanks to Professor Constance Lütolf-Carroll, who has provided the idea and the inspiration

of well-defined business model. Many methodologies in this thesis are based on her instruction and

concept.

A special thanks goes to my classmates, the class of 2005-2007 HSE EMBA in Seoul. They have

always encouraged me in my research with their great intelligence throughout the various real world case

discussions. All the friends I have made in this class help to make my study in HSE a really happy one.

Finally, I send my deepest gratitude to my family; my lovely wife Anna, for supporting me and always

believing in me and my choices. Your encouragement, support, and patience sincerely cherished during

my studies of master degree for one and a half years. She has always inspired me to greater efforts until

completing my thesis whenever I am in difficulties for the hard work and study.

James(Kyeong-Ho) Kim, January 2007