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Graduate School of Management

Pamantasan ng Lungsod ng Maynila

Intramuros, Manila

GRADUATE SCHOOL OF MANAGEMENT

Doctoral Program

Dissertation Writing

EFFECTS OF KPO STRATEGIES ON FINANCIAL SERVICES INDUSTRY IN THE PHILIPPINES

Submitted to: Dr. Pescadera

Submitted by: Oliver A. Javier

TABLE OF CONTENTS

CHAPTER 1 3
Introduction 3
Background of the Study 3
Statement of the Problem 7
Significance of the Study 8
Scope and Limitation 9
CHAPTER 2 10
Review of Related Literature 10
Benefits and Risks of KPO 13
Synthesis 17
Conceptual Framework 18
CHAPTER 3 20
Methodology 20
Research Locale 21
Samples and Sampling Techniques Used 22 Population 22 Sampling techniques and Sample size 22
Instrumentation 23
Procedure 24
Statistical Analysis of Data 25

CHAPTER 1

Introduction

Background of the Study

The present day world is witnessing a rapid change from an industrial to a knowledge-based economy. In the knowledge economy, there is knowledge intensity where efficient production relies on information and know-how. A highly skilled labor force is the key to success in the knowledge economy and knowledge industry (Skyrme 1997, Stiglitz 1999). The knowledge professionals involved in the knowledge economy are referred to as knowledge workers. Knowledge workers are those workers who have higher levels of education and their work is the output of their skills (Taylor 1998). Also in a knowledge economy, the sustainable comparative advantage of a country lies in its intellectual resources in comparison to its natural resources or cheap labor force (World Development Report).

Knowledge Process Outsourcing refers to the outsourcing of high-end complex tasks and processes like market research, investment research, patent filling, legal and sourcing and information amongst others. It includes legal process outsourcing. These are both high-end-value-added forms of business process outsourcing (BPO). KPO firms provide domain-based process and business expertise, rather than just expertise. Firms gradually move from low end to high outsourcing.

The evolution and maturity of the Philippine BPO sector has given birth to KPO or Knowledge Process Outsourcing. BPO is getting differentiated into strata based on the level of skill and knowledge required for the job. As global business is becoming more competitive, the cycle time for introducing products and services has become smaller. Customers demand high quality of services provided. In response, business enterprises adopted systems and business models that provide operational efficiency. Also, these business models also add strategic value to their products and services. Hence, many firms have started outsourcing their high-end knowledge work to low-wage destinations. This phenomenon is known as knowledge process outsourcing or KPO. Knowledge Process Outsourcing involves off shoring of knowledge intensive business processes that require specialized domain expertise (Evalueserve 2005, Sengupta 2005, Sen and Sheil 2006 ).

The outsourcing industry has been extensively researched in the past decade. Business Process outsourcing (BPO) in particular has been the topic of many analyses. Outsourcing first appeared in the IT industry in the 1980s. This was the time when companies recognized the benefits of having IT service partners in order to develop complex systems, and enhance the way that a business process or service is managed. Since then, the outsourcing industry has gone through its introduction and growth stages, with growth rates of around 50%, and has reached its transformation stage. Increasing globalization and high pressure to innovate have substantially shortened the product and service life cycles. Industry life cycles have therefore become shorter and shorter - outsourcing is no exception. Over the past five years a new form of outsourcing has become popular and promises, as BPO once did, huge growth and profit potential.

Knowledge Process Outsourcing ((KPO) is the next step up the outsourcing value chain. While BPO provides extensive process expertise, KPO is emphasizes on business expertise. KPO indicates a major industry shift, away from execution of standardized processes to carrying out highly complex and customized processes that demand advanced analytical and technical skills as well as decisive judgment. The major strength of this approach is not the cost-saving aspect but it is more the value that these services provide. They offer a sustainable competitive advantage to its customers in all knowledge-intensive industries by pricing market and industry research, data and statistical analysis, competitive analysis, and support in legal and administration process. This and similar forms of outsourcing have forced enterprises not only to adjust their organizational and operational structure to the global trend, but also to consider outsourcing in their overall strategy.

Since KPO is making a big wave in the country today, it is important to study the benefits and risks of KPO in organizations specifically in the financial institutions. Current strategies have to be studied, identify challenges, areas of improvement and formulate new strategies that KPO industries can adapt to make the Philippines a world leader in the Knowledge Process Outsourcing.

Statement of the Problem

1. What is the current state of the KPO industry in the Philippines?

2. What are the critical success factors of a KPO industry that makes a country an attractive financial services KPO destination?

3. What are the strategies that can improve the financial services KPO industry in the Philippines?

4. What are the different skills sets across KPO activities of varying complexity that makes a financial service KPO successful?

5. To what extent does the outsourcing affect the financial services industry?

Hypothesis

1. The critical success factor of KPO industry does not have a relationship towards the success of the KPO industry.

2. The different skills set across KPO activities of varying complexity does not have a direct relationship towards the success of a financial service KPO.

3. KPO Strategies do not have a relationship towards the improvement of the KPO industry.

Significance of the Study

The relevance of this study is that Knowledge Process Outsourcing has grown from a rare phenomenon to a standard in business strategies. Companies are looking for different ways to reduce their cost and risk, especially with the current economic crisis. Aside from the Philippines, many countries are also very attractive destination for Knowledge Process Outsourcing. It is interesting to know what are the strategies that are used by Knowledge process outsourcing companies in the Philippines. The effects of these strategies in the organizations specifically in the financial service industries are worth studying. Currently the KPO industry in the Philippines is slowly taking it off but not as fast as the rival KPO destinations like India and different counterpart countries. This study hopes to help KPO industries build competitive advantage by means of strong KPO strategies and help the country emerge as a leading KPO provider by not just having a captive KPO but also having a lot of third party providers.

Scope and Limitation

The time and resources provided for DBA’s candidate further restrict the scope of this study. Constraints of the DBA’s dissertation also limit the scope in terms of the industry. Thus, this study is framed within the financial service companies in the Philippines. The topics that will be covered in this study will be limited to the strategies of the KPO industries that can help the country emerge as the leading destination for KPO. Since most of the huge KPO providers are located in the National Capital Region, the study will be conducted in only in the said areas and the respondents will be limited to the top 5 KPO companies in the region.

CHAPTER 2

Review of Related Literature

This chapter provides the background of the research. This chapter provides an overview of the published literature on Knowledge process outsourcing. Knowledge Process Outsourcing is not very new, however, there are very limited literature in this field. Although there are some published research about KPO most of it are done abroad.

Foreign Literature

The Knowledge Processing Outsourcing (KPO) industry has come of age. Independent researchers estimate the annual value of KPO will reach at least US$10 billion1 in 2010. Not surprisingly, the financial services sector is leading the KPO charge. To appreciate what is happening in the world of KPO, picture this: a Wall St equity research firm has made the investment decision to not spend US$250,000 a year to cover a specific stock listed on the New York Stock Exchange. The reasoning behind not investing is that the revenue generated by covering this stock would total no more than US$200,000. As a result, this Wall Street equity research firm would in fact lose money if they covered this specific stock. Now, take a moment to imagine how the situation would change if the same Wall Street equity research firm could obtain the same high quality analysis of the stock for a cost of US$100,000 a year. It now becomes a viable investment decision to cover this stock. These types of decisions are now a reality. KPO is the key. In our example, the Wall Street equity research firm will generate an additional US$100,000 in revenue, by outsourcing the analysis of the stock in question to a captive or third party KPO provider. It gets even better. As more financial model development and even report writing is offshored, US based analysts are free to spend more time developing relationships and communicating their insights directly to investors, in the process boosting the organization’s top line revenues. In this study, KPMG examines leading KPO providers in the financial services space, the kind of work these providers are undertaking, and the geographic locations most likely to attract KPO operations. This study looks at the financial services KPO space, which is driving the KPO evolution. Along the way we aim to show that KPO is a business phenomenon in its own right, not merely an elaboration of business process outsourcing. Of course, the KPO industry still faces inevitable teething problems. Based on our study we have identified three immediate challenges for the industry: • Ongoing shortages of skilled resources • The declining competitiveness of India-based KPO providers as the Indian Rupee continues to appreciate against the US Dollar • Legal and compliance departments within KPO providers that are under resourced and inadequately empowered. Many senior executives within the financial services sector remain skeptical of the potential of KPO.

The Outsourcing Industry has been extensively researched in the past decade. Business Process Outsourcing (BPO) in particular has been the topic of many analyses. Outsourcing first appeared in the IT industry in the 1980s. This was the time when companies recognized the benefits of having IT service partners in order to develop complex systems, and enhance the way that a business process or service is managed (Schumacher, 2005). Since then, the outsourcing industry has gone through its introduction and growth stages, with growth rates of around 50%, and has reached its transformation stage. Increasing globalization and high pressure to innovate have substantially shortened the product and service life cycles. Industry life cycles have therefore become shorter and shorter - outsourcing is no exception. Over the past five years a new form of outsourcing has become popular and promises, as BPO once did, huge growth and profit potential. Knowledge Process Outsourcing (KPO) is the next step up the outsourcing value chain. While BPO provides extensive process expertise, KPO is emphasizes on business expertise. KPO indicates a major industry shift, away from execution of standardized processes to carrying out highly complex and customized processes that demand advanced analytical and technical skills as well as decisive judgment (Aggarwal and Pandey, 2004). The major strength of this approach is not the cost-saving aspect but it is more the value that these services provide. They offer a sustainable competitive advantage to its customers in all knowledgeintensive industries by providing market and industry research, data and statistical analysis, competitive analysis, and support in legal and administration processes. This and similar forms of outsourcing have forced enterprises not only to adjust their organizational and operational structure to the global trend, but also to consider outsourcing in their overall business strategy.

Benefits and Risks of KPO

The main driver for outsourcing is cost reduction. Labour cost savings overseas are just too great to be ignored. In knowledge-intensive industries such as Analytics and Data Mining Services, Research and Development, and Intellectual Property Research, companies can save significantly – as much as 40-50% – by offshoring work to low-wage countries. Destinations such as India, China and Russia are ideal for these services as they provide a large pool of engineers and even PhDs at a substantially lower cost. According to Boston Consulting Group, a typical annual salary for an Indian IT engineer is USD 5,000, and for a graduate with a masters degree in Business is USD 7,500 – about one tenth of their American equivalents (London, 2006). The cost differential between a PhD in the Sciences and Engineering in the US and in India (or in Russia) can range between USD 60,000 and USD 80,000, respectively. Besides India and Russia, countries such as the Philippines, Chile and Mexico are setting themselves up to provide high-end services at low-end prices as a way to boost employment and help their economies. Hence the increasing competition will drive prices even lower than the existing level (Kakumanu and Partanova, 2006). Another early driver of outsourcing is the shortage of skilled labour. Developed economies such as the US, the UK, and Western European countries are already facing a shortage of highly trained and specialized professionals in some knowledge-intensive, high-skill sectors, such as R&D in very large scale integration, engineering design, IT, and financial risk management. One way to mitigate these skills shortage is to source talent from low-wage developing countries. India alone produces 441, 000 technical graduates, nearly 2.3 million other graduates and more than 300, 000 postgradutes every year (London, 2006).

According to a NASSCOM-McKinsey study this is about 30% of the available supply of skilled manpower in low-cost countries (Balaji, 2005). Having one or more offshore centers can also provide flexibility in terms of human resource and time management. Outsourcing allows companies to add or reduce personnel far easier than a company can do in house, hence avoiding an expensive layoff process. By utilizing the time difference between different parts of the globe, development can take place constantly. The ability to send massive data amounts anywhere via the internet allows continual collaboration on a large scale (Kakumanu and Partanova, 2006).

Risks: One key issue is security. A company can better control access to information and protect equipment when it is in house. In Knowledge Process Outsourcing this can include confidential company data, Intellectual Property and knowledge in general. This awkward situation can be avoided by choosing a partner with international security standards such as the ISO 27000 certification.

Other forms of control can be lost as well. The quality of personneland work cannot be guaranteed. Corporations risk low quality work ormassive delays in work because they are in the hands of the outsource service provider. Besides quality, companies also can loose the knowledge they require to function. If a service provider goes bankrupt, the firmcould be in a dire situation. The company cannot even temporarily resume the outsourced roles because the internal knowledge has been lost. This can again be avoided by focusing on a company’s core activities and outsourcing non-core activities (Chanvarasuth, 2005). Public opinion in the United States and Europe can also be atremendous downside. On the one hand, companies are perceived to be sending jobs overseas, and the perceived loss of high profile jobs can cause poor publicity so that the associated costs in public relations can increase the outsourcing costs, while boycotts and protests can directly affect the bottom line. The cost of negotiating, managing, and overseeing a detailed contract can also be great. To alleviate some of the aforementioned risks, a good contract with appropriate incentives, penalties and benchmarks is very important. On the other hand, the protectionist lobby and their anti-BPO drive in the USA and Europe are indirectly helping the proliferation of global offshoring by providing free publicity. Hence this drive has increased not only India’s but also China’s, Russia’s and Mexico’s brand images because companies now feel that these outsourcing companies are capable of almost anything. It is very likely that this protectionist movement will help these low-cost companies to improve their brand image and thereby move up the value chain even faster (Aggrawal and Pandey, 2004). Another drawback is the idealized expectations regarding the return on investment and the time it will take. Many firms envision drastic cost savings of up to 80%. A company looking for a quick solution will be frustrated by outsourcing. Outsourcing goals that are too high are never reached and they often lead a company to believe that it failed in its implementation when it still achieved major gains. In most cases outsourcing can only show its real potential if it is long-term and partnership oriented. Additionally, legal, language and cultural barriers can cause serious problems. Differences in dealing with problems and conflicts, and a lack of communication between the outsourcing partners can cause friction and inefficiencies. Both companies need to respect each other’s corporate and national cultures and find mutually beneficial ways.

Synthesis

The literature presented pointed out the importance of Knowledge process outsourcing and how it helps industries to reduce cost. The literature also presented the benefits and risks associated to knowledge process outsourcing. As noted by independent researchers, Knowledge process outsourcing in the financial services sector is a multi-billion dollar industry. Previous studies also show that India is the leading in knowledge process outsourcing. The aim of this study is to see how can the KPO in financial services sector in the Philippines be improved and share a huge chunk of the multi-billion dollar industry. As pointed out in the literature, India is the leading in the KPO industry, hence, another aim of this study is to determine what strategies can be employed to be successful in the financial services KPO industry.

Conceptual Framework

Strategic KPO Framework

A successful financial services KPO must start by identifying the critical success factors of the KPO industry which determines the KPO activities that are instrumental in the success of a financial services KPO. In order for the KPO activities to be planned and executed well, the organization/industry should have a strong KPO strategies that will serve as their guiding principle in the planning and execution.

CHAPTER 3

Methodology

In the previous chapter, the literature review was presented. The purpose of this chapter is to identify and describe the methodology employed to explore the research problem and answer the questions. This chapter provides justifications for the research design and research strategy and discuses the features of qualitative research. This is followed by an exploration of the issues of data collections and the appropriateness of the sampling design. Next, validity and reliability are discussed. The data analysis technique employed in this study is also addressed. A brief sections discussing the limitations of the interview research and data analysis follows.

Research Design

In this study the companies that will be studied are from the KPO industry specifically in Captive Outsourcing Category. These are the companies with company owned operations abroad where the outsourced process activities are performed. In the Philippines there are a lot of KPO companies that belongs to the Captive Outsourcing Category. In the financial services sectors, the top players in the country that uses Captive Outsourcing KPO are Thomson Reuters, Bloomberg, Macquarie, Deutsche bank and JP Morgan to name a few.

Currently the Philippines is in the top 5 KPO destinations however, the country is still behind compared to India, China and Israel, which are in the lead. This study aims to examine the current strategies employed by these KPO companies and see the areas of improvement to make the Philippines the leading KPO provider destination.

Even though KPO industry is not new in the Philippines, there is not much study conducted in this field. It is very difficult to find any literature about KPO in the Philippines; hence this study will be conducted as an exploratory research design, which allows the researcher to examine a new interest by breaking new ground in an inductive way for better understanding the phenomenon (Babbie,

Research Locale

Knowledge Process Outsourcing (KPO) is not new in the Philippines, however, there is not much study done about it in the past. This study will be about the KPO in the financial service industry in the Philippines. Since most of the KPO companies are located in the National Capital Region, data will be gathered from companies within the said area.

Samples and Sampling Techniques Used

Population

Since the focus of this study is in the Knowledge Process Outsourcing, the data will be gathered from the people working in the KPO in the financial service industry specifically under the Captive Outsourcing category. The respondents will be the decision makers of their respective organizations. They will be the senior managers like Operations Managers, Global Heads, Training managers and possibly Human Resource Manager. The companies that will become respondents of this study will be chosen in terms of their tenure and performance in the industry.

Sampling techniques and Sample size

The research will use purposive sampling technique. The target population for this study is limited to financial companies using KPO strategies. The companies will be selected on the basis of their performance and ranking in the industry. The companies that will be selected will be coming from the top 5 financial companies using KPO strategy.

As mentioned by Sekaran (1992) and Zikmund (2000), the largest possible sample size should be used to reduce the sampling error and increase the generalization of the result. As the potential population is relatively small, and there will surely be difficulties in gaining the agreement of senior management personnel to participate due to commercial sensitivity, the whole sample size will be used in order to achieve the outcome of at least 5 companies agreeing to participate in the research. Qualitative analysis approach entails a repetitive interaction between theory analysis to discover underlying meanings, patterns and the relationship between variables (Babbie, 2007; Bryman, 2004). There are different methods in qualitative analysis such as grounded theory, semiotics and conversation analysis (Babbie, 2007; miles and Huberman, 1994).

Instrumentation

In qualitative research, interviewing varies a great deal in the approach taken by the interviewer (Bryman, 2004). This study begins with clear focus topic with the aim to gain knowledge by seeking the participant’s perspective. Therefore, the interview process must be formulated in a sufficiently open way to encompass the entirely of the participants’ problems and how they worked to overcome them. Thus, semi-structured interviewing with an open-ended questionnaire is the ideal type for this study. (Babbie, 2007; Bryman, 2004). Besides, by asking general questions before being asked more specific questions will reduce the order bias that is caused by the influence of respondes from earlier questions in a questionnaire (McPhail and Perry, 2001)

Procedure

Senior managers who have the power in decision-making will be selected for interview. Each senior manager will receive an informed consent letter, which will provide detailed information about the purpose of this research. Signed informed consent forms will be returned to the researcher at the interview.

Participants will be requested to contribute about 20 to 30 minutes for a recorded interview, face-to-face, in-depth interview at a venue and time chosen by them. After confirming that participants understood the aims of the study and after the questions are answered, they will be asked for their permission for the interview to be recorded for transcription.

Under semi-structured in-depth interview forms, open-ended questions will be used. Once the interview is completed, raw data will be kept confidential. The transcription will be conducted by the student researcher and the participants will be offered the opportunity to review the transcript of the interview.

Statistical Analysis of Data

In this study , Mean, Media, Mode will be used to treat the data. And to understand how far apart or close together the participants’ responses are and to understand more about the nature of the data, standard deviation will also be used. The standard deviation tells us how well the mean represents all the data.

Mean formula:

(( (x

(

Standard deviation formula:

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Successful Financial Services KPO

KPO activities

Critical Success Factors

KPO strategies