| bobby khan | K.P.O { Knowledge Process Outsourcing} [bobby24365]
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Knowledge Process Outsourcing (KPO)
----------- Opportunity to be Worth USD 17 by 2010
There is tremendous potential in the knowledge process outsourcing space. Only companies that have a strong pedigree, domain expertise, clear focus on the high-end space, a proactive solution orientation and a collaborative mindset will emerge as the winners.
The acronym BPO is passé. It's time to move up the value chain for the Indian BPO industry to KPO, a niche, high-value knowledge process outsourcing business. Globally, the KPO pie is estimated to touch $25 billion by 2010. By that time, India would command a 60% market share, with an employee requirement of over 3,00,000, said recent study conducted by Evalueserve.
The KPO landscape is getting increasingly visible in the country with players like WNS, Evalueserve, Thomson Financials, GE Analyticals, Bear Sterns, Goldman Sachs, JP Morgan Chase and Reuters expected to play a dominant role. In addition to this, over a dozen existing BPO firms are gradually migrating into value niches.
Typical users of KPO services are market research agencies, consulting firms, investment banks, financial institutions, legal firms, telecom, engineering/design, automotive companies and corporate planning departments of large enterprises. Foreign small and medium enterprises are also looking at KPO services to cater to their high-value project-specific activities.
"Global companies are looking at ways and means to create intellectual properties for their clients across verticals like healthcare, pharma and life sciences, chemicals, engineering, business and commercial information, research and database services," said Narayanan Ramaswamy director of KPMG.
How is KPO different from BPO?...
... BPO is entirely rules-based while KPO is purely judgment-based where human discretion plays a dominant role. KPO includes an entire gamut of services like intellectual property, legal and medical researches, R&D, pharma, biotechnology-related researches and process outsourcing, data mining, analytical services like equity research, market research, content and journalistic outsourcing, data cleansing, data validation, data analysis, formation of libraries, indexing, cataloging, creation and updating of databases and directories, to list a few. Services under KPO are still emerging.
"Indians are good at brain works, analytical, logical and arithmetical skills. The growing Indian diaspora has been creating an impression among international community that Indians are good at intellect-driven skills," said Chandu Nair, president, Scope e-Knowledge Centre, a Chennai-based KPO firm.
However, winning KPO deals is not an easy proposition. "It demands intrinsic domain knowledge, a good amount of trust, impeccable track record, long-standing client relationships, deep research skills, strong management capabilities and sound technical know-how," said S. Ramakrishnan, CEO of Marketics, a Bangalore-based KPO firm.
According to business research firm Evalueserve, the revenue for the global KPO market was USD 1.29 bn in FY 2003 and this is expected to grow to USD 17 bn by FY 2010, a cumulative annual growth rate of 46%. In contrast, the revenue from plain vanilla BPO services will grow from USD 7.7 bn in FY 2003 to USD 39.8 bn in FY 2010, a cumulative annual growth rate of 26%.
-- KPO involves business processes that require domain expertise and high-end talent such as MBA's, engineers, doctors, lawyers, accountants and other highly skilled professionals. "KPO requires moving away from simply executing standardized processes to carrying out processes that demand advanced analytical and technical skills as well as some decision making," says Alok Aggarwal of Evalueserve. Some of the destinations from where KPO services are being provided are India, China, Russia, Canada, Israel and the Philippines.
Typical users of KPO services are market research and consulting firms, investment banks and financial services institutions, and corporate planning departments of large Fortune 500 companies. These services can also be easily used by small and medium sized enterprises due to project-based nature of the work.
Some examples of services in the KPO domain are intellectual property research, R&D in pharmaceuticals and biotechnology, data mining, and a range of analytical services such as equity research and financial modeling.
Writing patent applications in the US is expensive and a typical application costs between USD 10,000 to USD 15,000 for drafting and filing with United States Patent and Trademark Office (USPTO). In an offshore mode, an intellectual property 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, who ultimately files it with the USPTO. This can result in cost savings of up to 50%.
In the R&D area, contract research organizations are being widely used by pharmaceutical companies. Destinations such as India offer significant cost advantages - often as much as 40% to 60%. Recently, companies such as AstraZeneca and Glaxo-Smith-Kline have set up drug discovery centers at low-cost destinations to offshore R&D.
In the area of data mining and analytics, destinations such as Russia and India are ideal because they provide a large pool of engineers and PhDs at substantially lower costs. The cost differential between a PhD in Sciences and Engineering in the US and India (or between US and Russia) can range between USD 60,000 and USD 80,000. "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" says Alok Aggarwal, who holds a PhD in mathematics and computing.
Given the large number of engineers, doctors, lawyers, chartered accountants, statisticians and scientists in India, Evalueserve believes that India can provide KPO services worth USD 12 bn by FY 2010 instead of USD 720 mn that it provided in FY 2003. This would represent a cumulative annual growth rate of approximately 50% and 250,000 such professionals would be hired by Indian KPO providers by FY 2010, which would therefore provide direct employment worth 300,000 people.
Benefits go beyond just cost savings. KPO users typically save on time and also have a greater access to various skills. In many cases, providers also offer multi-lingual research capabilities.
However, executing KPO projects is not easy and requires a professional services culture rather than a BPO culture. Processes executed within the KPO domain require higher quality standards because the stakes for the clients are high. Furthermore, the clients are likely to have apprehension about the quality of the services delivered (especially by low-cost destinations) and these may be difficult to alleviate. To manage these perceptions and ensure smooth delivery, vendors work in a "80-20" mode which involves providing leverage to senior professionals.
"Another key challenge in the management of a KPO is the identification of performance criteria – 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 right career paths for its professionals", says Marc Vollenweider of Evalueserve, a former partner with McKinsey.
However, these factors will not impede the growth of the KPO industry. In fact, the protectionist lobby and their anti-BPO drive in the USA and the UK have helped global offshoring and, in particular, global KPO by providing free publicity. Evalueserve estimates show that between June 1, 2002 and May 31, 2004, India Inc. alone received more than USD 89 million in free publicity from more than 1,980 distinct articles in newspapers and magazines and over 210,000 distinct references and "threads" in the U.S.A and U.K. Hence, many Americans and the British companies now feel that Indian companies can do almost anything, even Rocket Science!
WHILE OUTSOURCING is present in numerous business functions, including manufacturing, legal, financial and human resources, it is the term BPO (Business Process Outsourcing) that is largely in the news on a daily basis. India's capabilities in this area have been moving towards enhancing the nature of the work done. From mere data entry kind of work, the focus has shifted to transaction processing. Now, there is a nascent move towards knowledge process outsourcing (KPO).
Unlike in BPO where the focus is on executing standardized routine processes, KPO involves processes that demand advanced information search, analytical, interpretation and technical skills as well as some judgment and decision making. Examples of KPO functions are intellectual property or patent research, R&D in pharmaceuticals and biotechnology, data mining, database creation, and a range of analytical services such as equity research, competitive intelligence, industry reports and financial modelling. Many of these activities lend themselves to remote execution from anywhere.
Typical users of KPO services include market research and consulting firms, investment banks and financial services institutions, industry associations, media, publishing and database firms, and corporate planning departments of large Fortune 500 companies. Several global players such as McKinsey, Goldman Sachs, Reuters, IMS Health, Harris Interactive, Ipsos, Maritz, AC Nielsen, TN0S and the WPP group are already using India as a remote base.
The KPO Value Chain:
Typically, the extent of offshoring is a function of the degree of e-enablement possible and the quality of the human capital required. Some activities such as paralegal and medical transcription require low quality human capital as compared to activities such as data mining and analysis, engineering design and e-learning. The latter are also highly amenable to IT enablement. Other services such as legal consulting, intellectual property research and strategic consulting require the highest level of human capital and are the least amenable to IT enablement.
A veritable gold mine:
Companies in the KPO space thus need to make the transition from offering services that require low human capital quality and low IT enablement to those that require a high degree of human capital and IT enablement. The National Association of Software and Service Companies projects that the total global offshoring market opportunity by 2008 will touch $141 billion. Of this, data search, integration and management will account for $18 billion. Medical, legal content and associated services represent an opportunity of $2 billion. However, Scope e-Knowledge Center estimates that only 45-50 per cent (about $65-70 billion) of the total off-shoring opportunity is likely to be realized even by 2010. According to Scope, the global offshore BPO (non-IT) revenue in fiscal 2003 was close to $9 billion and this is expected to grow by about 35 per cent a year through 2008.
An obvious advantage of BPO is the immediate cost savings (over 30 per cent) and yet a steadfast focus on high quality standards. This also allows the in-house team (of the overseas client) to focus their expertise on more value-added work while delegating the lower-end work to more cost-effective resources. For India, it is a new job creator. It is estimated that the total number of jobs created so far as a result of outsourcing, primarily call center operations, is about 180,000. Of these, the U.S. and the U.K. together have a share of over 86 per cent. By 2010, the share of non-call center outsourcing is placed at 50 per cent of the total number of jobs created. One estimate places the KPO jobs alone at over a quarter of a million by then.
At the same time, companies abroad are sceptical about outsourcing high-end services for varied reasons such as data security, quality and professionalism in a remote location, political and regulatory climate.
Collaborative approach:
Clearly, this is an evolutionary process and certain roadblocks that exist need to be taken care of. Companies need to adopt a collaborative approach to tackle such issues. For instance, Scope has addressed these issues by adopting a relationship-based model. In this model, concerns on quality and timeliness have been addressed by Scope through a process of pilots and phased transfer of work. Technology — hardware and software — is world class. International certifications such as ISO and BS7799 also help. Likewise, Service Level Agreements that are mutually fair have been put in place.
What helps the India case is the ready access to a large intellectual pool with expertise in areas such as research and analysis, not to mention reasonable English language skills (that need honing) and strong domain expertise.
But finally, it is the management that plays a vital role in enabling the smooth operationalisation of such remote knowledge partnerships.
There is tremendous potential in the KPO space. Only companies that have a strong pedigree, domain expertise, clear focus on the high-end space, a proactive solution orientation and a collaborative mindset will emerge as the winners.
Knowledge process outsourcing is widely predicted to be the buzzword in the New Year; here's why. According to a recent study by Evalueserve, the global KPO market is expected to grow at a cumulative annual growth rate (CAGR) of 46 per cent, from $1.2 billion in 2003 to $17 billion in 2010.
Compare this with the prediction for the low-end outsourcing services market. This is expected to have a CAGR of 26 per cent, from $ 7.7 billion to $39.8 billion in the same period.
Evalueserve says India provided $3.5 billion of BPO and KPO (but non-IT) services in 2003 and is expected to grow at a CAGR of 36 per cent during 2004 to 2010. Hence, it is likely to earn $30 billion in 2010 by providing these services.
The high-end KPO opportunities are immense for Indian firms. For instance, look at some of the figures pertaining to intellectual property research.
Drafting and filing of patent applications in the US is quite expensive. A typical application costs about $10,000 to $15,000 to draft and file with the United States Patent and Trademark Office.
Cost savings from offshoring even a portion of the patent drafting process can easily save up to 50 per cent of the cost for the end client, according to Alok Aggarwal, chairman of Evalueserve.
Quite predictably, law firms such as Patent Metrix, Cantor-Colburn and Schwegman, Lundberg, and Woessner & Kluth, have already set up offices in India, and quite a few others are joining hands with Indian companies to cash in on the emerging opportunity.
Offshoring R&D in pharmaceuticals and biotechnology is another area where there is enormous potential for KPO. Aggarwal says destinations such as India offer significant cost advantages (as much as 40 to 60 per cent) in the areas of contract research and clinical trials.
Companies such as AstraZeneca and GlaxoSmithKline have recently set up drug discovery centers at low-cost destinations to offshore R&D activities.
Chip design and embedded systems is another critical area. A paper presented by Aggarwal says the reason why all major integrated design manufacturers such as Motorola, Intel, Analog Devices, National Semiconductor, IBM, Cisco, Cypress Semiconductor, Nokia and Philips have set up offshore design centers is simple.
The compensation for a chip design engineer with a master's degree and five years' experience is about $7,000 a month in the US.
An engineer with the same qualification and experience in India gets about $1,200 a month. Naturally, the cost savings in KPO is enormous. For example, data-mining services companies can save as much as 60 to 70 per cent on analytics and inventory management costs by off-shoring them.
The cost differential between PhDs/engineers in the US and India is almost $60,000 to $80,000. Companies like Evalueserve, GE Caps, MarketRx have set up centers at low-cost destinations to provide these services. And more are expected to follow soon.
A major reason why companies in India will have no option but to move up the value chain from BPO to KPO is quite simple. By 2010, India may have become too costly to provide low-end services at competitive costs.
For example, Evalueserve says Indian salaries have increased at an average of 14 per cent a 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 per cent.
This, the low-end work may move to relatively cheaper countries like Ukraine, the Czech Republic and Malaysia.
Moreover, commoditisation of BPO services will further boost the transition of present low-end destinations to the higher end of the value chain. 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 number of professionals working in the offshore 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 professionals working in this sector) gain experience and capabilities to provide high-value services.
During 2000 to 2003, the US offshored 2,38,000 IT service jobs. Evalueserve predicts that this is likely to increase to 7,75,000 jobs by FY 2010.
Further, by the end of March 2004, the US had offshored about 1,36,000 BPO (non-IT) jobs, mostly in the call center segment.
Forrester predicts that it is likely to offshore 1.314 million BPO (non-IT) jobs by FY 2010.
In its annual publication Strategic Review 2005, Nasscom has said the high-end activity of the BPO industry—the KPO or knowledge process outsourcing could be worth $15.5 billion by 2010.
According to earlier estimates, the BPO industry itself was expected to be about $20bn by 2008, hence a very significant portion of the sector—in excess of 50% is now projected to be knowledge based. This represents significant metamorphosis of call center sector business to completely different model.
Interestingly, Sunil Mehta, Nasscom vice-president research, distances himself from the estimates. The projections are based on a white paper released by Evalueserve. The paper cites reasons for a possible KPO boom.
It says higher savings by outsourcing knowledge-based activities combined with the scarcity of specialized talent in developed countries could lead to growth in the KPO sector.
Billing rates for KPO are higher at $30-45 per hour compared to just $10-14 in the BPO business. However, the paper also warns of several challenges like higher quality standards, greater investments and inadequate talent.
The study estimates that while the compounded growth rate of BPO till 2010 would be just 26% KPO is expected to be grow at almost 46%.
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contact us for KPO projects.
bobby24365@gmail.com
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