“A significant shift in the boundaries between ‘outsourceable’ and ‘non-outsourceable’ activities may happen with high-value activities overtaking low-end cost arbitrage work,” he adds, during an e-mail interaction with Business Line, soon after the launch of report titled Knowledge Process Outsourcing (KPO): Unlocking top-line growth by outsourcing ‘the core’, at Nasscom on February 13, in Mumbai.

As the KPO industry moves from basic and moderate complexity work to high complexity work, the boundaries separating the “core activities” of a global institution from the “non-core activities” are likely to be redrawn, observes Mr Zarrella.

“Decisions about outsourcing are likely to be accelerated to preserve and increase competitive advantage with large global banks and insurers looking at knowledge services strategies as key business drivers.” He sees the emergence of a new trend of ‘boutique’ providers who would look at leveraging knowledge services to create a differentiation and offer new services and offerings.

“Outsourcing strategies have progressed from being at the periphery of the enterprise to being at the heart of the business,” informs Zarrella. “More rigorous regulatory and compliance control will likely be demanded, as knowledge service providers deliver more complex services…”

Excerpts from the interview:

First, a definition of KPO and how it is different from BPO (business process outsourcing).

There is no set definition for KPO. Various industry professionals define KPO differently. However we believe that KPO enables clients to unlock their top-line growth by outsourcing their core work to locations that have a highly skilled and relatively cheap talent pool.

KPO is about “intellectual arbitrage”. This differentiates KPO from IT outsourcing (ITO) or BPO, both of which emphasise cost arbitrage.

KPO is characterised by niche offerings, highly skilled staff and a relatively small scale. It cuts into the traditional “core competencies” of many organisations. KPO is non-rule based while BPO is rule-based and continuous. Communication with client is more in KPO as compared to BPO wherein the backend operations do not involve client interaction.

While KPO involves high complexity and judgement-based work, BPO involves basic processes involving templates and standard procedures. The per-hour billing rate is much higher for a KPO as compared to that of a BPO. While staff numbers, volume and accuracy of output were the key drivers for the success of BPO, staff capabilities and expertise of the resources are the key drivers for the KPO to rise. Knowledge processes are different from business processes in terms of the value proposition to the client, which leads to a clear demarcation in process complexity, the amount of intellectual intervention in the process, the skills required and the ability to scale. While business processes are essentially process-driven and rule-based, knowledge processes involve judgment. By outsourcing their core operations to KPO providers (third-party or captive), KPO clients enhance their top line revenues by being able to make different investment decisions and take on more work than would otherwise be the case.

An example of a BPO activity would be finance and accounting outsourcing — accounts receivables and payables, and HR (human resource). On the other hand, an example of KPO would be equity research — initiation of uncovered stocks and valuation modelling.

Is there taxonomy of KPO — its varieties/forms? Do accountancy-related services form part of KPO? And, more specifically, does a qualified Indian CA fit the KPO slot?

There is no globally defined taxonomy of KPO. However KPOs can be classified according to the kind of industry they service. The KPO industry services the following verticals:

Equity, financial, insurance research.

Market research and competitive intelligence and general business research.

Data analytics, integration and management.

Research and information services in HR.

Intellectual property, paralegal content and services.

Engineering and design services.

Animation and simulation services.

Medical content and services.

Yes, high-end accountancy-related services do form part of KPO. A qualified CA fits the KPO slot as the KPO does require skilled professionals in various fields. The KPO industry hires people who are skilled (CA, CFA, CPA, MBA, etc.) not just plain vanilla commerce graduates.

For instance, work related to M&A (mergers and acquisitions) forms a part of KPO work. To go ahead with an M&A activity, the firm needs a valuation to be performed. A chartered accountant is the ideal resource to perform a valuation there. Hence the KPO would have CAs as their staff.

Talking of skills, what are the demands of KPO from the talent pool?

KPO staff are more difficult to find, take longer to train and are harder to replace, and are therefore in high demand. Skill-sets sought by the KPO industry include financial analysis and statistical analysis skills (including actuarial skill-sets).

Financial analysis skill-sets drawn on in the KPO industry are those of Chartered Financial Analysts (CFAs), Chartered Accountants (CAs) as well as Engineer-MBA and Engineer-CFA combinations. Statistical analysis practitioners are generally masters’ level graduates in statistics or operations research. Our research shows that actuarial skills are rapidly gaining currency in the KPO industry.

The KPO industry faces a severe skills shortage. This is demonstrated by both churn rates (now about 25 per cent per annum) and salary inflation (typically around 30 per cent per annum).

However, salary inflation at providers’ home locations is not a critical issue because of similar salary inflation in client organisations’ home markets. Salary inflation is also less of an issue in KPO, since KPO by definition is about knowledge arbitrage and access to high-end talent.

How big is KPO, in value terms, globally and in India? And the growth? What are the key drivers behind the growth of KPOs?

Various sources of market research predict the knowledge services industry will be anywhere between $10 billion and $17 billion by the year 2010.

While the level of optimism on industry growth varies, few doubt the fact that the industry will grow at a staggering rate. The financial services sector is likely to account for a major proportion of the knowledge services pie. Assuming a conservative growth, KPMG expects the financial services KPO industry to be in excess of $5 billion by the year 2010.

By 2010 the global KPO market is expected to grow in excess of 30 per cent per annum, from $1.29 billion in FY 2003 to $17 billion. This would lead to an increase in the number of jobs, from 25,000 in 2003 to approximately 2,50,000. Revenues in the Indian service sector are expected to rise in excess of 10 per cent per annum. India is expected to account for a major chunk of global KPO revenues. There are a number of key drivers behind the growth of the KPO. Primarily KPO significantly enhances the client service organisation’s ability to generate top-line revenue. Also the vendors have demonstrated their capabilities to execute high-end knowledge work efficiently. A seemingly unstoppable push towards global sourcing strategies at most major banking and insurance organisations has led to the rise of the KPO.

Also due to the relatively standardised nature of analytics and a growing awareness of the increasing quality of education systems in favoured offshore locations. The technology and telecommunication developments have helped the KPO industry to grow.

What factors should a company consider before going ahead with a KPO strategy? Which would be a better option: captive or third-party?

A company that plans to go ahead with outsourcing its high-end work must consider the following parameters:

Availability of skilled labour within the organisation. The organisation must check if it has resources capable to go ahead and carry out the operation instead of outsourcing it. However ROI (return on investment) needs to be considered as well.

Often there is a scenario that the client does not have a bandwidth at present to do a certain operation/function within its vicinity. KPO is a favourable option in that case.

In case a certain job does not need to be performed on a continuous basis, it may not be favourable to hire a resource for the entire year. In such a case it is cost-effective to outsource the work to a KPO.

There is a good mix of both third-party and captive structures in the knowledge services at present. KPMG expects hybrid multi-sourcing models of knowledge services to emerge in the near future.

They will most likely consist of captive units leveraging on their process and domain knowledge for executing high-end knowledge work and managing operations of third-party service providers executing roles at the lower end of the services pyramid.

Attracting talent is a critical success factor. While captives are relying on their global brand names to attract candidates, the ability of third-party service providers to better manage career aspirations gives them a recruitment advantage.

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