The widespread success of offshoring business process operations has encouraged a growing number of organizations to offshore their high-end knowledge work as well. The underlying expectation for offshoring these processes is that it will result in additional cost savings, improved operational efficiencies and access to talented labor in low-wage offshore countries like India.
The first wave of business process outsourcing (BPO in India began in the late '90s with simple back office services such as transcribing medical records, answering phone calls and data entry. Later, during the second wave of BPO services in 2002 to 2003, outsourcing firms graduated to more complex transactions such as problem solving and decision-making tasks, which included insurance claims processing and contact center customer service. Finally, in 2006 to 2007, the $7.2 billion BPO sector in India began providing knowledge-intensive business process outsourcing services which has since become the third wave of BPO services.
Knowledge intensive business processes require significant domain expertise. Examples include developing structured products for investment banks, patent valuation, legal and engineering analytics, and supply chain and financial analytics. Perhaps the major distinguishing feature of the third wave compared to the others is the fact that companies are now recruiting experts with professional degrees and up to 15 years of experience. As such, they are able to bill at higher rates and increase revenue.
Evolving outsourcing strategies are leading businesses towards offshoring high-end processes to low-wage destinations, a trend referred to as knowledge process outsourcing, or KPO. From a supplier perspective, Indian BPOs are moving towards offering KPO as they face declining profit margins from more basic business processes such as data entry, medical transcription and outbound calls, in addition to facing high agent attrition. Currently, India is in the midst of a major cultural shift in which workers are beginning to disregard a career in BPO as a viable long term option.
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 client by providing business expertise rather than process expertise. Thus, KPO entails the shift from simple execution of 'standardized processes' to processes that demand advanced analytical and technical skills as well as decisive judgment. The key sectors within the KPO industry, for example, include data search, integration and management services, financial and insurance research, supply chain management, biotech and pharmaceutical research and computer-aided simulation and engineering design.
While growth in BPO was driven by labor arbitrage and leveraging the IT skill sets of engineers and developers, KPO is likely to be driven by factors like breadth and depth of coverage, domain expertise, location advantage, sales and marketing capabilities.
Large IT service companies such as IBM, Wipro and Tata Consultancy Services (TCS) are also looking to enter the KPO space by shifting from traditional IT services to higher level engineering product design. These big players are keen to acquire smaller niche vendors within different vertical spaces to provide their customers with a broad spectrum of BPO, KPO and IT services. In the last few years, the BPO industry has witnessed some consolidation as larger companies look to acquire smaller niche players to gain the scale (volume) and sector specialization which is necessary to maintain margins in a highly competitive environment. The purchase of Indian firm Daksh by IBM in April 2004 is just one example of a major player looking to acquire contact center expertise through an offshore acquisition. Datamonitor expects a similar round of consolidation in the Indian KPO industry in the near future, as presently there are a large number of startup organizations catering to a niche audience. One such example is the acquisition of KPO player Marketics by WNS (one of the biggest BPO firms in India) to enhance their knowledge services business.
According to NASSCOM estimates, the KPO market is expected to grow from $1.2 billion in 2003 to $14-16 billion by 2010, and India is expected to account for 65-70% of this market. Some of the large players in the Indian market include third party vendors like Evalueserve, Genpact, WNS Global Services, Firstsource, McKinsey & Co, Accenture and Pangea3. Other countries such as China, Russia, Poland, the Philippines and Hungary are also looking to take advantage of KPO opportunities and will introduce new services in this market.
Against this backdrop and given the massive potential in the market, the KPO industry in India will witness an increase in the number of KPO players. Some firms will grow KPO services organically while it is expected the larger IT and BPO players will embark on an aggressive acquisition strategy to buy smaller niche players.
As BPO firms redirect their services portfolio toward higher value and higher margin business, more services that fall under the KPO classification will be offered. Services such as legal and business analytics, equity research, clinical trials analysis, drug discovery, pharmaceutical research, and supply chain analytics will emerge as core KPO offerings. This list is not definitive, however: over time, the overall breadth and depth of services in KPO will continue to expand.
Saurabh Virmani
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