PUNE, INDIA: Everyone was dreading the R word and with major banks and financial giants in the US tasting the dust, fears turned into reality. From Merrill Lynch, Lehman Bros, Bear Sterns to AIG, the US financial sector is on a rough patch – a patch that is showing its signs on the Indian IT and ITeS Industry.

Among other service players that are looming under the worry lines, there is the KPO breed of Indian vendors that also come under the lens of doubt. This is because a KPO is typically considered a caterer to the banking and financial part of the pie that a high-value outsourcing industry like this commands.

While theoretically, the range of KPO services is vast enough covering a wide gamut that includes research and development, business and technical analysis, learning solutions, animation and design, business and market research, pharmaceuticals and biotechnology, medical services, writing and content development, legal services, intellectual property (IP) research, data analytics, network management, training and consultancy etc.

However, on a practical side most of the KPO vendors and their offerings have been in the financial and accounting space. And that means the industry could be a direct injury candidate with the US financial turmoil.

Is that a myth, or is some other reality lurking around there?

How direct and deep is the impact on this industry, which has been posited as one that will capture more than 70 per cent of the KPO outsourcing sector by 2010 as per a report by Evalueserve? Another report by the Associated Chambers of Commerce and Industry of India pegs KPO worth $10 billion by 2012 with a growth of 25-27 per cent.

Are the numbers still as rosy?

There is no doubt that the financial crisis is showing its impact on KPO players, as some of them admit. Customers of KPOs are going in the slow or wait-and-watch mode, both from the financial and non-financial segment.

With the deferring of decisions and elongated deal cycles, the impact is showing. It's hard to say how much and how long would this impact be as everyone watches and waits for the dust to settle down.

The impact, however, would vary from short-term to long-term and from soft to hard, depending on the kind of clients a KPO serves and their individual strategies.

It would be a big, direct, immediate and severe impact for companies serving the large bulk bank side of the deals. But not for middle multiple business model companies, as Srinivas Macha, VP, Aranca, a financial and business research KPO, tells.

"We have from long shied away from large side of the market and focused on the middle and diversified genre. It's not just the US, UK markets but about two and half years back we have entered and served the Middle East market and have been doing well," he says.

The hedge, which was originally triggered as an unexplored territory in view of competition in a mature market like this, is now paying off in a scenario that the whole industry is currently going through. "The weather is not as gloomy for us and our pipeline and business is seeing a good traction."

Another KPO Major, Integreon, that operates in outsourcing market for research and analytics, legal and financial document services, legal and discovery services, and finance and accounting services, shares the same sentiment. The impact on KPO cannot be ruled out completely, but it would be a mixed one, more pronounced in some companies than others.

Lokendra Tomar, Senior VP, Integreon shares that it would be bigger companies that will survive better than smaller KPO firms that might face difficult times.

"Companies that have direct and dominant revenue links to BFSI clients added with client concentration on overall roster would face a more severe impact compared to companies that have a well-balanced portfolio of customers."

The time is also opportune for a diversified vertical mix. For Aranca, for instance, that had added two more business lines to the existing ones. Its existing lines were equity and investment research and business research, which have respective contributions of about 40 per cent and 35 per cent respectively. New lines are private company valuation services and IP research.

"The first two lines are determined by market forces while private valuation falls more on the regulatory side. IP is still in a development mode. We have just added it."

The portfolio makes sense for a KPO like Aranca, as all lines are de-risked from the others.

De-risking is the mantra that seems to have paid off KPOs in the present tough environment.

For Integreon too, no single client, including the biggest one, contributes more than five per cent to revenues. That has saved it from major or direct losses.

Dr. Ganesh Natarajan, deputy chairman and managing director of Zensar tells that he won't panic much on the KPO part of the US impact. "The story is different for outbound call centres and traditional voice-based BPOs. However, this is a time for deepening relationships."

The scene is not all shadow; there is bright light ahead as most prefer to see it as.

The current environment is tough as most companies are occupied with bailout and survival efforts.

"The priorities are different now, but it would possibly stabilize in a month or two and then quickly the attention would turn to cost savings and thus outsourcing. The tremendous pressure on cost cutting would change the scenario. From just a tool, outsourcing would become pivotal and that would mean new opportunities for KPOs," says an upbeat Tomar.

Once the environment stabilizes, overall business volume of financial giants would shrink but outsourcing as percentage of revenue is expected to go up too, he believes.

As to the political impact of national and government-led bailout plans for US financial sector, he denies any untoward impact on outsourcing prospects to India.

"Not so in specially a capitalist economy like the US. More so because the economic reasons for outsourcing are much stark than ever. There might be talk about the political concerns but in real world the effect won't be that negative. Stopping jobs won't happen. The pressure would be on tax incentives, at the most." Tomar explains.

It is a trying time for KPOs no doubt but KPOs should tighten up, consolidate and look at their capabilities in a new light and sharpen up. Also as Tomar reckons, the Indian vendors would face competition from other geographies increasingly as future outsourcing would be more on a global delivery mode more inclined on an offshore, onshore combination.

Macha's advice is simple and strong. "These are times to be weathered and to stay put.  The current crisis will lead to the next upside that will come for sure in a few quarters. That would mean more and new business as companies cut costs and thus look for outsourcing."