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Most companies turn to BPO mostly for cost savings, but a notable minority sees it as a tool for strategic change. Here's where BPO is moving in its next wave, why not all vendors will catch that wave, and what to look for in those that will.

More than seven out of 10 companies are forging ahead with Business Process Outsourcing (BPO) initiatives, even as a large minority expresses dissatisfaction with current BPO results. As they look to expand or maintain BPO efforts, these companies' biggest concerns relate to data security and the overall management difficulty with BPO, finds our InformationWeek Analytics survey of business technology decision makers. For most companies, however, the financial benefits of outsourcing continue to be compelling enough to proceed, with tactical goals of cost savings and efficiency improvements still being the dominant reasons companies use BPO.

A solid "strategic minority" of BPO users exists, however. Approximately 25% of companies look to BPO not as a short-term cost-cutting tool but as a road to bigger goals: increase revenue, transform processes, spur growth, and enter new businesses. Concerns about data security, intellectual-property protection, and vendor performance will only get larger as companies embrace more of these strategic efforts, since they require more sensitive data and closer ties with outsourcers. Yet market pressures—from troubles within the financial services industry to competitors successfully tapping these strategies—may compel companies to go beyond previous comfort levels with their outsourcing efforts.

One major area "beyond the comfort zone" is knowledge process outsourcing, or KPO. Based on their successes with IT outsourcing and BPO, service providers are promoting the concept of KPO, which involves high-level tasks requiring professional judgment and experience. BPO firms face significant challenges in this latest move up the outsourcing stack, including assuring clients they have the necessary industry knowledge and potential for innovation. Similar challenges exist with outsourcers' pitch to take over entire business processes.

To make KPO work, client companies will need to have highly evolved relationships with outsourcers, which make financial services companies prime candidates to lead in this arm of outsourcing, as they have in others. To make it work, financial institutions should evaluate their KPO providers as "new hires," using the tools of HR management along with the merger skills of due diligence, including examining financial and cultural risks. Whether it's BPO, KPO, or conventional IT outsourcing, saving money will continue to be a prerequisite for any deal. It's likely only a minority of companies will have the range of management skills needed to get maximum value of these deeper, more strategic, and more complicated relationships—suggesting there's competitive advantage to be had by those that can make it work.

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