A detour in to KPO sector

BANGALORE, INDIA: Someone has blogged that “KPO is about good money, better working hours compared to BPO and an opportunity to do research and technical consultancy.” Like religion, KPO means many things to many people as there are varying definitions of what knowledge based work comprises.

Simply put, KPO is an outsourced service that requires an element of domain expertise, judgment, decision-making and analysis. It requires varying degrees of brain-ware, with services at the top of the KPO value chain requiring a high degree of intellectual sophistication. The bottom end of the pyramid is marked by mechanistic process-driven work that mirrors some high end BPO tasks.

India’s emergence as the best destination for KPO services is driven by the usual set of factors – from cost saving to improved quality, overseas companies have a lot to gain. Having seen the tangible and intangible benefits of moving their IT and back office work to India, large organizations in the US and Europe are now tasting blood with the off-shoring of high-end design, research, analytics and modeling work.

The ability to do work in English will ensure that India retains the top slot globally for KPO off-shoring. While other countries in Eastern / Central Europe and Asia offer specific advantages, there is no region that brings as much to the table and at the desired scale. The clustering effect completes the virtuous cycle of reinforcing the lead that India has in this global market.

The KPO industry is scratching the tip of the iceberg currently, and will see strong growth in the next 5 years.  Financial year 2007-08 would witness a 30-35 percent expansion in the KPO market in India, if all goes well. Data analytics would witness the fastest growth given its current attractiveness. The RPO and LPO segments will see robust growth as well.

Stepping into 2008, impediments such as the rising rupee, exorbitantly priced infrastructure, a crippling shortage of talent, unrealistic salary expectations, and asinine taxation (MAT, FBT, Service Tax et al) will reduce the profitability of third party service providers, and dilute the business case for captive operators. These factors will not deter newer KPO players, but will challenge each industry participant to focus on productivity, efficiency and product pricing.

The KPO sector in India is heavily skewed towards work from the financial services market, especially in the US. There are some prominent KPOs that derive 100% of their business from the financial sector. The current turmoil in the US financial sector could rapidly morph into an animal that runs a shiver down the banking sector globally.  This would definitely impact the nascent KPO industry, reducing flow of work to India coupled with budgets getting tighter. Decisions will get pushed out further, extending the sales funnel and adding to business development costs.

The coming year will also see some consolidation in the industry, unusual for a nascent market like KPO, but driven largely by large Indian IT and BPO companies that would like to bolt-on KPO operations in the hope of becoming full service providers. Also, scaling up high-end work is much more difficult than a ramp-up in call center operations. Companies that don’t have the luxury of waiting for time-to-market will acquire smaller outfits in a race to grow rapidly. Some of the smaller firms will also sell out, cashing in on the unrealistic valuations (PE driven) in this space.

It promises to be yet another exciting year for this industry, where growth imperatives and talent constraints will drive companies to explore newer business models and operating strategies.

This contributory artcle is from Sameer Walia, MD, The Smart Cube