India set to ride the KPO wave: Report

The market for KPO or Knowledge Process Outsourcing, which follows the success waves created by ITO (Information and Technology Outsourcing) in the 1980s and the BPO (Business Process Outsourcing) in the 1990s, is expected to touch $10-17 billion by 2010 and India is well poised to grab a major share of the market, a research paper released by the global audit, tax and advisory services group KPMG has revealed.

Releasing the report Knowledge Process Outsourcing (KPO): Unlocking top-line growth by outsourcing 'the core,' during an outsourcing industry event organized by Nasscom in Mumbai, Edgidio Zarrella, global partner-in-charge, IT advisory, KPMG, said that KPO, which is seen as the third generation of the outsourcing process, is fast becoming a mainstream outsourcing option and has come of age.

Unlike other outsourcing methods, KPO involves outsourcing more highly skilled processes and within the financial sector it is the most mature form of outsourcing, being used to take care of credit scores, loss protection calculations and fraud analytics.

According to Zarrella, in financial services sector alone, the market for KPO is expected to touch $5 billion in the next 2-3 years and this form of outsourcing will extend to other industries in the near future.

KPO may still only represent a small percentage of the total outsourcing market but, with the financial sector demonstrating just what it can be used for, I think that all of these numbers are set to increase exponentially, Zarrella said.

According to the study, India currently leads the KPO sector globally, accounting for around 70 percent of revenues. However, many new locations like Estonia and Wales are springing up to create niches and attract work for themselves and other countries like Canada, China, Australia, Singapore, South Africa and parts of the UK are now competing for a piece of the action.

Asian countries like India, Malaysia, Indonesia are natural destinations for these. They have the advantage of demographics on their side, Zarrella said.

Similarly, some countries in Eastern Europe and Latin America too could develop as important non-English speaking centers. And, countries offering attractive personal tax regimes, superior lifestyles and physical security are also well placed to attract professional and technical talent from less favorable locations.

However, none of these countries are a threat to India because India has the numbers. If any company wants to scale up, they will have to do it from India, he added.

According to Zarrella, with 32 percent of India's population being below 15, it is only in this country that abundant manpower is available for this kind of an industry. None of the other places that are trying to build a KPO niche has such a huge young population, he said.

However, the top KPMG executive warned KPO is not a volume or cost arbitrage game but about knowledge and clients pay top dollar for quality. And, India, which already has a strong base in IT services and BPO sectors, should now build a knowledge base and move up the value chain.

These are premium dollars. People will pay only if you have the knowledge and wisdom that they do not have in their companies. It is not a costs game, it is a knowledge game, he said.

The study notes that the possibilities that KPO, which surprisingly focuses on the high-end activities that were traditionally considered part of a company's competitive advantage or core activities, presents in India are endless.

However, there are major challenges to overcome too.

Firstly, India's industry competitiveness is on the decline following the appreciation of the Indian rupee against the US dollar.

Secondly, there are apparent shortcomings in the KPO providers' legal and compliance departments that could place valuable intellectual property at risk.

Thirdly, KPMG foresees an escalating battle for talent in the KPO market due to the highly specialist skills which it offers. And, to overcome high attrition rates, KPO providers need to quickly adopt recruitment and retention strategies to attract and keep staff with the required qualification and skill sets.

Without those talented people, KPO simply cannot exist. Such people - in appropriate locations - will become extremely sought after, Zarrella said, adding that KPO providers should look for alternative locations for additional delivery centers, both from a customer and service provider perspective.

Success in offshoring business operations has encouraged many multinationals to start outsourcing key business processes and high-end knowledge work, said Pradeep Udhas, global partner-in-charge, sourcing advisory, KPMG.

Cost savings, operational efficiencies, access to talented workforce and improved quality are driving offshoring of high-end knowledge-based processes, Udhas said.

Exploring the business opportunities KPO presents in India, Udhas said that even at 20 percent annual wage inflation, India will continue to retain cost competitive advantage over the matured markets for at least 15-20 years.

The salaries in India now allow us a 10-15 years of free way to use the cost benefits to our advantage. However, there needs to be an understanding of what is needed by the companies, Udhas said.

India can also become a hub for a lot of countries in the region like Sri Lanka, Vietnam or even Pakistan, he added.

According to Udhas, though the financial sector will continue to fuel the growth of the Indian KPO market, pharmaceuticals, core accounting and legal sectors will gain grounds.

Udhas was also hopeful that the captive units would continue remain dominant though catering to niche areas in the KPO landscape.

According to the report, as the KPO industry moves from basic and moderate complexity work to high complexity work, the boundaries separating the core activities of a global institution from the non-core activities are likely to be redrawn and Indian KPO providers could tap the opportunity by offering services of consultants with cross functional experience who would provide strategic inputs for business. These could be in the areas of investment research, IP launching, data analysis, business research among others.

The KPMG report follows another report published by GlobalSourcingNow which identifies India as the leader in KPO services.

The myth that Indian companies can only provide software coolies is changing as businesses tap into its large pool of knowledge workers. By 2010, the KPO market in India will be worth $12 billion, the report said adding that the KPO sector in India will employ more than 250,000 professionals by 2010.

Apart from India, the report predicts that countries such as Russia, China, the Czech Republic, Ireland, and Israel will eventually join the KPO industry.