The roots of outsourcing in India can be traced back to the 1980s, when India became an IT support center. This was followed by the 1990s, which saw the emergence of the Business Process Outsourcing (BPO) sector, wherein companies based in developed countries outsourced some of their elementary processing, administrative, and support functions to Indian firms. Over the past few years, the focus has shifted to the Knowledge Process Outsourcing (KPO) sector, which primarily deals in the outsourcing of high-end activities or the white label support services?core operations of the business. Thus, the KPO industry represents the third wave of process outsourcing undertaken by global organizations. While cost reduction was the mantra behind the IT and BPO waves, intellectual arbitrage is the KPO buzzword.
India, with its enormous pool of talented professionals, has been consistently rated as one of the top destinations for the KPO industry. According to ASSOCHAM, theIndian KPO sectoraccounts for about 70% of the global KPO industry and is expected to grow at a CAGR of 30% to reach $30Bn in 2015, with financial services being the largest contributor. The industry has also finally come of age, with the sector now providing a variety of services such as legal processing, clinical trial management, along with advanced research &analytics. Popular KPO services include services to the financial sector (such as insurance & actuarial services, corporate credit & project finance services, equity research, and investment banking), intellectual property research, medical &legal research, and research in biotechnology &pharmaceuticals.
A possible talent crunch and increasing competition from other countries such as China and the Philippines are the major challenges currently faced by the industry. The high growth forecasted above may outpace the number of professionals joining the industry, leading to a talent crunch. According to the Economic Times, the Indian KPO industrywill need at least 0.60?0.80Mn professionals by 2015 from the current 0.35 Mn. Also, countries such as China and the Philippines have emerged as low-cost outsourcing destinations and pose a significant threat to India?s dominance in the KPO sector.
Given the high growthforecasted for this sector, the following three key trends are expected to shape the future of the industry, particularly the financial services domain:
1. Exploring new geographies and localization of operations
In line with the model adopted by the IT and BPO companies, the KPO service providers?including some of the major Indian research & analytics providers?have also started setting up delivery centers abroad. Language considerations are the primary driver behind this change, as international delivery centers enable the firms to serve the non-English speaking clients. Other potential benefits include hedging or risk diversification capabilities as the dependence on a single country is reduced and also the fact that it allows the service providers to be more responsive to the client needs by matching the client time zones. As the industry continues to grow and expand, global expansion is expected to continue.
2. Land grabbing phase to continue
The years 2008 and 2009 in the financial services KPO industry saw the takeovers of the captive units of global investment banks byIT giants. Some of the deals were the acquisition of the global captive unit of Citibank by Tata Consultancy Services for $505 Mn in 2008 and the acquisition of Swiss bank UBS?s Indian outsourcing arm by Cognizantfor $75 Mn in 2009. These deals could be viewed primarily as initiatives to embark on horizontal integration routes, as they not only enhanced the acquirer?s knowledge of the financial services domain, but also augmented their capabilities to provide integrated services across consulting and technology.
Recent deals include the acquisition of Pipal Research by Crisil in 2010, the acquisition of Copal and Amba Research by Moody?s in 2011 and 2013, respectively, andthe acquisition of Fractal Analytics by TA Associates in 2013. These deals were primarily undertaken to acquirethe niche capabilities of the targets. For example, Moody?s acquisition of Amba gives the group access to Amba?s global clientele, which includes seven of the top 15 global banks as well as several asset management and corporate banks engaged in both investment banking and commercial banking.
3. KPO industry to follow the IT industry, moving from commoditized work streams to high-end work
Following the growth path of the IT industry, the KPO industry today has an influence over the front office functions of almost every major division of global financial services institutions. The KPO providers are being increasingly viewed as strategic partners rather than mere support providers. Whether it be devising fund raising strategies for a corporate finance advisory client or live deal support for a private equity fund or real time quarterly updates for an equity research boutique or charting out the key legal M&A deal terms, the KPO industry does it all. Thus, thelines between outsourceable and non-outsourceable work have become thin.
On a concluding note, we can say that India, with its vast knowledge pool, will remain a preferred location for the KPO sector. Going by the trends, the industry will continue to evolve, carrying out tasks requiring high complexities. Industry consolidation will continue, with the bigger players setting up international centers globally. The sector will also need to cater to the talent crunch and mitigate the competition from countries such as China and the Philippines.
By Aman Chowdhury, Co-founder and CEO, Cians Analytics.
Note: The views expressed are those of the author alone.
