Contents :
  • Meaning of Business Process Outsourcing (BPO).
  • Types of BPO's.
  • Advantages & Disadvantages of BPOs.
  • Meaning of Knowledge Process Outsourcing (KPO).
  • Goal and Motive of KPOs.
  • Benefits of KPOs.
  • KPOs in India.
  • Books of Account and Methods of Accounting Maintained by KPO and BPO.

What is meant by Business Process Outsourcing (BPO) ?

Business Process Outsourcing (BPO)

Due to the faster communication and speedy means of transport, the World has become smaller. Further, because of globalization, trade barriers between countries are getting dismantled. As costs of different inputs for different industries can vary widely in different countries, industrialists and businessmen now have a wider choice for manufacturing their entire range of products or parts of products at different locations, where the costs are cheaper. In other words, they can outsource part or the whole product to an outside party.

Meaning of Business Process Outsourcing (BPO) :

Business process outsourcing means handing over some functions and processes to a business process outsourcing company which studies these functions and processes thoroughly.
Outsourcing became popular with the development of Information Technology. Experts in information technology in developed countries like Europe and USA, cost a huge amount. However, the same work can be done at a much cheaper price in countries like India, Mexico or China where the labour is comparatively cheaper. Because of internet, it is also very easy and quicker to transfer enormous amounts of data over long distances and therefore, there are no transportation costs involved. This concept started getting very popular in the USA, where labour is expensive. With the highest kind of scientific and technical education being available in the USA, most manufacturing companies producing goods right from eatables to huge trucks, now resort to outsourcing.
For example, car manufacturers in USA, would like to get certain parts manufactured in Korea or Taiwan or India, where costs of labour is much lower.
There are many electronic products where the design is made in USA, but the manufacturing is done in China.
Business process outsourcing can be done fully or partially. In case of fully outsourced business, the entire manufacture or processing is done outside and only the finished product is bought back to be sold under the own name and brand of the outsourcing company. The outside company or enterprise has its own building, machinery and the entire management set-up. The only thing it does not have to do is marketing. Because the entire output is sold to the outsourcing company. In case of partial outsourcing, only partly processed information or spare parts are sold back to the original enterprise.

Types of BPO's :

In case of IT BPOs the following types are often seen.

1) Back Office Outsourcing :
Here, the original office retains its main external office where meetings and reactions with external agencies take place. But, all internal processing of information is outsourced.
For example, in an institution like LIC, where there are millions of policies to be issued, a substantial amount of data processing is required. LIC therefore, outsources the data feeding portion to outside agencies.

2) Front Office Outsourcing :
Many institutions have now started outsourcing front office functions like receiving new customers and giving them introductory information about the company and so on.

3) Off-shore Outsourcing :
Some developed countries where labour costs are high, give out work in other developing countries. This is off-shore outsourcing.

4) Near-shore Outsourcing :
Outsourcing to neighboring countries would be near-shore outsourcing.

Advantages of BPOs :

1) Concentration on Main Business :
By giving part of the work outside, the organisation can concentrate more on the main business and carry out expansion more efficiently.

2) Reduces the Overheads :
Outsourcing generally reduces the total expenses of an organisation as part of the work is done by less paid work force.

3) Increase in Quality :
By outsourcing a part of the activity to a specialized agency, can increase the quality of the final output of an organisation.

4) Reduces the Stress :
Outsourcing reduces the stress on a company's work force as the responsibility now gets divided.

Disadvantages of BPOs:

1) Leads to Unemployment :
Outsourcing can result in making some employees redundant in the original organisation and can lead to unemployment, as is happening in USA at the moment.

2) Reduces the Desire of Work :
Outsourcing lessens the desire of the existing work force to put in their maximum productivity as they would like more and more part of the work getting outsourced.

3) Loses its Knowledge :
Outsourcing can result in a company doing only trading and lose its manufacturing knowledge and expertise altogether. Car manufacturers in USA, for example, may stop manufacturing cars altogether, if they outsource entire production to Korea or Japan.

4) Trade Secrets are Out :
Outsourcing can result in letting out trade secrets to outside organisations and hence, the original company lose its own expertise altogether.

What do you mean by KPO (Knowledge Process Outsourcing) ? 

Knowledge Process Outsourcing (KPO)

As we move further into the Information Age, our success lies in our ability to apply the knowledge that we have obtained. Some of the changes that are occurring in Information Technology are astounding. It will change the face of the business word forever. In this knowledge era, our success depends on what we know and what we do with what we know. Perhaps one of the most impressive phenomena to occur in the countries such as India is KPO, or knowledge Process Outsourcing. "The maturity and success of outsourcing strategies is leading businesses to shift towards the offshoring of high-end processes to low-wage destinations. This is referred to as Knowledge Process Outsourcing.

Meaning of Knowledge Process Outsourcing (KPO) :

KPO involves knowledge-intensive business processes that require significant domain expertise, analytic skills and judgment and decision making capabilities.

Goal and Motive of KPOs :

The goal of KPO is to deliver value by providing superior expertise decision-making as opposed to cost saving alone. Therefore, companies can improve top line result and better their bottom line.
The main motive behind KPO is to allow companies to invest time, money and human resource into main processes and fuel growth. It helps free up an organisation's capital and reduces costs besides allowing the company to save on human resource costs it would otherwise have to incur. It presents organisations with an opportunity for radical improvement. The rise of a new class of KPO providers creates strategic growth for new ways to maximize the productivity and innovation of existing resources and divert focus by running their own captive centre.

Expected Benefit of KPOS :

  1. More granular market and customer segmentation.
  2. More predictive response modeling and propensity cross-sell/up sell modeling.
  3. Precision marketing, churn prediction and management, customized products and services in finance, insurance, telecom services.
  4. For retailers, store and shelf space management at neighborhood market level and store level.
  5. Promotional efficiency tracking at micro-market level.
  6. Category/brand performance measurement tracking and control at micro-market level.
  7. Market mix modeling at lower granularity levels of product, geography and time dimensions.
  8. Precision and dynamic pricing, promotion and product portfolio design and optimization.
  9. Primary, secondary and web-based market research.
  10. Monetization, predictive analysis and portfolio management of intellectual property and patents.

KPOs in India :

India is emerging as a key player in the KPO space due to its large base of highly qualified professionals. India has advantages over other locations as an offshore destination for KPO. The depth of knowledge, judgement and expertise that India's abundance of educated professionals can offer drives KPO. From doctors and lawyers to chemical engineers and Ph.D.s, India is the world's third largest brain bank with approximately 2.5 million technical professionals. In India, six times more people go to universities than in China. And, it is no surprise that India is developing into the second largest English speaking resource in the world.
A KPO does highly skilled domain specific work. It has the requisite expertise to execute complex tasks. Talent looking for KPO jobs needs to have high level of domain expertise.

1) Basic Requirements for KPO Jobs :
  • Excellent communication skills 
  • College education
  • Good soft skills
  • Domain expertise

2) Areas of KPO Jobs :
KPO jobs are available in the following functional areas like :
  • Operations
  • Finance
  • Human Resources
  • IT

3) Advantages of KPO Jobs :
Some of the advantages of KPO jobs are as follows:
  • Global exposure.
  • Industry standard HR practices.

4) Distinctive Practices for Successful KPO :
Unlike BPO, which has become a commodity operation, KPO service providers need to have distinguished practices and demonstrate deep vertical make domain expertise. Domain-specific knowledge is the key to understanding the business context and delivering timely revenues impacting insight that what differentiates KPO from BPO. Providers who can demonstrate that domain knowledge will operate at the high-end of the value chain and provide their clients with significant value.

Books of Account and Methods of Accounting Maintained by KPO and BPO

BPO and KPO are the companies providing services to various business. These are the services organisations handling some function and processes of a company situated in other countries. Business process outsourcing can be done fully or partially. KPO involves knowledge - intensive business processes. These organisations. Companies receive their fees in foreign currencies. These companies have to maintain their books of accounts as per the rules and regulation in Foreign Contribution and (Regulation) Act, 1976 and Rules framed thereunder, and as per the norms and conditions of International Accounting Standards.

Books and Record to be Maintained :

  1. All associations, which have received foreign contributions are required to maintain separate books of accounts.
  2. FCRA specifies that the books of account should be maintained on the principles of double-entry book keeping on yearly basis from 1st April to 31st March of the year.
  3. Every year Balance Sheet and Receipts and Payments accounts are required to be prepared and certified by a Chartered Accountant.
  4. Record of contribution received in kind is required to be maintained as per Proforma provided in FC-6.
  5. Where organisation has received foreign securities, Form FC-7 is required to be followed to maintain the records of such securities.
  6. It may be noted that separate books or accounts specifically for foreign contribution are required to be maintained.
  7. Under no circumstances, domestic contributions should be mixed up with foreign contributions.
  8. In case of contributions received in kind, the approximate value is required to be mentioned in Form 6 and is also required to be reported in Form FC-3.
  9. FCRA does not specifically prescribe any method of accounting. Therefore, a organisation should continue to maintain its account on the method of accounting it has been following prior to FCRA registration.
  10. The FC-3 statement should be prepared on cash basis, based upon the receipt and payment account.

Accounting for Foreign Contribution Received in Kind :

As per rule 8 (1)(a), account has to be maintained for foreign contribution receive in kind. Form FC-6 provided the format and the manner in which the receipt as we as the utilization of contributions received in kind. The entries made in FC-6 should correspond with entries made in Form FC-3.

Maintenance of form FC-6 - An organisation may keep the Form FC-6 in a book form, Form FC-6 requires the following information to be recorded in case of receipt :
i) Date
ii) Name and Address of the Donor
iii) Mode of receipt
iv) Purpose of receipt
v) Quantity received
vi) Approximate value
vii) Date of intimation sent to Central Government

Recording of specified information With regard to utilization and disposal of contributions received in kind, Form FC-6 requires the following information to be recorded :
i) Date
ii) Name and Address of the Donee
iii) Purpose
iv) Quantity utilized by the organisation
v) Quantity sold
vi) Quantity otherwise transferred
vii) Quantity, if sold, the amount for which sold
viii) Reference to entry in FCRA account
ix) Quantity in stock

It may be noted that it is not necessary to file Form FC-6 with FCRA return in Form FC-3. In case when article is sold and some revenue is generated in Indian currency, such amount should be shown as receipt in Form FC-3 as wel as the FCRA cash book.

Approximate Value of Contribution Received in Kind :

Form FC-6 is like a stock register, where the receipt movement and closing balance of all goods received in kinds are maintained in quantitative term. But, column-6, of the Form requires approximate value of the goods to be specified. In this context, it may be further noted that, the approximate or the estimated value of contribution received in kind is required to be reported in Form FC-3, column 688. Therefore, for reporting purposes of contribution received in kind, column 6 & 8 of the Form FC-3 are relevant and Form FC-6 is just a format for preparing the books of accounts with regard to contribution received in kind.

'Cash Basis' Method of Accounting :

There is a commonly prevailing understanding that FCRA prescribes 'Cash Basis' method of accounting. Such presumption has resulted due to the requirement of furnishing receipt and payment account along with Form FC-3 as per Rule 8(2). But, there is no specific mention of the method of accounting to be followed by the organisation for FCRA purposes. Section 13, talks about the maintenance of accounts, but there is no reference to the method of accounting to be followed by the organisation. The text of section 13 is reproduced as under :
Recipients of foreign contribution to maintain accounts etc. very association, referred to in section 6, shall maintain, in such form and in such manner as may be prescribed :
a) an account of any foreign contribution received by it,
b) a record as to the manner in which such contribution has been utilized by it.
It is evident from Section 13 that no specific method of accounting has been prescribed. But the intent and requirement of FCRA in this regard are to some extent clarified in Rule 8 of FCR Rules, 1976. The text of Rule 8 is reproduced 'as under :

Maintenance of Accounts :

1) Separate set of accounts and records shall be maintained, exclusively for foreign contribution received and utilized :
a) in Form FC-6, where the foreign contribution relates only to articles as referred to in item (1) of sub-clause(c) of clause (1) of section 2;
b) In the cashbook and ledger account on double entry basis, where the foreign contribution relates to currency received and utilized, and a separate bank account shall be maintained in respect of such contribution;
c) In Form FC-7, where the foreign contribution relates to foreign securities.

2) Every account specified in sub-rule (1) shall be maintained on an yearly basis commencing on the 1st day of April each year and every such yearly account duly certified by a chartered accountant in Form. FC-3 along with a Balance Sheet and statement of Receipts and Payments, shall be furnished, in duplicate to the Secretary to the Government of India, in the Ministry of Home Affairs, New Delhi, within four months of the closure of the year."
From the above, it can be seen that as per Rule 8 (1) (b), all organisations are required to maintain separate books of account for foreign contribution received and utilized. The books of accounts required are ledger and cash book maintained on the principles of double entry. Further Rule 8(2), specifies that Balance Sheet and Receipts & Payments Account should be submitted. There is no mention of the specific method of accounting to be followed by the organisation.

Reporting in FC-3 Form :

From the reporting requirement of FCRA, it is evident that the authorities are interested in the actual receipts and utilization of FCRA funds. If we see the Form FC-3, we find that the reporting is to be made for the receipts and utilization of FC. FCRA also requires submission of receipt and payment account along with FC-3 return. The intent of FCRA is very clear that it wants the organisation to report all the FC transactions on cash basis. In other words, the organisation should report the actual receipt and payment of foreign funds during the previous year irrespective of the method of accounting followed. The organisation which are following accrual basis of accounting should not prepare the FC-3 statement on the basis of their income and expenditure account. The FC-3 return should be based on the receipt and payment account. As long as the organisation is complying with the reporting requirements of FCRA, it does not seem necessary to change the method of accounting only for the purposes of FCRA.