A new report has labelled Knowledge Process Outsourcing (KPO) as a recognized and mainstream outsourcing option, particularly in the financial services sector.

The KPMG International report claims KPO has come of age with services in the financial services sector alone expected to reach US$5billion by 2010.

KPMG IT advisory director, Bob Hayward, said KPO is seen as the third generation of the outsourcing evolution and involves outsourcing more highly skilled processes basing its appeal primarily on intellectual arbitrage rather than the cost reduction potential of its counterparts.

Within the global financial sector, KPO has already been used to handle - among other things - credit scoring, loss protection calculations and fraud analytics.

Hayward said that Australia is well placed not only to make use of this new style of outsourcing, but also to provide KPO services. "This form of outsourcing has been occurring for several years, however it is most mature in the financial services sector, and we believe this will extend to other industries in the near future," he said.

"Australia is well placed to be both a key provider and consumer of KPO services. Our sophisticated economy gives us a wealth of intellectual capital to underpin KPO providers, while many Australian based organisations will find KPO a compelling value proposition."

KPMG's research found that the global KPO sector is set to be worth between US$10billion and US$17billion within two years.

To better explain KPO, Hayward cites the hypothetical example of a Wall St equities research firm which is faced with spending US$250,000 to cover a specific stock when the most it can hope to achieve in revenues from that research is US$200,000.

However, if that research can be outsourced to a KPO provider at a cost of US$100,000, the operation suddenly returns to profitability.

As well as the profit uplift, more of the home office analyst's time is freed up and can be put to use on even more high-value activities.

Outsourcing began with IT Outsourcing (ITO) in the 1980s, when strategies were put in place for third parties to manage IT systems' maintenance, development and application.

In the 1990s, this was followed by Business Process Outsourcing (BPO) which focused on relatively elementary and standardized processes.

"One of the most surprising aspects of KPO is that it focuses on the highly skilled activities which were traditionally considered part of a company's competitive advantage or core activities," Hayward said.

"In this regard, this marks a major stepping stone for the outsourcing industry; moving from being at the periphery of the enterprise to the very heart of it. Now it's there, the possibilities are endless."

Hayward said a long-term concern may be the apparent shortcomings in the KPO providers' legal and compliance departments - which could place valuable intellectual property at risk - and the escalating battle for talent.

Due to the highly specialist skills which it offers, he said there is not the same sized talent pool available to KPO providers as is the case for BPO or ITO.