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Knowledge Process Outsourcing (KPO)

After BPO, Knowledge Process Outsourcing (KPO) is gradually unfolding as the next big opportunity for India. In fact India, with its abundant skilled resources and competitive cost advantage is all set to bank on this next big thing. KPO is defined as high end knowledge work which includes equity & finance, intellectual property rights, analytics, business research, market research, investment analysis, data management etc.

According to Evalueserve, the global KPO market was around USD 1.29 bn in FY04, which touched USD 4.4 bn in FY07, growing at an annual rate of 54%. The KPO industry is expected to grow at an annual rate of 39% over the next couple of years to touch USD 16.7 bn by FY11. India had a market share of close to 70% of the global KPO market in FY07, with employee strength of 75,000 catering to this growing segment.

Engineering Process Service (EPS)

Engineering Process Services (EPS) is another emerging segment of the global outsourcing business. EPS encompasses product design, R&D and other technical services across various sectors such as automotive, aerospace, hi-tech/telecom, utilities and construction/industrial machinery. India has comparative advantage in terms of cost and a highly competitive pool of human resources. Companies have developed required skills, capabilities and the investments made in technology development open immense opportunities in this segment. According to a study conducted by NASSCOM in association with the global consulting firm Booz Allen Hamilton, it is estimated that global spending on engineering services would reach USD 1.1 trillion by 2020 from USD 750 bn in 2004. Currently, around USD 10-15 bn is offshored and there is a huge potential for the offshore segment, which is anticipated to be around USD 150-225 bn by 2020.

A study done by NASSCOM–BAH predicts that by 2010, India’s share in the high tech/telecom engineering space would be close to USD 11 bn, followed by the automotive engineering space at around USD 1.8 bn, aerospace with USD 600 mn and utilities at USD 200 mn.

However, there are various challenges associated with it. China has already emerged as leading destination for offshore work. For instance, as per a recent survey of top 10 outsourcing destinations conducted by AT Kearney, China was just behind India in terms of most preferred location for outsourcing and is likely to catch up with India in the near future.

Legal Process Outsourcing (LPO)

Legal Process Outsourcing (LPO) is another emerging sector which Indian companies have recently started leveraging. Currently, US accounts for more than two thirds of the global spending on legal services. Considering India’s competitive advantage, a large number of organisations have already started outsourcing their legal services to India. For instance Oracle, Sun and Cisco have been outsourcing their patent research and other documentation work to Indian BPO firms or to their own captive units. In fact, there are around 100 small and big size law firms in the country which are exclusively servicing their clients in the US, UK and other European countries.

According to NASSCOM, the market potential for LPO from the US alone is estimated to be around USD 3-4 bn. Moreover, as per the study conducted by Forrester Research, 79,000 legal jobs are anticipated to be outsourced to low cost countries like India by 2015, since the cost of legal services in India is much lower as compared to the US. For example, India offers just around 30% of the fee charged by a paralegals and assistants in the US, similarly in case of an Attorney, India offers only 20% of the fee charged in the US.

Emerging Verticals

Insurance

Global insurance companies are facing various challenges caused by growing claims disbursements, underwriting losses, rising agent attrition, growing competition from brokerages and banks amongst others. As a result, insurance companies have realised outsourcing is the best option to combat these issues and hence reduce administrative and labour costs. Notably, the US and Europe constitutes more than 80% of the total insurance outsourcing revenue.

Procurement Outsourcing (PO)

The procurement outsourcing is another new growth segment of Indian outsourcing industry. According to a study conducted by IDC, global procurement outsourcing (PO) market was recorded to be around USD 886 mn in 2007 and will grow at a CAGR of over 21% to reach USD 2 bn by 2011. Indian BPO companies are gearing up for PO boom to tap the potential of the segment due to its competitive advantage.

Healthcare

The Healthcare outsourcing industry is making waves in the Indian outsourcing scenario with a growing trend of healthcare outsourcing by global organisations. Healthcare BPO offers services across wide range of business processes such as medical coding, medical billing, forms processing, medical transcription and claims processing. Significantly, as per the Centre for Medicare and Medicaid Services, the US healthcare spending in 2005 was USD 2 trillion (16% of the US GDP), which is expected to reach USD 4.14 trillion by 2016. Importantly, with increasing pressure from regulators and rising cost, global players are increasingly outsourcing their healthcare services. As per a joint study conducted by FICCI and Ernst & Young, the healthcare outsourcing industry in India is likely to grow from USD 3.7 bn in 2006 to around USD 7.4 bn in 2012.

Outlook

Global ITeS-BPO Spending

Outsourcing to low cost countries continues to gain momentum in the current business environment, not only for reasons of cost and quality, but also as strategic business drivers. For instance currently, companies measure the advantages of outsourcing based upon various parameters such as reliability, speed to market, new market opportunities, lesser working capital, reduction in defects, higher customer satisfaction, and most importantly, emphasizing on core competencies which helps companies to improve quality and productivity. According to IDC, global spending in ITeS/BPO witnessed a growth rate of 9.7% in 2007 to reach USD 461.7 bn and it is expected to grow at a CAGR of 10% over the next four years to reach USD 677 bn by 2011.

Global Segment wise Market Share

The US accounts for more than two thirds of the total ITeS/BPO spending, followed by Europe, Middle East and Africa (EMEA) region, which accounts for 18.7% and the rest by the Asia Pacific region. Within the EMEA region, the Western Europe itself accounts for over 90% of the market. Recently, it is being observed that larger companies from UK have increasingly started outsourcing their non-core activities. Logistics continued to be the biggest segment in ITeS/BPO industry with estimated size of USD 223 bn in 2007, while sales and marketing segment market size was around USD 166.5 bn during the same period.

Road ahead

The Indian ITeS/BPO industry is expected to continue its growth march in future as well with increased challenges. It is likely to become more specialised in the KPO, EPS and LPO arena. The BPO sector was the driving force behind the Indian ITeS/BPO industry during its advent days, while currently the driving force happens to be the KPO sector which offers high analytical services to global clients. It is expected that the EPS and LPO segments would be the future drivers of the next wave of outsourcing However the Indian ITeS/BPO industry is expected to slow down in the near short term (next two-three quarters) due to multiple factors like the expected recession in the developed countries, particularly the US after the recent turmoil witnessed in the US mortgage and financial service industry, the slowdown in the global economy and the competition likely to be given by other emerging ITeS/BPO destinations. Firms focusing on the BFSI segment are likely to be hit more than those having a diversified client portfolio. It is also expected that the companies who are involved in providing low end transactional services, would see pricing pressure on their contracts when they come up for renewal. Larger companies would see a gradual shift from the fixed-fee contracts to a combination of fixed-fee and variable-fee contracts.

Herein there is a big scope for all the companies operating in the ITeS/BPO industry. With the slowdown expected in the global market, a majority of these players are expected to shift their focus on the domestic market which was not catered to the full extent until now. Increased awareness about the benefits derived by outsourcing its activities has resulted into a flurry of contracts being outsourced by Indian companies to ITeS/BPO service providers. Thus moving forward, we could see a lot of these companies focusing on the Indian domestic market.