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Knowledge Process Outsourcing: The Big Game
Touted as the Next Great Thing to happen to the outsourcing industry in India, knowledge services or KPO, could outpace business process outsourcing. While the latter draws upon the process expertise of the vendor, the former utilizes specialized knowledge skills. In the last two years, KPO has grown to encompass several specialist areas that were earlier considered off-limits for offshoring. For instance, a legal outsourcing firm employs lawyers; a pharma R&D outsourcing company recruits doctors, PhDs in life sciences and an auto engineering outsourcing firm requires engineers with CAD/CAM expertise. Unlike traditional BPOs where relatively low-level skills were required, here knowledge and professional education is the key. This report tells you what KPO consists of, what countries dominate, who the major players are category by category, what billing rates you can expect to pay, and what the challenges are for both clients and service providers. KPO: Skills to WinThe table below lists a few of the prominent KPOs and the skills required.
KPO Skills: The Global SpreadAccording to a Confederation of Indian Industry (CII) study, KPO will grow at a compounded annual growth rate of 46% to be worth $17 billion by 2010, of which $12 billion will be outsourced to India. NASSCOM projects that the KPO sector in India may reach $15.5 billion by 2010, up from $1.2 billion currently. Several other countries are now trying to build capabilities in specific KPO areas. Russia claims to be a good destination for healthcare- and technology-related KPOs. The Philippines has established itself as a successful animation outsourcing destination.
India, however, remains the proven and favored destination, way ahead of other competitors in most areas, especially financial research, legal and healthcare/pharma research. The reasons that usually influence buyers' decisions regarding choice of destination are:
Underlying all of this, of course, is the availability of high-quality personnel at a reasonable cost. Proliferation of VendorsSince 2004, India has seen a proliferation of vendors in every niche. Apart from the large number of entrepreneurs and professionals starting KPO outfits, almost all the large multi-service BPOs (like WNS and MphasiS) are joining in, attracted by growth and higher margin business. Some of the prominent KPO segments and players in India are given below.
The list is merely indicative, and in each segment there are anywhere between 40 and 100 players. These can comprise a handful of employees or a few hundred like Evalueserve and Ugam. Billing Rates for KPOs: The Key DriverThe fact that qualified professionals in India are paid approximately half the salaries earned by their counterparts in the US has been one of the biggest drivers for the sector. This has resulted in lower billing rates per hour from vendors in India. The diagram below gives approximate billing rates across various segments.
Captives Outnumber Third-party Vendors in the KPO SpaceKeen to reap the benefits of outsourcing yet not willing to expose themselves to risks, a number of companies have opted for the captive route. This enables them to protect themselves against possible IPR threats and feared loss of patented material. For instance, several pharma and legal companies that deal with sensitive data have opted for captives. (Nineteen of the top 20 global pharma R&D companies have established R&D centers in India.) These captive KPOs are expanding their India presence:
New Verticals and New MarketsThough the US has traditionally been identified as the single largest market, other countries such as Japan have also commenced outsourcing of knowledge activities. Some of the latest verticals that are traveling the outsourcing route include architecture and civil engineering. Hitachi, provider of software development and systems maintenance services, established a niche outsourcing captive in India to increase its overseas business and revenue from foreign operations. The joint venture between Harris Smriga & Associates and Taj Design Services will cater to the infrastructure design needs of HS Associates. The decision was taken keeping in view a shortage of civil engineers in the US owing to the growth of the IT sector.
Challenges Ahead...With significant hype surrounding the industry, the KPO ring will only grow louder with time. However industry experts envisage a shortage of qualified personnel in the next couple of years. Increased employee attrition will also make KPOs innovate their recruitment and retention strategies. The industry needs to take significant initiatives to grapple with the shortage of quality supply of professionals and ensure strong training methodologies for their recruits. To get more complex jobs, hence higher billing rates, issues of data security and patent infringement need to be addressed more proactively. With a positive buildup and expectation from India in the KPO space, the onus on the industry to deliver weighs even heavier. Given that projects can be relatively small and infrastructure requirements minimal, entry barriers are low. Domain expertise and qualified personnel rather than size are the keys to success. Owing to this fact new KPOs emerge on the outsourcing scene every other day. For every single large KPO player in an area, there are an estimated 10 small players offering similar services -- usually at lower billing rates. While entry in KPO is easy, surviving and winning is what will set apart the stronger players in the long run. We expect a wave of consolidation in the industry between 2006 and 2008. We will see a far greater number of small deals, driven by acquisitions in the knowledge services space, as acquirers will find it worthwhile to do small deals to obtain specialized knowledge, capabilities and customers. The mushrooming of small niche players will, in turn, create a large pool of acquisition targets. High degrees of specialization and innumerable niches will allow even relatively small firms to exist profitably. So even as consolidation picks up pace, the explosion of new service providers will create further fragmentation. Overall, fragmentation will become a stronger wave than consolidation among the KPOs, leaving the industry with even more players by 2010. However, the abundant availability of these small vendors as acquisition targets will lower valuations. This will be more so for the small, multi-service outfits without the financial muscle to scale. Useful LinksValueNotes About the Authors:Deepali Sathe is an analyst with ValueNotes Database, a research firm focused on the outsourcing industry. ValueNotes provides service buyers, vendors, consultants and others in the outsourcing industry with access to in-depth research and analysis backed by reliable primary intelligence. Contact Deepali Sathe at deepali (at) valuenotes.com or visit http://www.valuenotes.com.Aradhana is an analyst with ValueNotes Database, a research firm focused on the outsourcing industry. ValueNotes provides service buyers, vendors, consultants and others in the outsourcing industry with access to in-depth research and analysis backed by reliable primary intelligence. Contact Aradhana at aradhana (at) valuenotes.com or visit http://www.valuenotes.com.Reproduction Without Permission Is Strictly Prohibited – Request Permission Publish an Article: Do you have a sourcing tip, learning or case study? Share it with the largest community of Outsourcing professionals, and be recognized by your peers. It's a great way to promote your expertise and/or build your resume. Read more about submitting an article.
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