Knowledge Process Outsourcing

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KPO Industry at a Glance ........................................................................ 4

Introduction ............................................................................................ 5

Major Segments of KPO Industry ............................................................ 6

Growth of Indian KPO industry ............................................................. . 7

Indian KPO Industry Outlook ................................................................. 9

Emerging Business Model ......................................................................... 10

Emerging Trends ................................................................................

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Indian KPO Industry Performance ............................................................ 15

Competitive Landscape ........................................................................

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Challenges ................................................................................................. 18

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KPO Industry at a Glance

Knowledge Process Outsourcing (offshore outsourcing) revolves around high-end knowledge work. KPO, also known as Knowledge Process Outsourcing, refers to any outsourcing service that cuts into the traditional Core capabilities’ of many large organizations. Knowledge Process Outsourcing (KPO) suitably allows clients to unlock their otherwise jammed top-line growth by outsourcing all their core work to ideal locations where the talent is skilled and labor costs cheap.

Information Technology is a key driver of improving KPO service levels and reducing costs. Businesses are looking to leverage an integrated solutions approach and process standardization with the help of an outsourcing partner to deliver critical value to customers.

Introduction

“India has a large pool of knowledge workers in various sectors ranging from Pharmacy, Medicine, Law, Biotechnology, Education & Training, Engineering, Analytics, Design & Animation, Research & Development, Paralegal Content and even Intelligence services.”

Outsourcing refers to a business restructuring or changes in current business practice that shifts operations or processes  previously performed  within the  company to an outside  entity—an independent third party. One  result of  outsourcing is that the locus of work shifts, and associated jobs migrate, outside the company. For both firms and the Government, outsourcing or “contracting out” shifts jobs among employers, but does not necessarily reduce the number of jobs. Knowledge Process Outsourcing (KPO) is a higher-end version of outsourcing of business processes that require significant domain expertise. With  the  evolution and maturity of companies’, businesses are moving towards outsourcing high-end processes such as legal processes, market research and analytics, engineering processes, design and product development. Such off shoring of high-end knowledge intensive work is termed as KPO.

Major Segments of KPO Industry

Segmentation

Data Management, Search & Analytics

Contract Research & Biotech

Engineering Design

Remote Education & Publishing

Writing Content & PublishingAnimation &

Simulation ServicesMarket Research & Competitive IntelligenceBanking,Securities & Insurance (Equity

Research Captive Centre's)

Growth of Indian KPO industry

India has become one of the most sought after destination for the companies wanting to outsource their  business, knowledge, research, legal and related high-end processes. This not only boosts exports, increases national income and creates greater employment avenues, but also increases tax revenues, caters  to the growth  of  other  related   industries like infrastructure, catering, etc. The companies involved in outsourcing activities tends to earn huge profits out of this and thus, are in a position to offer their employees the good and competitive pay packages, along with many attractive employee benefits. The Indian KPO services industry is estimated to be around USD5.7 billion currently and grew by 15-17% in the recent past. The Indian KPO providers offer a range of solutions to diverse industry segments such as FMCG, engineering, automobile, telecom, R&D, banking and financial services, insurance, etc.

In the coming years, the volume and complexity of work being outsourced to the Indian KPOs is expected to increase tremendously, due to the competitive advantages mentioned. Analysts put cost advantage, as one of the most significant drivers of KPO business. Another critical driver is the prevailing shortage of skilled human resources in developed countries, like the USA and EU.

India KPO Industry Market Size and Number of FTEs (2006-2014)

KPO firms in India would employ approximately 205,000 professionals generating revenue of $ 10 billion by 2014 from current $ 5.95 billion and 135,000 professionals in 2011. Evalueserve predicted Global KPO market will reach $17 billion revenue by 2011 in 2005. KPO market slowed down due to the Global financial crisis. With tough competition form Latin American, Eastern European and some Asia Pacific countries, India KPO market is expected to grow by 20% annually lower than KPO industry annual growth rate of 24%. But India is expected to retain its dominant position in near future.

According to Nasscom-Crisil study, knowledge services outsourcing industry in India is expected to grow at a CAGR of 22.2% over 2015 from $2 billion in 2010 and touch $5.6 billion. Globally, knowledge services landscape is expected to grow from $2.9 billion in 2010 to $7.9 billion by fiscal 2015. Business research would continue to be the most widely adopted service line with a 39.4% share, representing a $2.2 billion opportunity. Share of data analytics, on the other hand, is expected to increase from 18.5% to 20.6% ($1.15 billion) over the same period. Legal Process Outsourcing is also expected to record robust growth of $1.3 billion by FY15. In terms of verticals, financial services would continue to be the largest contributor with a 32% market share ($1.4 billion), followed by healthcare at 19.5% and hi-tech and telecom and retail at 13% each.

Growth of Indian KPO industry Continues

Indian KPO Industry Outlook

Indian Knowledge Process Outsourcing Industry expected to touch US$ 30billion by 2015 India’s KPO market is expected to touch US$30 billion by 2015 from the FY2013 level of US$20 billion, which highlights the fact that KPO industry in India, continues to grow at a CAGR of about 30% annually, according to ASSOCHAM. India dominates the Global KPO industry as it controls the 70% market and industry is seeing good growth despite the economic slowdown that impacted the outsourcing industry as a whole.

Growth in the Industry is fueled by demand for profession-based services in areas of research for capital &financial markets, legal works, editing jobs for international publishing houses, analytics, etc. KPOs has also other advantages like better work tools and processes, sophisticated client centricity, higher billing rates &more domain focused organizations.

Currently the industry has more than 3.5 lakh professionals specialized in engineering, medicines, management and professionals in the field of accountancy, company secretary and legal fraternity but there still is huge demand for professionals as the industry still needs around 6-8 lakhs professionals by 2015.

India’s professionals are proficient in KPO software like SPSS, SAS and MS Excel and well trained in advanced analytical, technical and interpretation skills. But industry is facing stiff competition from countries like Philippines, Russia, China, Poland and Hungary as these are emerging strong contenders for KPO business in view of qualified KPO professionals, low-cost advantages, domain expertise, location advantage, sales and marketing capabilities and data compliance, according to ASSOCHAM.

Indian KPO’s operate primarily through three business models, i.e., captives, third party and virtual; and the selection of a business model depends on various parameters like work complexity, internal competency levels, nature of the business (core or non-core), and costs or stakes involved.

Captive Centers

Here, a company establishes its dedicated operations in regions offering high talent availability at low operation costs. Such an arrangement caters only to parent company requirements. Since the capital investment is large with higher payback period, these are generally established by larger multinational companiesExamples include Goldman Sachs, JP Morgan, UBS, Deutsche Bank, Morgan Stanley

Third-Party Service Providers

As the cost involved with captive centers is high, especially if the volume of work is not large, third-party service providers offer a viable option to companies. One of the key benefits of third-party service vendors is that operations can be ramped up as and when required. At the same time, third-party vendors offer greater flexibility and customization to clients. Some of the Indian companies operating on this service model include Evalueserve, Irevna, Aranca, etc.

Virtual Captives

Virtual Captive centre's have both the functionality of captives and third party providers. It is a hybrid business Model. There is no upfront investment undertaken by the parent company in establishing the centre as in a captive centre. This centre acts as an overseas resource centre for a client in the third-party service provider setup. The major advantage of virtual captive is that, it provides higher quality of services involving higher transparency, control and security. The clients are usually willing to pay a premium for virtual captive services.

Emerging Business Model

Emerging Trends

Indian Companies Exploring Expansion Opportunities Overseas

A large number of Indian companies are looking towards expanding their operations by setting up delivery centers across the globe. Indian players are targeting regions such as China, Latin America and Eastern Europe to set up new offshore locations. Some of the prominent reasons for this trend include the following: • Clients are increasingly demanding localized services. Thus, Indian KPO vendors are exploring offshore locations where they can leverage the local talent and language capabilities. • Operating in different geographies with varying time zones helps in offering 24*5 services, which acts as a substantial differentiator for any KPO player.

Expanding Into Tier-II Cities

KPO players are facing concerns related to high attrition rates and real estate prices. Moreover, the pressure to maintain profit margins is fuelled by an increased level of competition. To mitigate these challenges, KPO players are now turning to Tier-II cities such as Jaipur, Chandigarh, Hyderabad, Pune, a trend that is expected to gain momentum in the near future.

Emerging Trends Continues…

Need of Professionals Consolidation and fragmentation of outsourcing fields in KPO

Boom in the knowledge process outsourcing industry is an established fact now and as per estimates of various studies the industry. Indian KPO industry growth will necessarily mean a quantum increase in the workforce engaged in providing KPO services.

Hiring of professionals such as chartered accountants, doctors, lawyers and engineers will see sharp rise.

Minimal entry requirements, low infrastructure and set-up costs will encourage the smaller technically strong companies to establish a KPO set-ups. Unlike commodity services of BPO such as call centers, CRM or large-scale back-end processing, the minimum critical size for KPOs need not be very large. What is more important is to have a high degree of specialization which will allow even small firms to function profitably. Further, since the knowledge process outsourcing business is not necessarily scale driven, smaller business entities having total strength of around 20 professional are also gaining popularity along with concept of freelance work. This style of functioning is driving the increasing fragmentation of service providers.

The emergence of “KPO” will see a proliferation and entry of new service providers in the arena of the industry. “The emerging opportunities in knowledge services are attracting a new breed of entrepreneurs, absolutely professionals like lawyers, chartered accountants, doctors, engineers, scientists, etc. into the outsourcing business..

Emerging Trends Continues…

Small Towns –New areas joining the outsourcing buzz

Expansion of offshore centres in India

India’s status as the No. 1 destination in the offshore business is not in doubt. However, lf the growth has been concentrated in a few cities, like NCR Delhi, Mumbai, Hyderabad, Bangalore, Pune and Chennai. But rising wage costs and rising attrition in the larger cities coupled with attractive benefits being offered by many state governments are driving the BPO move to the hinterland.

Various state governments in association and coordination with STPI India are developing IT/software parks with complete infrastructure to encourage companies to move to smaller cities.

States like Punjab, UT Chandigarh, Rajasthan, Uttar Pradesh taking the cue from Maharashtra, Andhra Pradesh and Karnataka, have

taken initiatives and have started investing heavily in IT Parks.

As benefits of offshoring business are becoming evident, large multinational corporations, are expediting the process of spreading the offshore presence. The bulk of this is towards fully owned captives, driven by two factors. i.e. firstly, the increasing sensitivity towards data security , IPR, and confidentiality; all of which make captives center to be the most preferred choice. Added to this, many large companies that have been testing the offshore waters are looking to plunge into the water in a bigger way. In the recent past several Fortune 500 and FTE 100 already have established their captive centers in India. The trend is to further accelerate keeping in mind the changing forces and dynamics of the industry.”

However, after a certain size, the economics of captive offshore centers becomes unfavorable as compared to contracting and outsourcing to third-party vendors; and many corporations will prefer this route as they expand in India.

Emerging Trends Continues…

Acquisitions and Mergers to increase

Acquisition and merger activity has reached new heights and is expected to be much higher in the coming years as a mode of expansion. However, along side mega deals, large number of small deals shall also become fruitful. This will be driven by acquisitions in the knowledge services domain, where acquirers will find it worthwhile to enter into small deals to acquire domain knowledge, new clients and position themselves in this small, but fast growing segment. 

Indian IT companies have been entering the both BPO and Knowledge Process Outsourcing (KPO) industry in a big way, and Systems integrators and IT companies formed the maximum percentage of acquirers. The acquisitions are found to be an easy way to acquire domain specific capabilities. Cognizant, KPIT and Patni were among the larger IT companies are examples in the category of BPO.

Indian KPO Industry Performance

India's Knowledge Process Outsourcing (KPO) industry may touch $30 billion by 2015 from the existing $20 billion, on the back of growing demand for knowledge-based services, a study said. "The rising demand for professional-based services is expected to drive the growth in the industry. It would be in areas of research for capital and financial markets, legal and editing jobs for international publishing houses, among many others," according to an Assocham study.

The country would need about 6-8 lakh people in the industry. At present, the sector engages about 3.5 lakh people, the study said. Considering the situation that there is no dearth of doctors, engineers, MBAs and lawyers in India, the industry is banking on availability of this talented pool to fill up its seats, but now they are facing the supply crunch, it said.

At present, domestic KPO industry is facing stiff competition from countries like China, Philippines, Russia, Poland and Hungary as they offer services at low costs, have sales and marketing capabilities, domain expertise and location advantage, he added.

Competitive Landscape

India will remain as the top knowledge process outsourcing (KPO) destination despite competition from China, the Philippines and Sri Lanka, says a report released by independent technology research firm Ovum.

These countries will find it hard to challenge India’s dominant position in the market in the foreseeable future, says the report. However, these regions emerged as new options for companies to pursue a multi-shore strategy.

The report cited that the KPO industry is maturing and many services have been added in the space. From its early beginnings in research and analytics, the definition of KPO now has many other services like legal process outsourcing and clinical trial management, among others. The report also revealed that share of data analytics was expected to increase from 18.5 percent to 20.6 percent ($1.15 billion) and legal process outsourcing is expected to record robust growth to a $1.3 billion market by 2015.

The NASSCOM and Crisil study further said that financial services would continue to be the largest contributor with a 32 percent share ($1.4 billion) of the market. That would be followed by healthcare at 19.5 percent and hi-tech/telecom and retail at 13 percent each. As per reports, the knowledge services market is currently pegged at around $2 billion. Some of the key Indian companies in the KPO space include eClerx, Evalueserve, Genpact and ExlService Holdings.

Competitive Landscape

Indian KPOs have significant competitive advantages in terms of low-cost offerings, skilled manpower with sales and marketing capabilities, domain expertise and knowledge of regulatory compliances. Highly educated professionals in engineering, medicine, management, accountancy, company secretary, legal fraternity are available in India. The Indian KPO providers offer a range of solutions to various industry segments such as FMCG, engineering, automobile, telecom, R&D, BFSI, etc.

With tight SLAs and quality services, Indian KPO vendors deal with confidential data, including financial data, treasury and cash management functions and investment portfolio decisions. Indian KPO Vendors not only ensure safety of confidential client data but also have better work tools and processes, more sophisticated client centricity, higher billing rates and more domain focused organizations.

Challenges

Risk Management

High Investment

Confidentiality

Emerging Destinations

KPO demands professionals with advanced analytical and specialized skills in specific domains. Confidentiality and enhanced risk management, requirement of higher level of control and high investment for infrastructure are some of the challenges involved in this sector. KPO also faces attrition, as it is difficult for companies to retain talented and trained people. With higher pay packages and perks, people change jobs very frequently. Many people are still reluctant to join as they feel it is an unstable career. Another major challenge faced by the industry is the emerging KPO destinations.

Recommendations

• Establishing business focussed SLA’s

• Proactively Design tactics to appropriately mitigate outsourcing risks.

• Creating more opportunities for highly qualified workforce.

• Government needs to take measures towards liberalisation & deregulation of policies.

• Better infrastructure facilities.

• Maintaining highest degree of quality standards, to stay ahead in competition.

• Establishment of higher educational institutions, for deployment of skilled workforce.

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