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KPO in India

By Scott Naxton: After the great success of Business Process Outsourcing (BPO) in India, it is now the KPO turn to make its presence felt. BPO success in India is encouraging overseas companies eyeing Indian market for outsourcing their high-tech knowledge based jobs. Operational cost saving, pool of talented workforce, infrastructure improvement and favorable government policies are the major factors, which are responsible for the Knowledge Process Outsourcing (KPO) in India. According to a report by Global Sourcing Now, the Global Knowledge Process Outsourcing industry (KPO) is expected to reach USD 17 billion by 2010, of which USD 12 billion (almost 70%) would be outsourced to India alone. Indian KPO sector has already taken steps in employing highly educated and talented people and number of KPO professionals is expected to cross more than 250,000 by 2010 compared to the current figure of 25,000 employees. The graph on the right suggests that Expected Growth in Global BPO and KPO Markets (2003-2010)

What makes India a preferred destination for KPO?

The Indian workforce is highly literate and they are well-versed with English language, thanks to Indian educational system. Every year India is producing hundreds and thousands of English speaking, trained professionals in the fields of IT, Engineering, Education, Law, Science, Finance, Architecture and other competitive fields.

The Indian advantage primarily lies in the educational and technical qualifications of its workforce. A survey conducted in 2002 by NASSCOM (National Association of Software and Service Companies) showed that an Indian ITES-BPO center in banking and financial service sector, performs better than US and UK based BPO centers in various categories like the total number of transaction, total number of correct transactions, total customer satisfaction, number of transaction per hour and the average speed of answers.

It has also showed in the survey that 45 percent of Indian service providers have the highest quality certification like Six Sigma (A rigorous and disciplined methodology that utilizes data and statistical analysis to measure and improve a company's operational performance, practices, and systems. Six Sigma identifies and prevents defects in manufacturing and service-related processes.). BPO or KPO in India are getting more quality conscious and they are frequently improving to have standards that of internationally accepted. They are in the process of highly acclaimed quality management standards from International Organization for Standardization (ISO) such as ISO 9002, ISO 9001, ISO 9001:2000, and ISO 9001:2001 and from the CMM framework to the new CMMI framework.

1 Introduction

The success in offshoring Business Process operations with respect to reducing costs and often improving quality has encouraged many firms to start offshoring their high-end knowledge work as well. Their underlying expectation is that offshoring high-end processes will result in additional cost savings and operational efficiencies, coupled with access to very good talent in the low-wage offshore countries. In this paper, we will refer to this offshoring of higher-end services as Knowledge Process Offshoring (KPO).

According to our estimate, the KPO market is expected to grow from USD 1.2 billion in FY1 2003 to USD 16 billion in FY 2010. The sectors that are expected to shine within the KPO industry include data search, integration and management services, financial and insurance research, biotech and pharmaceutical research and computer-aided simulation and engineering design. My source has forecasted the number of professionals that are likely to be employed by this industry and we also present some important drivers behind the movement from BPO to KPO.

Finally, this paper attempts to compare countries (such as China, India, the Philippines, Ireland, Israel and Russia) that can provide KPO services with respect to labor costs, geographic location, demographic factors and other miscellaneous factors. The paper also discusses the future outlook of the global offshoring industry.

2 What is KPO?

The maturity and evolution of outsourcing strategies is leading businesses to shift towards the offshoring of high-end processes to low-wage destinations, a trend referred to as KPO. This involves offshoring of knowledge-intensive business processes that require significant domain expertise. In comparison to BPO, KPO delivers higher value to organizations that offshore their domain-based processes, thereby enhancing BPO's traditional cost-quality paradigm. The central theme of KPO is to create value for the client2 by providing business expertise rather than process expertise. Hence, KPO entails the shifting from simple execution of standardized processes to carrying out processes that demand advanced analytical and technical skills as well as decisive judgment. Figure 1 provides two examples? one relating to IT services and the other relating to insurance services.




With global businesses becoming more competitive, the cycle time for introducing products and services has become smaller, and customers are more demanding with respect to the quality of services provided. This has forced enterprises to adopt systems and business models that will not only provide operational efficiency, but also add strategic value to their products and services. KPO services can enable enterprises to reduce design-to-market lead times; manage critical hardware efficiently; provide research on markets, competition, products and services; enhance organizational effectiveness in business administration; and help in dealing with rapidly evolving business scenarios. Finally, the outsourcing solutions for high-end processes, unlike traditional BPO solutions that are commoditized fixed-price solutions, are usually customized and value based. It is often this customization that enhances the value proposition of KPO.

3 KPO The Opportunity and Associated Challenges

This section analyzes the opportunities presented by the KPO industry and also identifies some of the challenges that this emerging industry might face in the near future.

3.1 BPO and KPO Estimated Size of Opportunity

Evalueserve predicts that low-end outsourcing services will grow globally from USD 7.7 billion in FY3 2003 to USD 39.8 billion in FY 2010, which implies a Cumulative Annual Growth Rate (CAGR) of 26 percent. In contrast, the revenue from the global KPO market was USD 1.2 billion in FY 2003 and this is expected to grow to USD 17 billion by FY 2010, which implies a CAGR of 46 percent (according to Evalueserve).

Figure 2 demonstrates the expected growth in the BPO and KPO markets over the next seven years.

The following is a list of potential high-end services for the KPO sector.

1. Intellectual Property (IP) research
2. Equity, financial, and insurance research
3. Data search, integration, and management
4. Analytics (data analytics/risk analytics) and data mining services
5. Research and information services in human resources (HR)
6. Business and market research (including competitive intelligence)
7. Engineering and design services
8. Design, animation, and simulation services
9. Paralegal content and services
10. Medical content and services
11. Remote education and publishing
12. Pharmaceuticals and biotechnology
13. Research and Development (IT and non-IT areas)
14. Network management
15. Decision Support Systems (DSS)


Table 1 provides the Evalueserve estimate on the market size of some of the abovementioned
high-end processes over the next seven years.



3.2 High-end KPO Opportunities

The following are some examples of high-end KPO:

3.2.1 Intellectual Property Research (IPR)

Drafting and filing of patent applications with the United States Patent and Trademark Office (USPTO) is expensive; and a typical patent application may cost between USD 10,000 and USD 15,000.

An Intellectual Property (IP) specialist in an offshore location can produce a preliminary draft of a patent application, which is then reviewed and modified by a registered US patent attorney, before it is filed with the USPTO.

Offshoring even a small portion of the patent-drafting process can save up to 50 percent of the total cost (for the end client).

IP asset management, IP landscaping of technology domains, IP licensing, IP docketing, and IP commercialization services are some other services that can be offshored in a similar manner. These services can be provided not only for patents but also for trademarks, copyrights, and other Intellectual Property.

Some law firms in the US have already set up their back-end centers in India, and others are joining hands with Indian companies for this purpose.

3.2.2 Offshoring R&D in Pharmaceuticals and Biotechnology

Contract research organizations are being widely used by pharmaceutical companies. Other emerging areas within this sector include lead optimization and improvement of manufacturing processes.

The global contract research market is estimated to grow to USD 20 billion by 2007.

Destinations such as India offer significant cost advantages ? often as much as 40-60 percent ? in the areas of contract research and clinical trials.

Recently, companies such as AstraZeneca and Glaxo-Smith-Kline have set up drug discovery centers at low-cost destinations thereby offshoring their R&D.

3.2.3 Analytics and Data Mining Services

Companies can save significantly ? as much as 60-70 percent by offshoring data mining, analytics, and inventory management work to low-wage countries.

Demand and channel planning, manufacturing scheduling, and transport planning are examples of some supply-chain management solutions that require the use of mathematical programming, statistical analysis, and computer-aided simulations.

Destinations such as Russia and India are ideal for these services because they provide a large pool of engineers and even PhDs at substantially low costs. The cost differential between a PhD in the Sciences and Engineering in the US and in India (or between the US and Russia) can range between USD 60,000 and USD 80,000, respectively.

3.3 Challenges in KPO

KPO presents substantial opportunities for players in the outsourcing business. However, there are some formidable challenges in the path of their development, which include the following:

Processes executed within the KPO domain require higher quality standards because the stakes for the clients are high. Furthermore, the clients are likely to be apprehensive about the quality of services delivered (especially in view of the fact that these services are being provided by low-cost destinations) and these may be difficult to alleviate.

In some cases, investment in KPO infrastructure is expected to be higher than that in traditional BPO. For example, a company involved in Simulation and Finite Element Analysis will require high-end workstations, whereas one involved in simple data collection, sorting, and analysis may require moderate capital. Similarly, contract research organizations are likely to require higher amounts of capital.

The lack of a good talent pool for the execution of projects may often prove to be a hindrance in many countries.

KPO projects require a higher level of control, confidentiality and enhanced risk management. Laxity in any of these parameters will not only jeopardize the KPO services being provided, but may also affect the entire business conducted by the client.

In comparison to traditional BPO services, scaling up of KPO operations will be difficult, primarily owing to difficulty in finding highly trained professionals.

3.3.1 Problems in Sourcing, Retaining, and Nurturing Talent

KPO companies are faced with the challenge of hiring the best talent and imparting continuous training to these professionals. It is advisable for offshoring companies that venture into the KPO industry to focus on initial training and continuous development modules. Another key challenge in the management of KPO is the identification of performance criteria?. This involves setting the right expectations with the end client, as well as its professionals; continuous assessment and monitoring, constructive feedback, appropriate coaching and mentoring, and identification of the right career path for the company's professionals.

4 Drivers behind the BPO to KPO Shift

The gradual shift from BPO to KPO in some offshore countries is expected to change the dynamics of job migration. Evalueserve predicts that more low-end jobs will migrate to emerging low-cost countries (from a percentage perspective and not as an absolute number) such as Ukraine, the Czech Republic, Belarus, Romania, China, the Philippines, and Malaysia. At the same time, KPO jobs are likely to be created in India, Russia, Ireland, Israel, and Canada. Even though some emerging countries, especially those in the Central and Eastern European Region (e.g., Ukraine and the Czech Republic), can provide KPO services, the ?brand equity? of these countries is quite low. Therefore, it is predicted that these emerging offshore locations will not attract KPO services, at least for the time being.

4.1 Factors Fuelling the BPO to KPO Movement

Some key factors that may fuel the transition from BPO to KPO are discussed in the following sections.

4.1.1 Buyers of Offshoring Services Save More at the Higher End

Buyers of offshoring services save more at the high end of the value chain, compared to the low end. Therefore, many of the current low-cost destinations will become a logical choice for companies for offshoring their high-end processes.

4.1.2 Scarcity of Highly Trained Specialized Talent Pool in the Developed Countries

Developed economies such as the US, the UK, and Western European countries are already facing a shortage of highly trained and specialized professionals in some knowledge-intensive high-skill sectors, such as R&D in VLSI, engineering design, IT, financial risk management, etc. One way to mitigate this skill shortage is to source talent from low-wage developing countries, which produce highly educated scientists and professionals. This has been the practice in the US for the past several decades. The US permits emigration of engineers, scientists, and medical doctors from developing countries, such as India and China. With tighter visa regulations (in the developed countries) and cost-reduction pressures on MNCs, global offshoring of high-end services to low-wage countries to tap the existing talent pool in a cost-effective manner is a viable and lucrative option.

4.1.3 Maturity and Evolution of Present Low-end Destinations to the Higher-end of the Value Chain

The evolution of present low-end destinations to the higher end of the value chain, aided by the maturity of the processes, will result in organizations moving up the value chain to provide KPO services. Commoditization of BPO services will further boost this transition and the better margins expected at the higher end of the value chain might act as a deterrent for companies in accepting low-end work. The barriers to entry in the KPO industry are also higher, and therefore, offshoring companies may not have the same competitive pressures as are there in traditional BPO.

4.1.3.1 Some of the Present Low-cost Destinations May No Longer Remain Low Cost

Some current low-cost destinations may no longer remain low-cost due to increase in salaries and hence, may not be able to provide cost-arbitrage benefits to companies that want to offshore these services. For example, Indian salaries have increased at an average of 14 percent per year. If this trend continues, they are expected to increase 2.5 times the current salaries (in constant dollars) by FY 2010, thereby reducing the cost-arbitrage benefit from the present 40 to 25 percent.

4.2 Increasing Number of Professionals in the Offshoring Industry

The number of professionals working in the offshoring industry is expected to increase as more and more companies decide to become involved in BPO and KPO. This will further drive the trend towards the migration of low-end services to high-end services, especially as offshore service vendors (as well as the professionals working in this sector) gain substantial experience and capabilities to provide high value services.

During 2000-2003, the US offshored 238,000 IT service jobs. Evalueserve predicts that this is likely to increase to 775,000 jobs by FY 2010. Further, by the end of March 2004, the US had offshored about 136,000 BPO (non-IT) jobs, mostly in the call centre segment. Forrester predicts that it is likely to offshore 1.314 million BPO (non-IT) jobs by FY 2010.

Evalueserve estimates that the UK had offshored 35,000 IT service jobs by FY 2003, and this is expected to grow to 110,200 jobs by FY 2010. Evalueserve also estimates that 30,000 BPO (non-IT) jobs (mainly in call centers) have already been offshored by the UK by FY 2003, and 201,100 BPO (non-IT) jobs are expected to move from the UK by FY 2010.

Table 2 provides a summary of Evalueserve estimates for jobs offshored from the US and the UK by FY 2003 and FY 2010.



5 Key Low-wage Offshore Locations: A Comparative Study

This section attempts to analyze key offshore destinations that are likely to emerge as the hubs of the BPO and KPO sectors. A comparative assessment of key low wage a destination, with respect to some critical parameters, is provided in Table 3.



The above-mentioned destinations offer both IT and non-IT BPO services. Among them, India offers the widest range of IT and non-IT BPO services; the Philippines currently offers mainly BPO services; and Israel and Russia offer niche services especially in the IT offshoring domain. The maximum benefits of offshoring are currently being realized in the Philippines and India. Moreover, China and India are geographically best located to provide 24x7 support although the Philippines is a close contender in this aspect. From the perspective of cultural compatibility and with respect to proficiency in written and spoken English, Canada, Ireland and the Philippines seem to score over other countries.

Investment and labor policies have been made ?offshoring friendly? by most governments in these countries. Countries such as India, Russia, and Israel have the requisite talent pool to move up the value chain and provide KPO services. The major impediments faced by offshore destinations taken up in this study are their small talent pools (e.g., the Philippines, Ireland and Israel) and non-English speaking population (e.g., China and Russia).

5.1 Future Outlook

Globalization of services is in its nascent stage. In fact, even in the IT services sector, only 1.9 percent of the total jobs are being carried out in low-wage countries. By FY 2010, we expect the following scenario:

Commoditization of low-end services is likely to occur because the potential barriers to entry are minimal.

New business models will be created and older ones will cease to exist. The next level of productivity improvements may emanate from this creative destruction of the current supply chain of services.

Many new business models will rely on re-arranging the supply chain of a given process and on using IT to enhance productivity. One such interesting new model of conducting research has been provided in the Appendix.

By FY 2010, India and other such destinations might become too costly to provide low-end services at competitive costs. Therefore, low-end work may move to relatively cheaper countries such as Ukraine, Belarus, the Czech Republic, and Malaysia.

5.1.1 Offshoring is Likely to Restructure the Global Workforce

With the proliferation of global offshoring and distributed delivery models, the emergence of a strictly onshore services workforce (as part of Tertiary-A) and a global information and services workforce (as part of Tertiary-B) is expected, as depicted in Figure 3.

6 Appendix

6.1 Emerging KPO Sourcing Models InnoCentive: A Case Study on Research and Development

Global sourcing is constantly evolving, as industries are exploring new avenues to increase the scope of their operations and become globally competitive. With increasing R&D costs, US firms are finding it difficult to train their employees to carry out research. Therefore, these firms are increasingly on the lookout to tap the available talent pool. This has led to the emergence of a new R&D model that is being called open innovation.

Large corporations are reducing their internal spending on R&D and are increasingly tapping external resources to solve their problems. A case in point is InnoCentive, an independent venture launched by Eli Lilly and Co., which enables firms to tap into the global scientific community. Figure 4 illustrates the sourcing model used by InnoCentive to leverage the globally distributed scientific talent pool.



InnoCentive is an interface between corporations beset by unsolved R&D problems and the global scientific community. The scientific community assists corporations to solve their problems by submitting solutions via the Internet. InnoCentive already has over 30,000 scientists from more than 125 countries around the world. Table 4 provides the geographic split of the scientific talent pool that is registered with Innocentive:

Large chemical companies such as Proctor and Gamble (P&G), Dow Chemical Co. and BASF regularly post their problems by using the services offered by InnoCentive, and are realizing quick and cost-effective solutions to their problems. These companies usually pay between USD 5,000 and USD 100,000 per problem, in return for the Intellectual Property provided by the external scientists in solving their problems.

According to a study conducted by the Technology Review magazine of the Massachusetts Institute of Technology, most leading companies in struggling industries, including aerospace, computers, semiconductors, and telecommunications have trimmed their R&D budgets over the last few years. However, the pace of innovation has not really slowed down because many of these companies are now offshoring their R&D work to captive centers or third parties located in low-wage countries.

Ajeet - I have sourced most of this details from website www.evalueserve.com for my studies purpose.