Future banking teams: Leveraging humans and computers

You probably don’t know Alok Aggarwal. But there is a fair chance you’re familiar with the concept he is credited with pioneering: knowledge process outsourcing (KPO).

“KPO is the outsourcing of core information-business related activities which are competitively important to form an integral part of a company’s value chain.” - Wikipedia

In fact, there is probably at least one project or group you have worked with that relies on outsourcing some part of its workflow to an external company, often overseas.

Before Aggarwal’s arrival on the scene, it had long been assumed that only lower-level, repetitive tasks could be outsourced through a process known as “business process outsourcing” (BPO). As co-founder of Evalueserve, Aggarwal (who is now CEO of Scry Analytics) and his team extended this concept to the outsourcing of complex and specialized skills, which evolved into KPO. Over the past 15 years, KPO providers have flourished, as onshore companies that leverage these offshore businesses have gained a competitive edge by reducing personnel costs and tapping into specialized skills on a flexible basis.

As a banker, I saw the benefit of KPO firms very early on and have worked with a variety of companies as both a client and a member of internal outsourcing committees. I have seen two fundamental things change over the past 15 years:

1. The cost differential between in-house and outsourced human capital has evaporated.
2. Computers have become cheaper and more powerful at an exponential rate.

For instance, the cost of each full-time KPO employee was about USD$15,000 per year 15 years ago, but is now closer to USD$65,000-75,000. Not cheap. Compound this with an average graduate starting salary of $45,478 in 2015 in the US and it’s clear that outsourcing is no longer the cost-effective option it once was.

This presents a huge opportunity for investment banks. But it requires a slightly different approach to outsourcing than has been applied over the past decade and a half.

Fifteen years of experience has given KPOs the institutional know-how to move further up the value chain and tackle increasingly complex work. And the void they leave behind? It can be filled with computers. By combining KPO and BPO, the real low-level work can be automated, costs can be reduced further, and the KPO process can be fine-tuned to add more value and justify its ever-increasing cost base.

Investment banks need to continue to find smart ways to outsource parts of their labor. Workstreams should be bifurcated, with repetitive tasks allocated to computers and other tasks outsourced to various knowledge partners, depending on the content and complexity. For this to work, these tasks need to be assessed not at the individual, group, or event level, but across the entire investment banking ecosystem. Only at the institutional level is there enough perspective to optimize resource allocation to the tasks required to produce the content needed.

Examined through that lens, a lot of ground can be covered with a work product delivery system that looks like this:

From a system perspective, this achieves three things:

• Lower overall costs: By replacing human capital costs with computers, the overall client servicing cost is reduced dramatically.
• Augment productivity of human resources: By pushing all humans up the complexity scale, the bank can provide a higher quality product to its clients.
• Increase operational leverage: Automation can translate variable employee/outsourcing expense to a fixed technology charge, and help avoid cyclical cost swings that can compress the bottom line in economic slowdowns—critical for banks to effectively use technology appropriately.

A bank’s long-term product delivery strategy shift should not be hindered by wage growth in non-operating jurisdictions. Instead, if it properly leverages technology, it can become a mechanism for achieving structural and persistent cost savings and a platform for scalable future improvements.

Thinking through where delivery capital (be it human or silicon) can fit into a workflow, is the road to both immediate and longer term sustainable savings.

First there was Prestech, then BPO, then KPO, and now? We should be preparing for the next stage of the investment banking outsourcing evolution, exploring and implementing new strategies for a competitive edge.

Any thoughts on KPOs or outsourcing tasks within investment banking? Email me at adrian.s.crockett@gmail.com.