With the financial support of

Ministry of Communication
(ITES Secretariat)

“BRIDGES ACROSS BORDERS”

Fostering Outsourcing Partnership
in
Financial Services & Information Technology
6-9 November 2007

Accra, Ghana

KNOWLEDGE
PROCESS
OUTSOURCING

Global Demand Study

Contents

I. Introduction…………….….……………………….….3

II. The KPO Industry……….....................................8

III. Setting up Captive V/S selecting a vendor…...25

IV. Success Story: India..………………………………29

Page 1 of 11 ITC ©
 Introduction

Knowledge Process Outsourcing (KPO)

• Business Process Outsourcing (BPO)
refers to outsourcing of business s KPO
KPO
ice
functions including accounting, Se
rv
customer services, and human O
BP
Customer
resources. Globalisation of services is Support
Insurance
moving up the value chain and although Telemarketing
Claim
A/R
there are several impediments to Management
processing
Value

outsourcing, the cost-benefits provided

to the company are very high and hence
outsourcing is fast becoming a trend.
HR Data Infeasible
Medical segments
Processing Transcription
Transaction
• KPO involves outsourcing knowledge services
intensive business processes that Infeasible segments
require specialized domain based Change forces
expertise Time
• KPO evolved soon after the advent of BPO services. KPO was considered as high value or high end
services and the transition from BPO to KPO is depicted in the above figure.
• These processes demand advanced analytical and specialized skills. The work profile involves not only
executing standardized processes but also adding high value through advanced analytical and technical
skills as well as some judgement and decision making.

The central premise of KPO is to create value for the client by providing the highest-quality
business expertise and superior productivity/effectiveness rather than cost savings based
only on geographic cost arbitrage.

The evolution of KPO industry….

• Phase 1: Captive KPOs
– Post BPO era in order to improve the margins
companies began thinking of outsourcing the
technology and intellectual oriented work. However
there was no player who would cater to these
needs.
– Further lack of skill set, government policies acted
as hindrances in setting up KPO centres. Hence
companies had to set up their own captive centres.
– However, this was not at all cost effective for the
companies that fell in the SME segment and as a
result the need for a third party KPO (KPO vendor)
started building up.

• Phase 2: Third Party KPOs

– With the profitability of Captives soon attracted
Third part vendors who were either BPO service
providers or pure KPO vendors.
– The advent of Third part vendors encouraged
SMEs to outsource their work, since it was
turning out to be a profitable venture.
– Third party vendors soon began gaining an
advantage as against the captives and are to
surpass the captive centers in the near future.

Page 2 of 11 ITC ©
 Third party vendors surpassing Captive KPOs
• Companies that have not yet set up captives and SMEs with engagements sizes being much smaller are
highly likely to choose the Third Party vendor model.
• Third party vendors have an upper hand against the Captive KPO due to the following reasons:
– Faster initial set-up
– Faster and easier initial staffing
– Better long term employee retention
– More flexibility
– Better Cost Control
• Initial set-Up phase analysis shows that a Third party KPO takes just above 3 months to begin
operations whereas a Captive KPO takes over 14 months to begin operations.

Initial set-up time comparison between Captive and Third party vendors

FTE : Full Time Employees

Services rendered by the KPO industry

Pharma R&D
• The KPO industry is rapidly growing and newer
Animation & Learning
Design Solutions services are being targeted to be outsourced.
• Along with the services depicted in the adjacent
Investment Analysis
& Equity Research
Business &
Technical figure, some of the newer emerging areas in the
KPO industry are:
Services

KPO Industry services

– Audiovisual services
Engineering &
Data Analytics
Design – Training services
– Education services
Business &
Legal Services
& IP Research
Market
Research
Writing & Content
Development

• By 2011 the KPO industry is expected to reach

$ 17 billion industry.
• The services rendered by the industry then,
along with their distribution is illustrated in the
pie chart.
• Newer segments are being added to the
industry with a cost-benefit analysis, adding to
the ever growing KPO industry.

The KPO Industry

Page 3 of 11 ITC ©
 An overview of the Industry
• As per NASSCOM India estimates, the KPO industry is Major Players in the KPO industry
expected to grow at 45% by 2010 to a $16 billion
industry Service Segment Country
• Some countries have started developing expertise in Animation Philippines, China, India
specific services in the KPO industry.
Content Philippines, India.
• Countries like India and China are major suppliers of
Financial services China, Ireland, India.
the KPO industry and have established themselves in
most of the sectors Healthcare Russia, India.
• Although nations like India, China are well established IT/R&D China, Russia, India.
and are considered as the leaders in the industry they
Legal New Zealand, India.
face significant competition from countries like Ireland
and Philippines, which are the new emerging nations. Pharmaceuticals Russia, Ireland, India.

Nations that vendor to the KPO industry

Offshore Leaders India, China, Canada, Mexico, South Africa, Ireland, Russia, and Philippines

Challengers Brazil, the Caribbean region, Eastern Europe, Malaysia, Israel, Singapore, and
Vietnam
Next in Line Northern Ireland, Bangladesh, Ghana, Korea, Mauritius, Nepal, Senegal, Sri
Lanka, Taiwan, and Thailand

The Future of KPO Industry

Analytics is expected to be the largest segment in KPO industry

Segmental growth in KPO industry

KPO Sectors FY 03 FY 10 CAGR

Equity, finance and insurance research 0 0.4 N/A
Data Search, integration and management (Analytics) 0.3 5.0 50%
Research and information services in HR 0 0.2 N/A
The fastest growing
Market research and competitive intelligence 0.01 0.4 70% sector

Engineering and design 0.4 2.0 29% Market research &

competitive
Animation and simulation services 0.1 1.4 46% intelligence
Paralegal content and services 0 0.3 N/A
Medical content and services 0 0.3 N/A Largest sector
Remote education and publishing 0 2.0 N/A Data Search,
integration &
Biotech and Pharma 0.25 3.0 40% management
R&D 0.2 2.0 39%
Total (USD bn) 1.29 17.0 46%

10

Demand Side of the KPO industry

• KPO services help to improve the time-to-market, E ur o p e ,
access to special skills, absorb peak load and 2 0%

enhance organizational effectiveness.

• Foreign small and medium enterprises are also
U K , 2 0% U S, 60 %
looking at KPO services to cater to their high-
value project-specific activities. US UK E ur o p e

• Developed economies, such as the US, UK, and countries in Western Europe are increasingly facing a
shortage of highly trained and specialized professionals in various knowledge-intensive high-skill sectors.
Figure above shows the country-wise contribution to the demand side of KPO.
• US, UK, Germany and France are the countries that drive the demand for the KPO industry. However, US
earns the maximum from outsourcing and a comparison of these nations is shown below.

For every $1 spent For every € 1 spent

US earns France earns back Germany earns
$1.14-$1.17 € 0.86 back € 0.74

0.57
Value of Labour
Re-Employed
0.44
0.34
Direct Benefits 0.07

0.50 0.05
0.03
Cost Savings for -
0.53 0.36 0.36
Customers &
Investors

11

Page 4 of 11 ITC ©
 Benefits of KPO
• Along with the cost effectiveness, countries can expect more than one of the following benefits:
Peak load absorption Organisation does not have to build their own headcount and have to spend less on
infrastructure

Complexity Reduction Significantly reduce the complexities involved in managing and continuous knowledge
building of human resources and concentrate on core activities

Access to Global Reach Reduction in cost of investment in facilities, infrastructure and human resources to a
large extent by outsourcing to a KPO vendor having global presence

Enhancement of Service Offshore centres have been able to make dramatic improvements in process quality
Quality and productivity as compared to that in the parent location

Accelerating Process Outsourcing non-core activities to specialized firms that are better, faster and more
cycle efficient at managing these processes, can accelerate the process cycles and reduce
turn-around time.

Availability of skilled Supply of skilled labour in most of the countries supplying KPO has been increasing
workforce at a steady pace.

Company Specific Regulatory related

Some impediments Management Attitude and Strategies Governmental Policies

to outsourcing Unsuitable Business Processes Labour Laws
Structural Issues Legal Protection

12

The Supply Side of KPO

• KPO is centered on professionals possessing the right skills. Hence, KPO operations are
likely to evolve in countries with the highest educational standards, providing a large
number of highly qualified professionals (Engineers, MBAs, CFAs, lawyers etc.).
• The supply side of the KPO industry can be classified into following major regions:
– South East Asia-Pacific
• Countries providing KPO services in this region include India, China, Philippines and Malaysia
• The Asia-Pacific region is the leader in the supply side of the KPO industry due to contribution by countries
like India and China.
• The labour costs are pretty low and skilled labour is available in abundance.
• Countries falling in this region can provide a 24X7 support to western countries.
– Europe
• Countries providing KPO services in this region include Czech Republic, Ireland, Poland, Hungary and
Russia.
• Outsourcing to Europe provides two primary advantages viz. Low risk profile and Cultural and geographical
proximity to Western regions.
– Latin America
• Countries providing KPO services in this region include Brazil, Chile and Mexico.
• Similar benefits as that of Europe.
– Middle East
• Includes Israel, and is yet to develop itself as an outsourcing region.

13

South East Asia-Pacific

INDIA Advantages Disadvantages

• Supportive Government policies. • Unreliable power supply outside the

top ten metropolitan regions.
• 24X7 support due to time zone
advantages. • Skilled labour mainly available in the
top ten metropolitan locations
• Falling telecom rates.
• Employee turnover ratio is high
• Availability of skilled labour.
• Huge labour pool.

CHINA Advantages Disadvantages

• A large numbers of bilingual engineers • Trade policies and over regulation of

who speak in Japanese & Chinese. Chinese government has hampered
Thus, it is uniquely positioned to tap growth
the Japanese and Korean markets.
• Intellectual property concerns linger.
• China is building networks,
• Weak command over English language
particularly telecommunications.
acts as a strong disadvantage. There is
• There are excellent opportunities for cultural incompatibility as well.
24x7 support.
• Employee wages are on the rise.
• Business transparency is increasing.
• Low infrastructure costs.

14

Page 5 of 11 ITC ©
 South East Asia-Pacific (contd…)

PHILIPPINES Advantages Disadvantages

• Business friendly government policies • High corruption levels

with respect to tax and set-up policies.
• Large skilled labour pool at low costs
• 24X7 support can be provided to the
western countries
• Employee turnover is 5%
• Cultural closeness to the western
regions.
• Poor risk profile in terms of legacy of
natural disasters and data theft.
• Though the policies are in place,
procedures are time consuming.
• Strict labour laws.
• Political instability.
• Infrastructure is weak.

MALAYSIA Advantages Disadvantages

• Attrition rates are very low.

• Small labour pool
• Supportive government policies.
• Low service maturity
• Strong language skills.
• Perfect geographic location which
connects the eastern and the western
countries.
• Skilled labour available.

15

Country-wise comparison of the South East Asia-Pacific Region

• Although China’s population is 16 times the size of Philippines, its pool of suitable young professional
engineers is half of the suitable candidates from Philippines.
• In India the overall quality of the educational system, apart from the top universities, needs to improve
significantly.
• A comparison showing the number of suitable candidates out of a possible 100 graduates with
relevant degree that could be employed if there was a demand for all of them is shown below.

C o u ntry F in an ce/
E n g in eer G en eralist
Name A cco u n tin g

C hin a 10 15 3

P hilip pin es 20 30 25
A sia
In d ia 25 15 10

M a lay sia 35 25 20

16

Europe
• Eastern Europe has 40 to 50 provincial cities with universities large enough to supply a highly skilled
labour force at lower labour cost.
• Outsourcing here would help to spread potential risks across a portfolio of locations with different risk
profiles by taking into account the reliability of infrastructure, political stability, and the possibility that
talent might emigrate be enticed by competitors, or prove less capable than anticipated.
• Countries like Russia could play a major role in the KPO industry if it were to introduce changes in its
labour policies
• If proper measures are taken by the European countries for development of outsourcing, European
region can catch up with Asian nations.

RUSSIA Advantages Disadvantages

• Availability of skilled labour • Telecom infrastructure costs are high.

• Huge labour pool • Cultural problems.
• Governmental policies act as a
hindrance.
• At the middle and lower levels English
proficiency is relatively poor.

17

Page 6 of 11 ITC ©
 Europe (contd…)

CZECH REPUBLIC Advantages Disadvantages

• Good government policies. • Intellectual property security problem

• The telecom infrastructure is good. • Salaries and other costs are on the rise.
• Good western culture affinity.
• Proficient skills in European
languages.
• Political stability.

IRELAND Advantages Disadvantages

• Literacy rate is 99.9% • The labour pool is pretty small.

• Low or no political risk in the country • Labour costs in Ireland are high.
• Solid infrastructure.
• Unique blend of language and
communication skills available.
• Favourable government policies

18

Europe (contd…)

POLAND Advantages Disadvantages

• Business friendly governmental • Cannot provide 24X7 support to the

policies with respect to FDI. western countries.
• Wages are on the rise
• Good public infrastructure.
• Skilled labour available.
• Poland has a strong cultural affinity
with Germany and the rest of Europe
• Good proficiency in languages like
English, German, French and Spanish.

HUNGARY Advantages Disadvantages

• Liberalized telecom structure. • Labour pool is limited.

• Good real estate availability. • Cannot provide 24X7 services to the
western regions
• Skilled labour available.
• Strong western cultural affinity.
• Proficient skills in English, German
and French languages.
• Closely located to European countries.

19

Country-wise comparison of the European Region

• Job candidates from Russia are well-educated but often lack grounding in practical skills
from their university education.
• Poland has nearly five times suitable qualified engineers as compared to the much more
populous Russia.
• Figure below shows the number of graduates out of a possible 100 with correct degree
could be employed if there was a demand for all 100.

Country Finance/
Engineer Generalist
Name A ccounting

R ussia 10 20 10

C zech
50 40 20
Eastern R epublic
Europe
Poland 50 30 15

H ungary 50 50 30

20

Page 7 of 11 ITC ©
 Latin America
• Latin American regions have a strong cultural affinity with the western regions.
• However, due to cost factors and lack of significant talented labour pool, these regions are
lacking behind
• Also, these regions cannot provide a 24X7 support to the western regions since they fall in
the same time zone.
• Often labour policies act as a hindrance in outsourcing of services.

Brazil Advantages Disadvantages

• Abundant real estate at cheap rates • Strict labour laws

• Low operating costs for business
• Excellent telecom and
services available
• Labour costs are cheap
• Brazil had slow growth rate (GDP grew
by only 2.3 % a year from 2000-2005
network
• Weak English language proficiency
• Lack of management skills
• Less man power

21

Latin America

CHILE Advantages Disadvantages

• Low levels of corruption • Small labour pool because of small

population
• Business friendly government policies
• Spanish is a must for doing business in
• Low electricity costs
Chile.
• Transparent legal environment
• Complex banking system
• Strong telecom infrastructure, railways
• Several visa and immigration
and roads.
problems.

MEXICO Advantages Disadvantages

• Labour costs are low. • Mexico has an underdeveloped

recruiting industry.
• Cultural proximity to the western
countries. • Poor language skills
• Labour skills are poor
• Country’s landscape for IT vendors
ranks second worst among the low
wage countries.

22

Country-wise comparison of the Latin-American Region

• Brazil is one of the most populated nations in the Latin-American region; however it has a
smaller size of population which will cater to the KPO industry.
• Figure below shows the number of graduates out of a possible 100 with correct degree
that could be employed if there was a demand for all 100.

Country Finance/
Engineer Generalist
Name Accounting

Brazil 13 13 8
Latin
America Mexico 42 35 11

Note: Data for Chile was not available

23

Page 8 of 11 ITC ©
 Middle East

ISRAEL Advantages Disadvantages

• Skilled labour available. • Small labour pool

• Highest per capita engineers. • Politically unstable
• Active government funding.
• Strong education system
• Diverse population

• Israel has performed extremely well in high technology areas.

• Software companies form a major part of Israel’s industrial production and exports.
• However, it is a new entrant in the KPO segment and will have to develop itself in order to attract other
segments in the KPO industry.
• Currently there is no other nation from Middle east that vendors to the KPO industry. However, with
changes in governmental policies and tie-ups with US one can expect a major growth in these nations as
well.

24

Setting up a Captive v/s Selecting a vendor

25

Selection of a KPO vendor

• There are various factors which play a significant role in choosing a KPO vendor which are
segregated into two categories viz. Country specific and Company specific elements.

Country Specific Elements Company Specific Elements

• Cost Savings • Company size

• Availability of Skilled Professionals • Vision, mission, strategy and
• Personal Connection objectives.
• Project management skills and quality • Credibility
certification • Work ethics and culture
• Language and culture • Data security
• Telecommunication infrastructure • Security practices and initiatives
• Intellectual property protection • Competitive infrastructure
• Political stability and support • Skill set
• Time zone difference
• Country image
• Software and hardware resources

26

Page 9 of 11 ITC ©
 Selection of a KPO vendor (contd.)
• Over and above the factors mentioned earlier, the other important aspects the
companies should look into are:
– Security Practices and Initiatives
• Though security certification is a minimum requirement, internal security policies and
safeguards against vendor’s personnel are more important.
• Some of the security compliances that the companies look for are:
– Network Security Compliance
– Personal Security Compliance
– Physical Security Compliance
– Competitive Infrastructure
• Real estate is being developed to incorporate state-of-the-art telecommunications technology
(see example) in order to create smart buildings that have fibre optic cabling, alternative
power sources, and high-capacity, high-speed digital networks
• Easy accessibility to persons and documents
– Skills Sets
• The human resources at the vendor should possess certain basic skills sets as per the
requirement of different business segments

27

Challenges in setting up a KPO

• Operational Challenges
– Internal (lack of talented pool, rising wage rates etc.)
– Competition (newer entrants, better abilities etc.)
– Industry (infrastructure, amenities etc.)
• High Level of Demand for Quality
– Keen understanding of how client works and what his exact needs are.
– The client will not look at dollar figures but will be mainly concerned with quality of services.
• HR related Issues
– Recruiting and Training
– Retaining and Nurturing talent
• Company Branding
– Sales
– Marketing
• Innovation and differentiation
– Offer new types of services simply not available in high-wage countries for cost reasons
• Cross cultural skill requirement
– Understanding and appreciating of intercultural differences ultimately promotes clearer
communication, builds trust and yields tangible results in terms of business results

28

Staying Competitive
• To stay ahead in the global KPO market, vendor has to develop its indigenous KPO
niche to maintain its leading edge. Few ways of overcoming the challenges are:

At Operational Level At Strategic Level

• Skills Upgrade • Attract Better Quality Professionals

• Staff Retention • Bring In More Capital
• Better Security • Form an Effective Industry Association
• Better Control Mechanisms • Collaborate with Service Accrediting
• Improve SLAs to Improve Quality Organisations
• Sales and Marketing
• Governmental Intervention and Policies

29

Page 10 of 11 ITC ©
 India, The Success Story

30

India, the Success Story…

• India has been called ‘the back-office of the world’ by several research and consulting organizations.
• There are certain advantages of outsourcing to India such as:
– Successful BPO industry
• The BPO and the IT-ES sector success laid a very strong foundation for the KPO industry in India.
• The BPO and IT-ES sector gave a strong image to India as well.
– Largest skilled labour pool
• Skilled labour is available in abundance in India with many prestigious technical universities and business schools.
• With nearly 60% of its population between the age of 15-59 and more than half below the age of 25, India has significantly large
number of people in working age group.
– Competitive labour costs
• Although the labour costs are on the rise, they are still considered very cheap as against the western regions.
• Despite wage inflation averaging 10-15% annually, companies are able to leverage declines in telecom and other overhead costs,
productivity gains and economies of scale to sustain cost advantage.
– Supportive Governmental policies
• There is a stable and supportive political environment in India. The labour policies are liberal as well.
• Proactive measures are taken by NASSCOM and Government of India to realise success in KPO sector like BPO and IT-ES sectors.
– Competitive Infrastructure
• Reliable telecom and utility infrastructure support within India’s special IT parks.
• India has started taking measures in ensuring that it can match international standards of infrastructure. It has one of the most
competitive telecom rates world wide and several IT majors are now well established in India.
– Conducive business environment
• The government has taken initiatives to focus on the issues of data privacy, information security, and Intellectual Property Rights with
acts such as Information Technology Act 2000 etc.
• Companies are ensuring certification of standards like ISO and matching their framework to the CMM levels.

31

Future of KPO in India

• India has already employed over 25,000 professionals in the KPO sector and this figure is expected
to grow to over 250,000 professional by 2010.
• Figure below depicts services that will be outsourced to India along with their break-up, 5 years from
2006.
6 % 2% 9%
20%

33%
13%
13% 2 % 1%

F in a n c e A n im a t io n
D a ta & M a rk e t R e s e a rc h HR & C om p
Legal D e s ig n
E d u c a t io n P h a r m a a n d M e d ic a l
R& D

According to Evalueserve, Indian KPO sector will increase its share

share in the global KPO
sector to 71% by 2010. The KPO market in India is expected to increase
increase to USD 12
billion by 2010 reflecting a CAGR of 49.5%

32

Full study available upon request: services@intracen.org

Page 11 of 11 ITC ©