What is driving analytics outsourcing

Outsourcing of analytics-related processes started with such companies as GE Capital, American Express, HSBC and Standard Chartered, which opened captive units to service their own internal analysis requirements.

Admittedly, the analytics industry has gained prominence in terms of size over the last decade. Recently, many third-party vendors such as Adventity, EXL, WNS, Inforte, SmartAnalyst and MarketRx have opened shops offering a range of analytics services ranging from market intelligence to design of clinical trials.

Outsourcing decisions will have many connotations and will be governed by factors that could be cultural, political and financial. Our proposed framework by no means captures all of the myriad dimensions, but it offers a rich insight that relates practice to a theoretical concept. Both the knowledge-based view (KBV) and resource-based view (RBV) of the firm provide an interesting conceptual basis to underpin KPO decisions. If we examine KBV from the perspective of the theory of the firm, then specialization occurs as a function of market size. Given that specialization is driven by economies of scale and scope, firms look for deconstruction to derive the maximum value from any process. The central economic concept is that the horizontal boundaries (i.e., product range and market segment) of a firm are dictated by the firm’s economies of scale and scope. Therefore, it is the market that determines the degree of specialization pursued by the firm and is the driver for its outsourcing decisions. Firms are continuously exploring to build new capabilities and derive maximum value from their existing ones. Richness in resources and capability enables firms to drive maximum value and attain competitive advantages. The key is to recognize what capabilities to obtain from the market and which ones are to be internally driven. This has good potential to re-define the boundaries between ‘core’ and ‘non-core’ processes.

Evidently, there are key factors that motivate firms to outsource their knowledge processes to other companies. First and foremost, the clients prefer to focus on their core competencies. At the same time, competition demands that clients spend a considerable amount of time and effort in analyzing information to arrive at very good business decisions. Second, under the present regulatory regime, there is a gamut of compliance reports to be produced.

Combining information resources with analytical capability

 Both data gathering and holding companies are inclined to enter the KPO turf as KPO services seem to show great promise of generating higher premiums. Database companies for consumer, clinical and financial data have been allured by the KPO business and are moving up the value chain.  Data aggregation and information source companies like Factiva and Qbase are growing remarkably.  Consider the acquisition of  ChoicePoint Inc.. It was acquired by Reed Elsevier, the parent of LexisNexis, in a cash deal worth $3.6 billion. ChoicePoint is a data aggregation company for consumer data. It also provides private intelligence services such as employee screening among others. LexisNexis provides high-tech searchable archives of contents from newspapers, magazines and legal documents. It also publishes legal, tax, regulatory and other information. The deal combines ChoicePoint’s and LexisNexis' data assets and analytics capability; it will strengthen the combined entity's ability to meet growing demand in the KPO space.

Likewise, Hewitt Associates has acquired CSi this year to strengthen its compensation analytics capabilities in the Asia Pacific region. CSi is an Australian firm that specializes in providing pay-related data and related consulting services. Hewitt Associates has been into human-resources consulting and outsourcing space for quite a while. Such a deal will arm Hewitt with rich data sources on remuneration that it can combine with its analytical capabilities. That way it seeks to move into a space where it can dish out specialized services to clients on compensation-related processes. Obviously, Hewitt considers it to be a great addition to its portfolio as it gets the firm with the opportunity to move into a new KPO sub-segment.

Firms also need to acquire a competitive advantage in better understanding their customers and markets. All this may entail spending time and effort on hiring highly skilled human resources. Talented staff need to be hired, retained and developed within the company. This is where third-party vendors pitch in. Let the vendors deploy their own resources dedicated to the client such that the vendors work as an extended team of the company. This creates a win-win situation for both parties. The rationale looks simple, but it comes with its own set of challenges. Cost advantage is obvious, but is this a sustainable business solution? What may happen a few years down the road when business grows and the decision making process itself may be in need of being outsourced? Why is a country like India attractive to clients? Is it plain cost differentials or quality of services? Will the client be affected in the future when the third-party vendor gets to understand the client's business? One day the vendor might endeavor to take up the business on its own once it has gained sufficient market and financial strengths!