Trends in Knowledge Process Outsourcing – Growth Opportunities in High-Level Processes

8/9/2019 Trends in Knowledge Process Outsourcing Growth Opportunities in High-Level Processes

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Trends in Knowledge Process Outsourcing Growth Opportunities in High-Level Processes DMTC2287/ Published 03/2009

Datamonitor. This brief is a licensed product and is not to be photocopied Page 1

OVERVIEW

Catalyst

The maturing knowledge process outsourcing (KPO) market represents a significant growth opportunity for vendors. Aswell as defining KPO, in relation to the broader outsourcing market, this report will assess how vendors can best position

their offerings in order to take full advantage of the sectors blossoming potential.

Summary KPO represents the next stage in the evolution of the business process outsourcing market;

The KPO market continues to grow in maturity;

Offshore delivery has remained a constant feature of KPO;

Clients have concerns over the outsourcing of core business functions;

The KPO market remains extremely fragmented.

STRATEGIC FOCUS REPORT

Trends in Knowledge ProcessOutsourcing Growth Opportunitiesin High-Level Processes (Strategic

Focus)How can vendors take advantage of the growth potential of KPO through therecession and beyond?

Reference Code: DMTC2287

Publication Date: March 2009


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Key Messages



KEY MESSAGES

KPO represents the next stage in the evolution of the business process outsourcing market Knowledge process outsourcing (KPO) represents the next step in the evolutionary cycle of the outsourcing market. Just as

the success of IT outsourcing paved the way for the growth of business process outsourcing (BPO), so the growing

maturity of the BPO industry has led to the development of KPO. Unlike BPO, which refers to the transfer of mainly

transactional, non-core processes to specialist providers, KPO involves the outsourcing of core business processes, which

require a high level of domain expertise.

The KPO market continues to grow in maturity

The origins of the KPO industry can be traced back to the late 1990s, but it was not until 2003 that the market really began

to take off. At that time, KPO was the subject of a large amount of hype which led many within the industry to make boldclaims about how fast it would grow. The intensity of this hype has gradually died away and, since 2006, a more mature

KPO market has begun to emerge, with a significant amount of consolidation taking place and a growing awareness,

among both vendors and clients, of the full extent of what could be achieved through KPO services.

Offshore delivery has remained a constant feature of KPO

Throughout the development of the KPO market, the leveraging of offshore delivery locations has remained a constant

feature. India remains the pre-eminent offshore location for KPO delivery, but increasingly IT services and BPO vendors

are adopting a multi-sourcing approach to global delivery, and this trend has already impacted on the KPO market.

Locations such as China, the Philippines, Sri Lanka, Czech Republic, Hungary, Canada, Mexico and Brazil have emerged

as attractive locations for KPO delivery.

Clients have concerns over the outsourcing of core business functions

Unlike the established horizontal BPO areas, such as F&A and HRO, which focus on non-core aspects of the clients

business, KPO involves the outsourcing of core business functions. Clients are often reluctant to relinquish control over

areas such as planning, auditing, analysis and research and development to third-party vendors, with quality and security

being the major areas of concern. Vendors can take steps to alleviate customer worries, such as aligning themselves with

established business standards that cover process quality or security capabilities, or by offering services on a short-term,

single-project basis.

The KPO market remains extremely fragmented

Despite recent consolidation, a large number of providers continue to operate in the KPO market. These include: global

outsourcing providers such as IBM and Accenture; offshore outsourcing specialists like TCS, Wipro and Infosys; BPO

providers with KPO operations, including Genpact and WNS; KPO specialists such as Evalueserve; and captive operations

of major multi-national organizations like UBS, Goldman Sachs and Ford.


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Table of Contents



TABLE OF CONTENTS

Overview 1

Catalyst 1

Summary 1

Key Messages 2

KPO represents the next stage in the evolution of the busines s process outsourcing market 2

The KPO market continues to grow in maturity 2

Offshore delivery has remained a constant feature of KPO 2

Clients have concerns over the outsourcing of core business functions 2

The KPO market remains extremely fragmented 2 Market opportunity 6

Defining Knowledge Process Outsourcing 6

KPO vendors aim to go beyond cost arbitrage 10

Service Evolution 12

The Origins of the KPO Market 12

Offshore delivery has remained a constant feature of KPO 13

Evaluating emerging KPO delivery locations 14

Customer Impact 19 Clients have concerns over the outsourcing of core functions 19

KPO offers clients a range of potential benefits 20

Large organizations consume the most knowledge-based services 20

Competitive Landscape 22

Global giants have struggled to establish themselves in the KPO market 22

Indias leading outsourcers have well-established KPO offerings 23

The leading pure-play BPO vendors have strong presence in the KPO market 23

KPO specialists are able to target specific industries and service areas 24

Captive operations remain part of the KPO landscape 25

Go to Market 26

Scale is of lesser importance in KPO than BPO 26

Technology as an enabler for KPO 27

Potential impact of the current recession on the KPO industry 27

Recommendations 29


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Table of Contents



APPENDIX 31

Methodology 31

Further reading 31 Ask the analyst 31

Datamonitor consulting 31

Disclaimer 31


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Table of Contents



TABLE OF FIGURES

Figure 1: Rate the importance of the following factors in your decision to enter into a BPO contract (1 Least Important; 4 Most Important) 10

Figure 2: Total Contract Value of Outsourcing Deals ($m) against Number of Contracts, January 2008 to February 2009 28

TABLE OF TABLES

Table 1: Indias Top 10 BPO Providers, 2007-2008 7

Table 2: Acquisitions of KPO Vendors Since 2006 8 Table 3: Assessment of emerging KPO locations 15

Table 4: Analysis of key KPO vendors by service line 25


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Market Opportunity



MARKET OPPORTUNITY

Defining Knowledge Process Outsourcing Knowledge process outsourcing (KPO) represents the next stage in the evolution of the outsourcing market. Just as the

success of IT outsourcing paved the way for the growth of business process outsourcing (BPO), so the growing maturity of

the BPO industry has led to the development of KPO.

The definitions below illustrate the key similarities and differences between BPO and KPO:

BPO: Generally refers to the transfer of mainly transactional, non-core processes (such as human resources,

finance & accounting and procurement) to specialist providers. These providers typically deliver the majority of

these services from offshore locations such as India, delivering significant cost savings to customers;

KPO: Involves the movement of core business processes, which require a high level of domain expertise, tothird-party vendors. Once again, in the majority of cases there is at least some offshore delivery element.

Definitions of KPO include a broad range of services

The definition of KPO shown above is extremely broad, and can be tailored to cover a wide variety of service areas,

including (but not limited to):

Market Research : Covers primary and secondary research, data processing, presentation / report writing and

data analysis and reporting;

Analytics: Covers an extremely wide range of functions, often focusing on specific industries or key parts of the

clients business. Major areas include data analytics, financial analytics and risk analytics;

Equity, Credit and Investment Research: Services include debt maturity profiles, risk profiles and analysis,

earnings forecasts, cash-flow valuation models and the preparation of company profiles;

Research and Development: High-level R&D services in verticals such as high-tech engineering,

pharmaceuticals and biotechnology;

Legal Process Outsourcing: Covers patent drafting and patent litigation services, contract drafting and

management systems, document review services, deposition summaries and legal research and support

services;

Other Vertical Services: KPO can deliver services across a wide variety of industries. Those in which it hasalready made an impact include creative design and animation, healthcare and pharmaceuticals and education

and training.

The list above illustrates the complexity and specialization inherent in most KPO functions. In the past, these

functions were off-limits for outsourcing, with clients unwilling to relinquish control over such vital business functions

and uncertain of the ability of outsourcers to deliver such services to the level of quality required.

However, as the KPO industry has matured, so the proposition has become more compelling. Vendors have been

able to demonstrate that many locations are already heavily utilized for BPO work (most notably India), and offer a


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Market Opportunity



significant pool of highly educated workers, at a markedly lower cost than clients will be able to find in their own

country.

Contract signings and M&A activity illustrate growing maturity of KPO

Due to the sensitive nature of much of the work being outsourced, the majority of KPO agreements are not made

public. However, over the last two years Datamonitor has tracked three key KPO deals, which illustrate the growing

maturity of the industry:

March 2007: Tata Consultancy Services (TCS) was selected by pharmaceuticals giant GlaxoSmithKline to set

up a global drug development center in India. Under the terms of the deal, TCS provides services around clinical

research, including clinical data management and clinical submissions support;

March 2008: Infosys Technologies won a deal with private equity and venture capital firm 3i to provide

research services, along with other BPO functions. Infosys provides global research services to support 3i's

investment business, as well as managing the companys knowledge and resource center in Bangalore;

August 2008: Pipal Research, the KPO subsidiary of Indian BPO vendor Firstsource Solutions , secured a

deal worth $30m over six years from BT Global Services, to provide KPO services including market, segment,

country and customer research, proposition support and other numerical-analysis work.

All three of the vendors involved in the deals listed above are based in India, illustrating the importance of that region

to the KPO industry. All three are also among the 10 biggest Indian BPO vendors, according to figures provided by

the countrys IT trade association Nasscom.

Table 1: Indias Top 10 BPO Providers, 2007-2008

Rank Company Name Position in Previous Year

1 Genpact 1

2 WNS Global Services 2

3 IBM-Daksh Business Process Services 4

4 Aditya Birla Minacs Worldwide 3

5 Tata Consultancy Services BPO 5

6 Wipro BPO 6

7 Firstsource Solutions 7

8 Infosys BPO 9

9 HCL BPO 8

10 EXLService Holdings 10

Source: Nasscom, July 2008 D A T A M O N I T O R

KPO acquisition activity

Firstsource is an example of a BPO vendor which has invested significantly in its KPO offering. In September 2004

the company, then known as ICICI OneSource, acquired a 51% stake in Pipal Research, a US-based vendor

specializing in providing customized business research, analytics and information services to customers in the

financial services, life sciences consumer packaged goods and IT industries.


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Market Opportunity



In the less than five years since that takeover, a number of other BPO companies have looked to increase their KPO

business through acquisition. The table below summarizes the major activity.

Table 2: Acquisitions of KPO Vendors Since 2006

Buyer Target Main Activity of Target Employees Price Date

Integreon Datum Legal Litigation support and electronicdata discovery Not disclosed Not disclosed Jun 08

Satyam Caterpillars Market Researchand Customer AnalyticsMarket research, customer

analytics Not disclosed $60m Apr 08

Cognizant MarketRx Analytics for the life sciencesindustry 430 $135m Oct 07

Quatrro BPOSolutions Scope eKnowledge

High-end KPO, inc. patent filing,market research 500 Not disclosed Apr 07

WNS GlobalServices Marketics Technologies Marketing analytics systems 200 $65m Mar 07

EXLService Inductis Strategy and analytics to financialservices sector 250 Not disclosed Jul 06

RR Donnelley Office Tiger High-end KPO, inc. legal services,financial analytics 4,000 $250m Mar 06

Source: Datamonitor D A T A M O N I T O R

An increased level of M&A activity is generally considered to be a good indicator of growing maturity in a market.

Thus the number of deals tracked by Datamonitor suggests that the KPO market is moving beyond the early stages of

development.

The fact that major BPO vendors such as WNS Global Services, Cognizant, EXLService and RR Donnelley have

made significant purchases also suggests that the industry is being taken more seriously by well-established players.

Despite this activity in recent years, the KPO market remains extremely fragmented. A large number of boutique firms

still operate in this space, either providing services across one specific area of KPO, such as legal process

outsourcing, or delivering a range of services to one specific vertical market, such as financial services.

Many KPO vendors focus on specific vertical markets

The high level of domain expertise required for the delivery of KPO services means that it lends itself to vertical-specific

focus more readily than horizontal BPO areas such as F&A BPO and HR outsourcing. KPO has gained significant traction

in areas such as pharmaceuticals and life sciences and manufacturing, but it is in financial services where the majority of

niche vendors have chosen to concentrate.

The financial services industry is an ideal market for KPO

The financial services industry has been key in driving the development of both the IT outsourcing and BPO markets. In

both cases, the willingness of major banks, insurance providers and private equity groups to outsource to third-party

providers was vital to the development of each industry. Financial services is therefore one of the most mature vertical

markets when it comes to outsourcing, and also more savvy when it comes to global sourcing. This makes it an ideal

market for KPO.


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Market Opportunity



Added to this is the fact that, at a basic level, much of the analytical work that forms the bedrock of the majority of KPO

deals is highly standardized areas such as competitor analysis, profitability analysis and sector analysis. These kinds of

services can be provided at a significantly lower cost from offshore locations, epitomized by (but not limited to) India, which

boast large pools of workers with qualifications and experience in the necessary skill sets.

KPO also enables the different domains within the broad heading of financial services to obtain services that are directly

tailored to their needs. BPO deals in areas such as F&A and HR outsourcing tend to be generic, with similar services

provided whether the client is a retail bank or an insurance provider. Conversely, KPO deals can be tailored to the clients

individual domain, whether it is insurance, investment banking, retail banking or corporate finance.

As a result, many KPO vendors do not simply focus on the financial services market; they drill down even further, and focus

on a specific domain. As an example, Amba Research provides investment research support services to the capital

markets industry.

The current recession represents a major challenge for providers focused on the financial services sector

The turmoil that engulfed the financial services industry, beginning with the sub-prime crisis in 2007, is already having, and

will continue to have, major implications for KPO vendors focused on that market.

In research conducted for this report, one vendor told Datamonitor that, prior to 2008, it was recording compound annual

growth rates of between 70% and 80% on its revenue. Since then, however, there has been a major s lowdown, and growth

for the coming year is expected to be less than 5%.

The main reason for this dramatic drop in demand is that the industry remains in a state of flux. Clients are no longer

certain of how their business is going to look in six or 12 months time, and so are reluctant to commit to deals. The result islengthening sales cycles and a general uncertainty about how the market is going to look in the future.

However, most vendors focused on financial services that Datamonitor spoke with remain upbeat about the long-term

prospects for KPO. The consensus view was that the cost-cutting potential of KPO meant that it remained an attractive

proposition for clients. Also, KPO work can be performed on a short-term, project-by-project basis, which does not require a

major commitment from a customer.

This positive outlook is not unique to vendors focused on financial services either. Most of the vendors with which

Datamonitor spoke forecast double-digit growth for their operations in the coming fiscal year, and were equally bullish about

their prospects for the next 24 to 36 months. However, Datamonitor cautions that that the majority of KPO operations are

building from a small base, in many cases less than $50m. It is therefore easier to deliver significant growth on revenue of

this scale than it is to grow, for instance, a $200m BPO business by 20% in the current climate.

Just two years ago, research agencies and analyst houses were eager to predict that the KPO industry would be worth

anywhere between $10bn and $17bn by 2010. This estimate now looks overly generous, as the reality of the current

economic situation begins to impact on the outsourcing market. In February this year, for example, Nasscom downgraded

its forecast for IT and BPO export growth from India by several percentage points.


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Market Opportunity



KPO vendors aim to go beyond cost arbitrage

Cost savings are obviously top of any prospects list of priorities, but traditionally it has not been the main selling point

put forward by KPO evangelists. Rather, they prefer to focus on the potential for KPO services to create value for thecustomer, by augmenting the knowledge already available within the clients own organization and adding further

expertise in highly specialized areas.

This practice is not unique to KPO. Across the BPO industry, vendors are attempting to move up the value chain and

provide higher-value, more strategic services to customers. So, for example, a provider of F&A BPO services may

look beyond providing basic transactional processes, like accounts payable and receivable services and travel and

expense reporting, and offer clients strategic functions such as financial planning and analysis and budgeting and

forecasting.

The reasoning is clear - this kind of work offers higher margins and enables vendors to build closer relationships with

clients, which in turn leads to longer deals and more predictable revenue streams.

There is also demand from the customer side as well. In Datamonitors study Business Trends 2008 Understanding

Your BPO Customer (DPTC0050) , a survey of 177 BPO clients from North America, Western Europe and Australia

and New Zealand, found that cost is just one of many factors taken into account when deciding to outsource a

business process. Just as important to end-users are goals such as improving efficiency and quality of service to

customers.

Figure 1: Rate the importance of the following factors in your decision to enter into a BPO contract (1

Least Important; 4 Most Important)

3.2

3.4

3.2

2.9

2.8

2.5

2.6

2.7

2.8

2.9

3.0

3.1

3.2

3.3

3.4

Cos t reduction Improvement inefficiency

Improve qualityof service to

customers

Technologicalinnovation

Enablingbusiness

expansion

3.2

3.4

3.2

2.9

2.8

2.5

2.6

2.7

2.8

2.9

3.0

3.1

3.2

3.3

3.4

Cos t reduction Improvement inefficiency

Improve qualityof service to

customers

Technologicalinnovation

Enablingbusiness

expansion


As the BPO market matures, cost arbitrage is becoming a standard expectation, and clients are increasingly looking

to derive other, less easily quantifiable, benefits through the outsourcing process. More and more, they are looking to

their outsourcing provider to drive improvements in efficiency and productivity, as illustrated by the graph above.


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Market Opportunity



However, it is important to note that this survey was carried out before the full impact of the global economic downturn

became apparent. As the recession deepens, Datamonitor asserts that it is likely that cost-cutting will once again be

the main driver behind clients decision-making.


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Service Evolution



SERVICE EVOLUTION

The Origins of the KPO Market The origins of the KPO market can be traced back to the late 1990s. With IT outsourcing well-established and the BPO

industry rapidly expanding, several multi-national companies, including General Electric, American Express and McKinsey,

began experimenting with offshoring research and analytics services to India. Rather than using third-party vendors, these

corporate giants preferred to utilize their own captive operations.

In December 2000, three former employees of IBM and McKinsey came together to form Evalueserve, one of the first pure-

play providers of research and analytics services from India. The company rapidly picked up clients, boasting fifty just two

years after its formation. Even still, there remained a lack of momentum around the nascent KPO market.

The KPO hype begins to grow

That began to change in 2003, as the level of interest around KPO began to grow exponentially among prospects. The

market became increasingly crowded as new vendors were formed and established BPO providers looked to take

advantage of the opportunity by setting up KPO operations of their own. Clients also became increasingly aware of the

potential benefits of KPO. As an example, Evalueserve claims to have added 150 clients in the twelve months to the end of

December 2003 and a further 300 in 2004, taking its total to approximately 500 by the end of that year.

Estimates suggest that the KPO market was worth just over $1bn by the end of the 2004 fiscal year, with growth on the

previous year of about 50%. The level of hype about the industry at the time led many to make bold claims about how fast it

would grow, with some even suggesting the KPO sector could be worth upwards of $11bn by the end of fiscal 2011. Start-

ups eager to jump on the bandwagon flooded the market, making it even more difficult to separate the reality of the

development of KPO from the increasingly hysterical publicity surrounding it.

Growing maturity opens up significant opportunities

By 2006, a more mature KPO market was beginning to emerge. As shown in Table 2, a significant amount of consolidation

began to take place, as major BPO players looked to establish themselves in the sector and smaller vendors tried to grab

market share. There was also a growing awareness, among both vendors and clients, of the full extent of what could be

achieved through KPO services.

The early days of KPO had seen clients, still wary of handing over control of core processes to third-party vendors, clearly

define the parameters of KPO work. Providers were often restricted to handling specific data sets, with methodologies and

even conclusions prescribed from the outset, and as such were unable to utilize their full range of capabilities.

However, as the market has matured, the restrictions placed on vendors have been lifted somewhat. Outsourcers are no

longer simply called on to handle specific number-crunching processes, but are trusted to draw their own conclusions from

data, make recommendations and design processes to improve client performance. The process is now far more

consultative and collaborative, and represents a significant opportunity, which may actually be larger than that originally

envisioned in the early days of KPO.


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Service Evolution



Offshore delivery has remained a constant feature of KPO

Throughout the evolution detailed above, one feature of the KPO market has remained constant: that of leveraging offshore

delivery models. Chief among the factors that make KPO an attractive proposition to clients is that the services can beprovided cheaper abroad than in the prospects own country. This promise can only be fulfilled if the vendor utilizes low-

cost locations.

India remains the pre-eminent offshore location

While the number of locations capable of offering low-cost outsourcing services has increased significantly over the last few

years, India remains the pre-eminent offshore location for KPO delivery. The advantages of delivering work from the

country are clear, and include:

Cheap, plentiful labor: Despite experiencing wage inflation due to ongoing high levels of demand, labor costs

in India remain significantly lower than in major Western economies such as the US, Australia/New Zealand andUK. The supply of qualified workers also remains healthy. Indias labor force is estimated at well over 500

million, and the country produces over 3 million graduates annually, including half a million technical graduates

and 300,000 post-graduates;

Excellent English language skills: With the US and the UK by far the most mature markets when it comes to

use offshore delivery models, strong English-language skills are vital for a low-cost location. While Hindi is the

national language and the primary tongue of approximately 41% of the population of India, English is the most

important language for commercial communication;

Cultural affinity with key Western markets: Language is not the only aspect linking India with key markets.

For example, the countrys legal system is based on English common law, which makes it easier for UKcompanies setting up in the region. Cultural links also exist between India and the UK which are less easy to

quantify but just as important in guiding sourcing decisions;

Maturity of Indias offshore delivery model: Indias global delivery model is well established, having been

honed over many years of delivering a wide range of services to customers all over the world. As a result, the

risks for clients are lower than they would be if they were outsourcing to a relatively immature market;

Political and economic stability: Indias stability, at both a political and an economic level, is a strong selling

particularly when compared to other countries in the same region of Asia, such as Pakistan, Thailand and Sri

Lanka.

Unsurprisingly, given the factors mentioned above, India has been the focal point of the KPO industry since itsinception. The vast majority of the industrys major vendors were founded in India, have their headquarters in the

country and deliver the lions share of their services from Indian cities.

Multi-shoring models are gaining traction

It is unlikely that India will face a significant challenge to its position as the leading location for KPO services in the

near future. Increasingly, however, IT services and BPO vendors are adopting a multi-sourcing approach to global

delivery, and this trend has already impacted on the KPO market.


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Service Evolution



While still preferring to have one central sourcing hub, located in India, a growing number of vendors are setting up

centers in other low-cost locations, located across Asia-Pacific, Eastern and Central Europe and Latin America. There

are a number of advantages to this approach for both KPO vendors and their clients:

Enables greater proximity to clients: One of the main drawbacks to sourcing KPO work from India is its

distance from the US and Europe. Clients can feel very detached from their offshore center, and communication

issues are further exacerbated by incompatible time zones. These problems can be al leviated through the use of

nearshore centers, based in close geographical proximity to the customers own locations. For example, Latin

American countries such as Mexico and Argentina can be used as nearshore hubs for US-based clients, while

services for customers based in Germany could be delivered from Eastern European locations like Poland or the

Czech Republic;

Greater flexibility: Vendors are increasingly working with clients who have operations in more than one region.

Taking a multi-sourcing approach allows vendors to be more flexible when providing services to a client

operating in multiple locations;

Easing the pressure on Indias labor pool: While Indias labor force is significant, and the country is producing

a large number of highly-qualified graduates every year, there are concerns that the country could already be

suffering from saturation of the talent pool. This is a particularly pressing concern for the KPO industry, where

the quality of labor available is of the utmost importance and vendors are under increasing pressure to keep

prices down. While Datamonitor is not suggesting that the Indian talent pool is in imminent danger of running

dry, spreading out into new locations will help to ensure that the supply lasts even longer, and will enable

vendors to access previously untapped reserves;

In the broader IT services and BPO markets, the number of potential global sourcing locations is very large. However,

due to the complexity of knowledge-based work and the level of domain expertise required to deliver these services

successfully, the list of possible delivery centers, outside of India, is significantly smaller.

Evaluating emerging KPO delivery locations

Datamonitor has identified eight key delivery locations that have emerged in recent years as viable options for KPO

service delivery. In the table below, these countries are evaluated against a number of criteria, including population,

literacy, labor pool and language proficiency.

These locations are drawn from four main geographic territories: Asia-Pacific (China, the Philippines and Sri Lanka),

Eastern Europe (Hungary, the Czech Republic), North America (Canada) and Latin America (Mexico and Brazil).

They range in size from the extremely large (China, with a population of around 1.3 billion), to the relatively small(Hungary and the Czech Republic, both of which have populations of about 10 million people).

All eight countries are currently used as delivery centers for KPO services.


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Service Evolution



Table 3: Assessment of emerging KPO locations

Country Population Labor Pool % of Labor Pool inServices Literacy Major Languages

China 1.3bn 807.7m 32% 90.9% Mandarin, Cantonese

Philippines 96.1m 36.8m 50% 92.6% Filipino, English

Sri Lanka 21.1m 7.6m 39% 90.7% Sinhala (74%), Tamil(18%), English (10%)

Hungary 9.9m 4.2m 63% 99.4% Hungarian (94%)

Czech Republic 10.2m 5.4m 56% 99.0% Czech (95%)

Canada 33.2m 18.2m 76% 99.0% English (59%), French(23%)

Mexico 110m 45.5m 59% 91.0% Spanish (93%)

Brazil 196.3m 100.9m 66% 88.6% Portuguese

Source: Datamonitor / CIA World Factbook D A T A M O N I T O R

China

China has many attractive features as a location for KPO services. As in India, labor is abundant and cheap. The country

produces the most tertiary graduates of any country in the world about 2.4 million in 2006 meaning that fit is relatively

easy to find a large supply of workers with good analytical skills.

However, there are a number of drawbacks which have inhibited the countrys progress as a sourcing location, including:

Maturity: As mentioned above, Indias global delivery model is well established and the country has been at the

forefront of the development of the KPO industry. While China is rapidly gaining experience in the KPO sector, it

still lags some way behind India in terms of maturity;

Depth of experience: While China undoubtedly boasts a large number of highly qualified employees, a number

of vendors indicated to Datamonitor that the countrys talent pool lacks the necessary experience in knowledge-

based functions sustain a large amount of KPO work;

Language capabilities: It is estimated that less than 1% of the population of mainland China can speak English

as an additional language. Chinas total of about 10 million English speakers compares unfavourably with not

only India (about 90 million English speakers), but also the Philippines (over 42 million) and Canada (where over

25 million people speak English as either a first or second language).

Philippines

The Philippines has established itself as a popular location for call center outsourcing work, helped by its large

English-speaking population and close cultural ties to the US. The country has looked to build on that foundation, and

move up the value chain into providing KPO services.


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Service Evolution



There are signs that KPO is beginning to gain a foothold in the Philippines. KPO providers such as Integreon have set

up facilities in the region, often at the specific request of clients who felt over-exposed to India and/or wanted to tap

into a region that was closely aligned with the US but also gave ready access to Asian markets such as Japan.

The Philippines is also well-established as a center for animation outsourcing. The countrys animators have been

providing services to major Western companies such as Walt Disney, Warner Bothers, Cartoon Network and Hanna

Barbera for over 20 years, and the size of the industry has been estimated at about $65m.

Aside from this highly specialised area, a major problem for the Philippines KPO industry is the perception that the

region will struggle to deliver high-end services on a large scale. One vendor told Datamonitor during the research for

this report that, while workers in the Philippines had excellent customer service mentality, it was much more difficult to

recruit in higher-end processes.

High attrition is also a problem that has afflicted the Philippines for a number of years. It is a considerable challenge

for KPO providers, as, due to their complexity, they require a much higher level of training than other BPO functions. Ifemployees are leaving on a regular basis, the costs associated with training new joiners will be high, and could erode

some of the cost advantage the region holds over other locations.

Sri Lanka

Located less than 20 miles off the southern coast of India, Sri Lankas budding offshore industry has inevitably been

overshadowed by its larger neighbor. Yet Sri Lanka shares many of the attributes which make India such an attractive

location for outsourcing work. These include a low-cost of labor, a plentiful pool of educated, English-speaking workers,

high literacy levels and a legal system that is based on a Western model.

In order to maximize its potential as a sourcing location, Sri Lanka has opted to focus on just a few domain areas, includingF&A BPO and KPO. KPO providers that have opened facilities in Sri Lanka, such as Amba Research, tend to focus on the

financial services market, looking to tap into the countrys significant labor pool of qualified accountants.

Major challenges that Sri Lanka faces in becoming a major location for KPO service provision include:

Scale: The global sourcing industry in the country is heavily centered on the Colombo metropolitan region and

there are question marks over the ability of second tier cities to support this kind of work. No Sri Lankan city has

a population of over one million, which means there is a lack of depth in the labor pool outside the countrys

capital;

Security concerns: A sporadic civil war has been fought in Sri Lanka since the early 1980s. About 70,000

people are estimated to have been killed in the conflict. The issue of security is one which is certain to deter

many foreign investors.

Hungary and the Czech Republic

Many of the KPO vendors Datamonitor spoke to as part of the research for this report indicated that they expected Europe,

and particularly continental Europe, to be a major growth area in the next 12 to 24 months. The UK has always been

Europes most mature outsourcing market, while major territories such as France and Germany have lagged behind. In

recent years, however, the levels of outsourcing in these regions has risen inexorably, making it more likely that the KPO

proposition will gain traction in the very near future.


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Service Evolution



In order to take full advantage of this anticipated trend, KPO vendors are setting up nearshore facilities in Eastern

European countries, and Hungary and the Czech Republic have emerged as popular locations.

The Czech Republic has been utilized for BPO work for a number of years now. For example, in 2005 Indian vendor

Infosys opened a facility in Brno to provide back-office financial work, sales order management, and F&A BPO services.

Hungary, and in particular the capital, Budapest, has also established itself as a center for BPO activity in the last few

years, as it offers a highly-skilled and multilingual workforce.

The main challenge for both Hungary and the Czech Republic is differentiating themselves from their neighbors, such as

Poland, Romania, Russia and former Soviet states such as the Ukraine and Belarus. Most, if not all, of these countries

boast well-educated workforces, and language skills which vendors are eager to tap into.

Canada

The advantages of locating a KPO operation in Canada are clear: the country boasts a large, highly-educated workforce

with excellent English-language capabilities. Its close proximity to the US and close cultural ties with that country also make

it an ideal nearshore location, while the presence of a large French-speaking population, located mainly in Quebec, make it

ideal for providing native language services to customers in France.

The main issue that has held back Canadas emergence as a key location is labor cost. The country will always compare

unfavorably in this regard with countries such as India, China and the Philippines, and the situation was not helped by the

strength of the Canadian dollar against the US currency for most of 2008. However, having traded at a 1:1 ratio for much of

that year, the Canadian currency has since fallen again to a more helpful valuation of just under 80 cents. The outlook for

the Canadian dollar is tough to predict, however, which makes planning for the long-term difficult.

The outsourcing sector in Canada also faces strong competition for labor from the countrys major natural resources

industries, including oil and gas extraction and logging. These markets can attract qualified graduates away from careers in

technology, particularly when commodities prices are high.

Mexico and Brazil

Latin America is becoming increasingly popular as a global sourcing location, with a large number of vendors now using it

as a nearshore location to serve clients in the US. As well as favorable geographical location, Latin America also offers a

large pool of Spanish and Portuguese speaking workers, enabling vendors to not only tap into the Southern European

market, but also provide services to the growing Hispanic population in the US.

Mexico and Brazil are two of Latin Americas most developed economies and, along with Argentina, represent the most

attractive global sourcing locations in the region. Both boast large, well-educated populations, have experience of providing

outsourcing services and many major outsourcing companies already have a presence in one, or both, of these countries.

However, Latin America as a whole still has some perception challenges to overcome in its development as a sourcing

location. The regions IT sector is not as mature as Indias, and the infrastructure is still being developed to attract investors

to the region, something its Asian rivals have had in place for a number of years. Looking at Brazil specifically, the countrys

population is predominantly Portuguese-speaking, which has hindered its progress as a nearshore location for the US.


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Service Evolution



Also, concerns about stability (both economic, and political) and security continue to hang over many Latin American

countries, including Brazil and Mexico, which may cause vendors to think twice before setting up in those locations.

For example, the Mexican currency, the peso, has been volatile since the beginning of 2008, which could give potential

investors reason to pause. In Brazil, crime is a serious problem, particularly in urban areas. The US Department of States

travel guide for Brazil notes that the countrys murder rate is four times higher than that of the US.


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Customer Impact



to increase business in the long-term, as clients not only become comfortable with the services being provided, but

begin to appreciate the resultant benefits.

The main disadvantage of short-term KPO contracts is that i t does not give vendors time to garner detailed knowledge

of their clients business. As a result, some of the main benefits of KPO, that tend only to result from an extended

period of collaboration, will not be forthcoming.

KPO offers clients a range of potential benefits

So, what are the key benefits to an end-user of outsourcing its knowledge services? As mentioned previously, cost issues

are at top of the list of priorities for prospective clients, and KPO is able to deliver significant savings due to its use of

offshore delivery.

Vendors place focus on intellectual arbitrage

However, KPO vendors are eager to shift the focus away from simple labor cost arbitrage and on to so-called intellectual

arbitrage. In other words, KPO enables clients to tap into large pools of talent and to leverage skills in niche areas, which

otherwise would not be open to them.

One KPO vendor indicated to Datamonitor that, in its experience, many companies are frustrated by the lack of research

and analytics skills available within their own internal organizations and are therefore keen to work with an outsourcing

partner who can assist them when it comes to making key decisions.

As well as providing skills that are absent within the clients own business, KPO vendors can help improve the efficiency of

many core processes. For example, by providing data mining, processing and analytics services, KPO vendors allow the

clients own staff to concentrate on drawing conclusions from the analysis and adjusting their business accordingly.

Vendors can even go beyond that and produce the conclusions themselves, meaning the client only has to act on their

recommendations.

By improving efficiencies and freeing up resources within the clients own organization, KPO can help to improve

customers time-to-market, a business benefit which goes beyond simply delivering your mess for less services in the style

of transactional outsourcing.

Large organizations consume the most knowledge-based services

The benefits of KPO mentioned above are available to clients of all sizes. Traditionally, though, it has been large

organizations that have been most willing to outsource their knowledge services to a third party for example, the two

deals publicly announced in 2008 (and listed earlier in this report) involved 3i, a private equity firm that operates in 14

countries worldwide and has a market capitalization of approximately $1.2bn, and BT Global Services, the outsourcing arm

of telecommunications giant BT, which generated sales of $11bn in its most recent fiscal year.

Drivers behind dominance of KPO industry by large corporations

A variety of factors have contributed to the over-representation of large companies in the KPO market.


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Customer Impact



Enterprises consume more knowledge services: Large companies, with operations in multiple geographic

markets and, often, with interests in multiple industries, are in greater need of research and analytics services. It

is therefore inevitable that they will be more interested in outsourcing this part of their business;

Greater experience of consuming knowledge services: As large companies consume more knowledge

services, it follows that they will have more experience of the processes involved and the potential benefits

available. As a result, they tend to grasp the KPO concept more quickly than smaller organizations;

Large corporations were instrumental in the development of KPO: The foundations for the KPO industry

were laid back in the late 1990s by large corporations such as General Electric, American Express and

McKinsey. Corporations of this size continue to dominate the market;

The KPO industry focus favors large corporates: The vertical markets that KPO has played most

successfully in include financial services and pharmaceuticals. These tend to be dominated by multi-national

companies, such as GlaxoSmithKline, Pfizer and Bayer in the pharmaceutical space and banking giants likeHSBC and Bank of America;

Large corporations have more experience of outsourcing: This report has already established that it is

beneficial for KPO vendors, in terms of winning business, if prospective clients have experience of outsourcing

and offshoring. In general, this type of experience is more likely to be present among large corporations.

Breaking into the mid-market is a challenge for many vendors

If the KPO industry is to reach its full potential, it needs to penetrate further into the mid-market, targeting small and

medium-sized companies. This could present a challenge to vendors, particularly in the current economic climate.

Aside from the factors mentioned above which have contributed to a general focus on large corporates by KPO vendors,

the global recession means that mid-size prospects, struggling to compete in a depressed market, could be even less

willing to risk embarking on a KPO project, at least until their short-term survival is assured. Also, at a time when

unemployment is increasing across the board, customers are more likely to regard increased spending on areas such as

research and analytics as an unnecessary expense.

It may be that boutique KPO vendors, of which there are many, will find it easier than their larger counterparts to win

business in the mid-market. Part of the reason for this is that, by their very nature, small, focused vendors (who themselves

might have only a relatively small number of clients) are more capable of addressing the unique needs of their customers.

This is an attractive proposition for small and medium-sized organizations, who might be concerned that they would be

overlooked in favor of more well-known multi-nationals were they to partner with a larger provider.

Broad-based KPO vendors also tend to put an emphasis on the scale of their business when pitching to prospective clients,

which is much less of a priority for small and medium-sized businesses who might have operations in just one country and

require domain expertise in just one specific area.


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Competitive Landscape



COMPETITIVE LANDSCAPE

Despite recent trends towards consolidation, the KPO market remains extremely fragmented. When the hype around the

industry was at its height during 2004/2005, new vendors claiming to provide KPO services would appear on an extremely

regular basis. While many of them have not survived, a significant number did, and are still operating.

Datamonitor has split KPO providers into five broad categories:

Global outsourcing providers: Includes those global IT services and BPO providers who have KPO

operations, such as Accenture, HP, IBM and Capgemini;

Offshore outsourcing specialists: Includes Indias outsourcing giants, namely TCS, Infosys, Wipro and HCL

Technologies;

BPO providers with KPO operations: Companies that specialize in providing BPO services and have adedicated KPO operation. These include (but are not limited to) Genpact, WNS Global Services, Aditya Birla

Minacs, EXLService and Firstsource;

KPO specialists: Includes providers that offer services across multiple functions, such as Evalueserve, as well

as vendors that focus on specific skill sets. There are numerous examples of the latter type of company, ranging

from the small (less than 100 employees) to the larger player (more than 1,000 employees);

Captive operations: Instead of outsourcing to a third-party vendor, some enterprises prefer to set up a captive

center in an offshore location, which delivers services back to the parent company. Examples of companies that

have gone down this route include General Electric, American Express, ABN Amro and JP Morgan.

Global giants have struggled to establish themselves in the KPO market

Whereas global giants like IBM and Accenture lead the way in horizontal BPO areas such as F&A BPO and procurement

outsourcing, they have failed to fully establish themselves in the KPO market. However, they certainly have the scale to

build up in this area, and are formidable competitors in the areas in which they are present

Accenture: This firm is strongly positioned as a KPO provider in a number of key verticals, including energy and

utilities and telecommunications. It also has an offering focused on the capital markets sector, which provides

services such as such as furnishing information for clients' origination, research, sales, structuring and trading

activities across a wide range of debt, foreign exchange, derivative and money market products;

IBM: IBM is able to leverage skills within its own organization for its KPO business. For example, IBM Researchis an advanced research and development organization which operates laboratories in the US, India, China,

Japan, Switzerland and Israel. It is worth noting that, prior to forming KPO provider Evalueserve in 2000, Alok

Aggarwal was director of emerging business opportunities for IBM Research, working out of both India and the

US;

Capgemini: France-based Capgemini has been building up its KPO offering in recent years. The company now

has dedicated KPO centers in Mumbai, India and Krakow, Poland and its KPO services portfolio includes

reference data management and investment research for financial services clients, master data management for

the manufacturing sector and engineering services for the aerospace market;


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HP: The worlds second-largest outsourcer following its acquisition of EDS in 2008, HP delivers KPO services

through its Decision Support and Analytics Services operation. The division boasts over 400 employees and

provides services such as around marketing, sales, finance, supply chain and HR. Through the acquisition of

EDS, HP also acquired Mphasis, an Indian-based BPO vendor which provides KPO services including market

and risk analytics.

Indias leading outsourcers have well-established KPO offerings

Indias leading outsourcers TCS, Wipro, Infosys and HCL Technologies have all established KPO operations, often as

an adjunct to their existing BPO operations.

Another Indian vendor, Satyam, also had a significant stake in the KPO market, which it had recently expanded with the

acquisition of Caterpillars Market Research and Customer Analytics operation for $60m. However, Satyam is currently

embroiled in a major financial scandal after its CEO revealed in January 2009 that he had been running the company on a

fraudulent basis for an unspecified number of years. Satyams immediate future is uncertain, although Datamonitor expects

that the company will be acquired in the coming months.

TCS: Indias largest indigenous outsourcer, TCS has developed a major KPO operation. Areas of expertise

include customer analytics, spend and procurement analytics, equity research and statistical analysis. TCS KPO

business received a major boost in October 2007 when, as part of its 10-year, $1.2bn deal with media

information giant Nielsen, it took on responsibility for a team based in the Indian city of Vadodara (formerly

Baroda) with expertise around information-management processes for Nielsens Retail Measurement Services,

one of Nielsens core products for packaged goods manufacturers and retailers;

Wipro: Delivered under the banner of Knowledge Services, Wipros KPO offering includes services in the areas

of investment banking operations, research, analytics, reporting, planning and analysis and professional

services. In November 2006, Wipro appointed Ramit Sethi, formerly vice president of Infosys KPO operation, to

head up its own KPO arm;

Infosys: Infosys KPO offering covers four main areas, namely research, analytics, financial planning and

analysis and publishing. The company claims to have around 500 staff currently working in its KPO division, and

it focuses on a range of industries, including banking and capital markets, resources, energy and utilities and

telecoms and media;

HCL Technologies: HCL created its KPO business unit in 2005. In broad terms, it provides services around

supply chain management, business intelligence and analytics, telecom expense management and legal

process outsourcing. The companys largest vertical market is manufacturing, but it also operates across most

other major verticals. However, its presence in the financial services space is relatively small, compared to some

of its rivals in the KPO market.

The leading pure-play BPO vendors have strong presence in the KPO market

In a similar fashion to the offshore outsourcing vendors, the majority of the pure-play BPO players in the KPO market have

well-established KPO offerings (with India as the global sourcing hub) that cut across a number of service lines and vertical

markets. Key players include:


24/31




Genpact: Indias biggest BPO provider also has a sizable KPO offering, largely based around analytics. The

companys services include business opportunity assessment, customer acquisition, growth and retention, risk

mitigation and operations improvement. Genpact itself grew out of the offshore captive operation of General

Electric, one of the first companies to experiment with outsourcing knowledge-based services, and its

experience has helped the company, now independent, compete in an increasingly crowded market. Genpact

claims to have 1,500 staff in its analytics business, working out of Gurgaon, Kolkata, Hyderabad and Bangalore;

WNS Global Services: Formerly a captive operation of British Airways, WNS has grown into a major player in

the BPO market and is ranked second, behind Genpact, in the list of Indian BPO vendors. The companys KPO

services encompass a broad spectrum, from supply chain and procurement services to marketing and brand

analytics, sales force and loyalty analytics, data management and reporting and primary and secondary

research. WNS expanded its offerings in this area in 2007 with the acquisition of Marketics Technologies, a

provider of marketing analytics;

Aditya Birla Minacs: Formerly known as TransWorks Information Services, Aditya Birla emerged as a major

player in the offshore BPO market with the acquisition of Canadian contact center services provider Minacs

Worldwide in 2006. Minacs was particularly active in the automotive sector, and that focus is carried over in the

expanded companys KPO offering (although it also has expanded into the financial services market). Aditya

Birla Minacs provides knowledge services around areas such as governance and process re-engineering, as

well as offering marketing services including research and analytics;

EXLService: EXLServices analytics operation came through its acquisition of Inductis, a provider of strategy

and analytics services to financial services industry (including insurance), in 2006. Prior to its takeover, Inductis

had annual revenue of about $20m and had some 250 employees based out of India, the US and Singapore.

Research and analytics continues to form the core of EXLServices KPO operation, and financial services

remains the key vertical, although the company also has clients in the utilities, transport and telecoms sectors;

Firstsource Solutions: As noted earlier in this report, Firstsource established itself in the KPO market with the

purchase of Pipal Research in 2004. The companys KPO offering now runs from corporate intelligence and

financial research to analytics and enterprise marketing services, with clients drawn from verticals including

financial services (including investment banking and retail banking) technology media and telecoms, consumer

packaged goods and manufacturing.

KPO specialists are able to target specific industries and service areas

There are an extremely large number of specialist KPO vendors currently operating in the market. However, only arelatively small number provide a full range of services across multiple industries.

Evalueserve, for example, is a KPO-specific company whose services range from investment, business and market

research to data and financial analytics and legal process outsourcing and whose customers are drawn from the

automotive, life sciences, energy and utilities, financial services and manufacturing industries, among others.

Most other vendors prefer to pick one or two specific parts of the KPO industry in which to specialize. Key areas of focus

include business and financial services research, market research, legal process outsourcing and publishing & content

services, and key vendors in each of these lines of business are shown in the table below.


25/31




Table 4: Analysis of key KPO vendors by service line

Business and financialservices research Market research Legal Process Outsourcing

Publishing and ContentServices

Copal Partners Ugam Research Pangea3 Innodata Isogen

Amba Research Exevo Mindcrest Aptara

Adventity Tecnova Clairvolex Contech BPO Services

RocSearch Annik QuisLex DiacriTech

Aranca ValueNotes Clutch Group Apex CoVantage


This list above is far from exhaustive, and there is often overlap between the service lines, but it illustrates the

diversity of vendors operating within the KPO space.

Captive operations remain part of the KPO landscape

Captive operations have played a vital part in the development of the KPO industry, and they remain an important part of

the market. Many clients prefer to set up their own KPO operation (most often in India), rather than outsource to a third-

party, when the data to be analyzed is particularly sensitive, or it involves core intellectual property.

The most notable examples of captive KPO operations come from the financial services market. Institutions including ABN

Amro (now owned by a consortium including Royal Bank of Scotland and Banco Santander), UBS, Deutsche Bank and

Goldman Sachs have all gone down the captive route when outsourcing their knowledge-based services.

The captive model has also been utilized by companies looking to harness engineering skills in low-cost locations, including

firms operating in the automotive and aerospace industries, telecommunications providers, technology vendors, energy and

utilities firms and construction and industrial machinery manufacturers. Major examples include Ford, Intel, Motorola,

General Motors, Texas Instruments and Oracle.

In the wider outsourcing market, many former captives have either become independent companies in their own right (as

was the case with Genpact and WNS Global Services, formally owned by General Electric and British Airways respectively)

or been acquired by stand-alone vendors (for example, the purchase of Citigroup Global Services by TCS in 2008).

This general trend towards consolidation is likely to impact the KPO market over the next 12 to 24 months. It may already

have begun Datamonitor notes the acquisition by Satyam of industrial equipment manufacturer Caterpillars market

research and customer analytics operation in April 2008. However, the sensitive nature of large proportions of KPO work

means that captives will remain an attractive option for firms concerned about the risks of outsourcing to a third party.


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Go to Market



GO TO MARKET

Scale is of lesser importance in KPO than BPO As shown in the previous chapter, the KPO market is extremely fragmented, with boutique stores serving a single service

line or industry co-existing alongside major multinational BPO vendors. In part, this competitive landscape is indicative of

the relative immaturity of the KPO sector, and Datamonitor expects further consolidation to occur over the next few years.

However, the existence of small-scale, highly focused vendors also illustrates one of the fundamental differences between

KPO and BPO: whereas BPO vendors typically harness economies of scale to deliver significant cost savings, the main

selling point of KPO is its ability to deliver targeted, domain-specific knowledge, with scale playing less of a part in a

vendors go-to-market proposition. It is worth noting that KPO vendors can deliver significant cost savings with just 10 or 20

employees.

Size does bring advantages

That is not to say that scale is unnecessary for success in the KPO industry. Size brings with it a number of advantages,

including:

Access to talent: Larger companies may be able to attract more talent than their smaller competition, due in

large part to their greater ability to offer higher wages, greater benefits and more s tability. Many workers are also

attracted by the chance to work for a prestigious organization, such as IBM, or by the companys powerful brand

name (as part of the Tata Group, for example, TCS name is very influential);

Ability to scale-up quickly: Large vendors tend to boast significant existing talent pools, which can be drawn

on should a client wish to scale up an existing deal in a short space of time. Smaller vendors may find it harder

to attract staff with the necessary skills at short notice;

Dilution of risk: The size and experience of large KPO providers means that many customers tend to feel more

confident handing over confidential data and intellectual property. Smaller providers can be viewed as more

financially unstable and more susceptible to security breaches;

Ability to provide services in a number of areas: Many clients prefer to utilize one vendor across multiple

functions, in order to maximize cost savings. This is only possible when using a larger service provider, whether

that be a BPO specialist like Genpact or WNS, or an IT services provider with BPO expertise, such as IBM or

Accenture.

Niche providers can outperform industry giants

Despite the advantages mentioned above, niche providers are capable of competing with, and even outperforming, the

giants of the outsourcing industry, for reasons such as:

Flexibility and responsiveness: Larger companies tend to impose their methodologies and best practices on

clients, offering a one-size-fits all approach, rather than responding to their individual needs, whereas a small

company can be more flexible and responsive;


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Go to Market



Domain-specific expertise: Niche vendors, by their nature, have highly targeted knowledge and expertise,

either in a specific service line or vertical industry. While a BPO vendor may provide, for example, legal process

outsourcing as just one part of its KPO offering, a pure-play LPO provider will have no distractions from its main

area of focus. Many clients will prefer to outsource its legal services to a vendor that does nothing else, rather

than partnering with a firm where expertise is spread across service areas;

So, provided they remain profitable and manage their business effectively, niche KPO providers should continue to

make up a large and significant part of the industry. There is also the possibility that, as the KPO sector continues to

grow, more boutique providers will appear, looking to take advantage of the expansion.

Technology as an enabler for KPO

KPO is a heavily people-oriented area, as it relies upon the knowledge and expertise of employees. However, vendors are

increasingly looking at ways in which they can harness technology as an enabler for improving KPO processes. At a simple

level, this can take the form of using data mining and warehousing tools, but there is also potential for specific systems to

be developed around KPO service lines.

The use of technology to improve performance is increasingly common in the BPO market. In F&A BPO, for example,

providers have been experimenting with using SAP systems to optimize ERP functionality for F&A processes. This is in

addition to developing platform-based offerings, where a proprietary software system is used to deliver a range of

processes. While such approaches are not readily applicable to all areas of KPO, a number of vendors indicated to

Datamonitor that they were looking into the potential of developing platforms for analytics services.

Platform-based delivery is a concept that has gained a great degree of traction among Indias BPO vendor community, as

its fits with their philosophy of providing the lowest cost services in the market, and plays to their strengths in softwaredevelopment.

Analytics is the area of KPO which fits best with this approach, as it involves handling data from disparate sources, often in

diverse formats, using clearly-defined methodologies. Through delivering standardization across these processes,

technology platforms can improve efficiency and reduce costs.

The concern for many in the KPO industry is that increased standardization will hinder vendors from handling the individual

needs of their clients. This may be particularly true of large clients, who are more likely to demand a service tailored to their

own demands rather than accepting a homogenous service delivery model.

Potential impact of the current recession on the KPO industry The worlds major economies are currently in the grip of an extremely damaging recession. Nearly two million jobs were

lost in the US in the three months to the end of February 2009, leaving the total unemployment figure at 12 and a half

million people (as of March 9, 2009). In January 2009, the International Monetary Fund cut growth forecasts for the world

economy to just 0.5%, including a 2% contraction in advanced economies.

The received wisdom, before the full scale of the recession became apparent, was that the outsourcing industry would

prosper during the downturn as customers looked to cut costs in order to remain competitive. In reality, the devastating


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Go to Market



impact of the market turmoil on industries such as financial services, retail and manufacturing has meant that clients and

prospects are more worried about securing their very survival than they are about reducing costs through outsourcing.

Figure 2: Total Contract Value of Outsourcing Deals ($m) against Number of Contracts, January 2008 to

February 2009

0

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Source: DatamonitorD A T A M O N I T O R

As shown in Figure 2 above, there has not been an overall increase in the total contract value of outsourcing deals signed

since January 2008. Indeed, total contract value in each of the three months to the end of February 2009 was lower than at

any time in 2008. If the predictions made at the beginning of the downturn had been accurate, the graph would have shown

at least one, if not both, of these indicators trending upwards as the months went on.

The number of outsourcing contracts being signed has also not increased appreciably as the recession has worsened.

Indeed, having peaked at over 200 deals in July, September and October, the level of activity has fallen under 150 in

January and February 2009.

The situation is, if anything, even worse in the BPO market. The total contract value of deals signed in 2008 was $15.1bn,

down 33% on the previous year. The only positive aspect was that the number of deals awarded did not suffer such a

precipitous fall, finishing at 151 compared to 172 in 2007.

The conclusion that can be drawn from this is that clients prefer to sign smaller BPO deals. Adding weight to this

hypothesis is the fact that five mega-deals (worth over $1bn) were tracked by Datamonitors IT Services Contracts

Database in 2007. In 2008, there were just three mega-deals.

Yet this trend towards smaller contracts could actually end up benefitting the KPO industry. Most KPO deals are relatively

small in value (less than $10m) and so should be more insulated from the general downturn in demand for large awards.


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Go to Market



As mentioned previously in this report, KPO services could be well positioned in the current downturn as they deliver

benefits more quickly than some other areas of BPO, which can take up to 18 months to generate cost savings. Services

can also be delivered on a short-term project basis, which requires less of an outlay on the part of the client, allowing them

to reduce overall expenditure as well as cutting costs around their knowledge-based processes.

In general, most vendors are adopting a wait and see approach, rather than making any more rash predictions around

future growth. The impact of the downturn has been so devastating and wide-ranging that it is extremely difficult to forecast

what the situation in key vertical markets, such as financial services, will be in six to 12 months time.

Unfortunately from a vendor perspective, most end-users are adopting a similarly cautious approach. This has led to an

increase in sales cycles, as clients take their time before making decisions around their outsourcing strategy. This will

certainly affect the performance of many KPO vendors in the short term, and could have more serious implications for the

market if, having delayed their decisions, potential clients then decide not to outsource after all.

Vendors may need to look beyond financial services

The financial services sector has been particularly badly hit by the recession, with the largest institutions suffering

particularly badly. This has been bad news for the KPO industry overall, which has a significant focus on the financial

services sector in general and on large banking providers in particular.

As a result, some vendors (generally those with a broader vertical spread of clients, rather than those focused specifically

on the financial services sector) have begun to look at opportunities in other industries. In the course of its research for this

report, Datamonitor noted that various vertical markets were suggested by vendors as possible growth areas including

manufacturing, where there is significant scope for outsourcing R&D services, and retail, where market research and

analytics could play an important part, but that the areas most commonly identified were healthcare, life sciences and

pharmaceuticals.

These industries are not just forecast to be growth areas for KPO services. In Datamonitors Global BPO Services

Interactive Model 2009 (IMTC0297) , both the healthcare and life sciences BPO markets are forecast to grow at a CAGR

of 7.5% between 2009 and 2013, compared to a CAGR for the overall BPO sector of 5.7%.

KPO has the potential to take full advantage of the growth in these areas. Vendors have already begun to make inroads in

areas such as clinical research, clinical data management and clinical submissions support, and there is scope for further

expansion in areas such as drug development and testing. Also, there is significant overlap between the healthcare and life

sciences industries and areas of legal process outsourcing such as patent drafting and litigation.

Pharmaceuticals companies are also experienced users of outsourcing services. GlaxoSmithKline already has a KPO deal

with TCS, signed in March 2007, as well as other outsourcing deals with Genpact and ACS, while Pfizer has awarded

contracts to HP and Cognizant and Johnson and Johnson outsourced its HR to Convergys in 2007 in a 10-year, $1bn deal.

Recommendations

While much of the hype that surrounded the KPO market in 2004/2005 has now dissipated, it continues to offer significant

growth opportunities for vendors. In order to ensure that they derive the most value from their KPO offerings, Datamonitor

makes the following recommendations to vendors looking to expand their presence in the market:


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Go to Market



Investigate potential for growth in vertical markets outside of financial services

The current recession has created a great deal of uncertainty in the global economy. It had a particularly damaging effect

on the financial services market, which has been the backbone of the KPO market throughout its short history.

Consequently, vendors with a focus on this industry have seen drops in demand and are also experiencing growing

uncertainty over the future of their business. Datamonitor notes that, for those companies able to diversify their business

models, opportunities for growth still remain in other verticals, most notably the healthcare and life sciences sectors, and

these should be explored thoroughly.

Look to develop a multi-shore delivery model

India is, and will continue to be, the worlds major global sourcing hub. However, it is becoming increasingly necessary for

KPO vendors to be able to provide support to clients from a range of geographies, and in a number of different languages.

This is particularly relevant in the KPO space, where a significant proportion of customers are global corporations withoffices in multiple locations. High-level KPO work also requires a large amount of customer interaction, often face-to-face,

which makes having a location in close proximity to the clients own facilities a top priority. Fortunately, there are a number

of potential delivery locations available, including China, Hungary, the Czech Republic, Mexico and Sri Lanka.

Use multi-shore delivery model to target emerging geographic markets

The growth of the KPO market has been driven by the mature outsourcing markets in the US and UK. Setting up in low-

cost locations, whether they be in Central and Eastern Europe, Asia-Pacific or Latin America, affords KPO vendors both the

ideal location and the necessary skills to also target opportunities in emerging geographic markets. Demand is increasing in

continental Europe, for example, with countries such as France and Germany offering significant potential for growth. Other

increasingly attractive markets include Australia and New Zealand, which can be served from near-shore centers in Asia-

Pacific.

Recognize that strong client relationships are vital to the success of KP

Trends in Knowledge Process Outsourcing – Growth Opportunities in High-Level Processes

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