''KPOs have a hockey stick curve''

Pratima Harihunani of CyberMedia News chats with Hemendra Aran, CEO, Aranca and explores the 'how' and 'why'

You have recently extended your operations in Philippines. What prodded Aranca towards Manila given the fact that countries like Australia were in your consideration too? Is it an efficiency driver or a market opportunity?

We were looking for Asian language capabilities as required by a lot of our hedge fund customers for instance in Chinese areas. The Philippine economy cycle had forced many of our target talent segments go out of their traditional domains and thus gave us ready availability of CFAs etc. These people are already trained in US orientation and that reduces our investments in soft skills. The salary escalations are not as high as in India and Manila complements the TZ (time zone) edge. Besides these operational issues, we were also looking at new business development avenues. This new center is also high on contingency planning and de-risking strategy. Australia, for instance was costlier on the talent side.

What about your India operations? Would you be extending your coverage in and out of India?

We are currently present in Mumbai and I think we need some QOL (quality of life) for the employees given the long commute hours. We plan to have another office in India and would be doubling our talent by mid-quarter next year. As of now we have Pune and Kolkata on our priority list. Out of India Latin America is on our choice list so far as most of our US customers desire TZ compatibility. I think we may extend there by next quarter.

How would Pune and Kolkata compare in terms of your KPO requirements? By when would this second center is expected to come up?

Pune has got a good talent pool but we can source the same pool from our Mumbai center too. On the other hand, Kolkata also has a fresh set of CAs etc who might not be keen to relocate. We can expect a decision in the next three months or so.

In the light of these new investments and growth aspirations, how does a KPO model function on scalability vis-a-vis a BPO operation?

In a BPO the curve is initially very steep while in KPO one has to convince the clients for the first two-three years and then start rising. Unlike BPOs, KPOs have a hockey stick curve. We have grown 100 per cent in 2003-04 and 2004-05 (till December) and have touched 300 per cent this time in terms of revenue.

What is the extent of fillip received from the disaggregation of equity research from investment banking in US?

Earlier, the investment banking and research activities were bundled together. Equity research used to be a cushion cost center. An investment bank earlier provided consulting services, research reports for hedge funds and recommendations on which they earned brokerage. In the dotcom bust, eyeballs were sold over revenue and there was a lot of exaggeration, hence SEC (Securities Exchange Commission) mandated that a buying rating has to be supplemented with an IRP (Independent Research Provider) for an objective and unbiased scenario. Also, the revenue factor in research waned and spurred outsourcing to third parties. Since then a lot of IRPs have flourished there, who in turn are some our largest clients. It saves them costs and makes them stand on the right side of the law too.

The unbundling regulation has certainly helped us in garnering more business as the requirements on the IRPs is very high there and the capacity is limited. The dynamics have changed now. From cost-savings, the stage silhouette has now changed to customized research. It addresses the area of unbundling of soft dollars. The hedge fund market is growing fast and desires a research output based on their philosophy unlike in case of investment banks where output is for a large audience.

Does your research convert to buy-and-sell recommendations too and is so what are the implications thereof? Are there any regulatory barriers for an Indian KPO in this space?

Yes, they do translate. But research analysts have to put a disclaimer hence regulatory requirements are taken care of. At times, of course, there are differences of opinion between our research and client's point of view. As long as factual representation of facts is correct, there are no penalties. There are no restrictions from regulatory perspective that demand a US –registered/based KPO. But clients generally prefer a US set-up and it depends from contract to contract.

Have you ever mulled a foray in the Indian FRA (Financial Research and Analysis) industry?

We do some work on due diligence and in-depth research for some India companies here but that is triggered from our clients abroad, ex- hedge funds and IRPs. As of now, I don't think that market is as attractive here in comparison to US in terms of revenue and there's an opportunity cost factor.

How significant is the branded research space for Aranca?

It gives a KPO better margins and multiple-client dissemination advantage in the long term but there are challenges on scale, delivery and talent issues to be met. We are not in this space yet except for some PE (private Equity) clients for valuation of portfolios where we give Aranca's brand name. We will consider this option in future.

Is the onsite physical presence (for purposes of auditing etc) of analyst a requisite in your business?

Yes, in some cases it's a requirement mentioned in the contract. We engage our local pool in a consultant's role to meet these criteria in US. For ME regions, we send people from here for such visits.

Give us a break-up of your client palette in terms of margins and growth?

We have over 70 clients and are adding three-four new clients every month. Our clientele is spread across US, UK, ME, Australia and consists of investment banks, IRPs, PEs, large corporates like LSE, Reuters, NASDAQ, hedge funds and management consulting firms. PE and hedge funds are the growth areas in terms of volumes and growth both.

Have you faced any impediments due to the low-key perception and comparisons between BPOs and KPOs?

Unfortunately yes. People often perceive it to be a similar back-office set up. They don't realize the quantum of front-end interface that a KPO requires. The misinterpretation is normally from the talent side. From the client side, we are research analysts. Being part of the same outsourcing umbrella has its advantages and disadvantages both. Both the industries face the same challenges but there are huge differentials on delivery mechanisms, clientele, and contracts. We are educating people through media and industry platforms on this and our campus recruits serve as the best ambassadors.

How do you manage the issue of structuring of processes in a competence area where subjectivity and judgment override other tangibles unlike in case of BPOs?

There's a lot of individuality factor for a KPO worker unlike a BPO worker. Our SLA tangibles cover the criteria on reports but when it comes to quality, further reviews by senior experts and clients have to be incorporated. Normally our contracts have a month's sample period to get a view of client's expectations and orientation. After a three-four month period of engagement with the client, we create our own style guide and try to put in as much structuring in processes as possible. Though there's no measure on the depth of quality or research sample reports by clients and last-stop of expert review serve as a benchmark.

How do you manage the concerns on confidentiality?

This factor is very important since our support and output leads to crucial decision making, for instance in an IPO deal. The client binds us by a contract and we have to be continuously paranoid not only to honour these clauses but also to maintain our reputation as an industry. Access to every price is carefully controlled and is decided not only on basis of seniority but also on the role one plays in the process. There are strict HR policies, legal controls, robust IT systems and ways like pseudo names to take care of this area.

Is the India KPO pool sufficient enough for future growth?

From an industry perspective, there's no problem today and may be not even tomorrow. KPOs don't grow in thousands but in numbers of 30 or 50s. The problem is not on the raw talent side but on the grooming aspects of packaging and presenting research reports. The Indian analysts are sensitized to US way of turning observations into plausible arguments only on the job and that takes time and training. Apart from good quality analysis, modeling etc, the soft skills of presentation are equally critical. The industry however needs to gear up on better academic-industry collaborations for addressing these lacunae.

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