What is KPO?

by Adam Larkey, Wolet Capital

The next wave in the evolving dynamic outsourcing markets is here. The emerging Knowledge Process Outsourcing (KPO) is the process where businesses outsource high end knowledge or judgment services such as investment banking research, sales and marketing research, IP/patent research, R&D, legal research and case writing and even animation design. A provider must have an educated, skilled work force able to think independently and provoke their own free thought behind any research criteria. KPO involves a high degree of execution risk as providers look to create and combine complex levels of process, technology, and services. The business processes will require domain expertise and high-end talent such as MBAs, engineers, doctors, lawyers, accountants and other highly skilled professionals. KPO will move outsourcing up the value chain from simply executing commodity processes to carrying out processes with advanced analytical and technical skills and more decision making. Though knowledge outsourcing is in no way a new concept as law firms, doctors and businesses have long outsourced low-end knowledge work, the off-shoring of knowledge for these processes are being leveraged. Places such as India, China, Russia and Israel have the necessary resources to provide these services. The total KPO market is not to be confused with important functions and resources which KPO depend on such as Electronic Document Discovery (EDD) market which itself is over $1 billion just in the US alone.

The Market:

The KPO market is currently estimated anywhere from $1-3 billion and is expected to reach USD 17 billion by 2010, of which USD 12 billion would be outsourced to India according to eValueserve one of the incumbents in the space. They estimated that India will capture more than 70 percent of the KPO sector by 2010. Low-end outsourcing services have an expected Cumulative Annual Growth Rate (CAGR) of 26% by 2010. In contrast, the global KPO market is poised for an expected CAGR of 46% by 2010.

There is no market study productivity in terms of people. As with the BPO matrix where success can be measured in the number of bodies employed, no KPO company can measure success in the number of employees but rather by revenues per employee.

In the US, there is a shortage of talent able to provide the breath of KPO services. The necessary resources which will fuel this market may be predominantly found in India. There is more supply there of talent which will posses all the necessary requirements to service a KPO user than most anywhere else. The KPO providers can find the data, create the data, analyze the data, manipulate the data, provide relationships between the data - they cannot tell you what the data means in specific terms of one's business. That is for the customer to put into perspective for themselves. To differentiate out from the data what is important to their particular market. It is highly focused and designed support, not all the answers necessarily.

Buyers:

The users of KPO services are market research and consulting firms, investment banks and financial services groups, life-sciences companies, and law firms and legal departments of large companies. These services will migrate down to the small and medium sized businesses as the market matures.

Service Offerings:

KPO services are primarily focused within intellectual property research, R&D in pharmaceuticals and biotechnology, data mining, and a range of analytical services such as equity research and financial modeling.

For example, contract research organizations (CRO's) are being widely used by pharmaceutical companies. Destinations such as India and China offer significant cost advantages, often as much as 40% to 60%. Many leading pharma companies have partnered with or set up captive drug discovery centers at low-cost destinations to offshore R&D.

The patent application process can generate savings of up to 50% by outsourcing to an offshore KPO organization. The drafting and searches are done by a professional in India and then forwarded on to be reviewed and filed by a US patent attorney. Markets like Russia, India and China are well suited for analytics because of the large access to skilled engineers and PhD's at much lower costs. The cost arbitrage from a PhD in the US and India can range between $60,000 to $80,000.

To put things into perspective and provide a narrower view of the components of KPO, look at MarketRX. This company only works within the life-sciences markets and provides information to sales and marketing units through highly sophisticated analytics and research. Jaswinder Chadha, CEO of MarketRX, says that over $13 billion a year is spent by life-sciences sales and marketing departments. Life-sciences groups spend $3 billion on just buying data. If you spend $3 billion on buying data, what are going to do with it? A life-sciences company, large or small, would need to outsource to a highly sophisticated group which could help them make sense of it, maximize it in a timely manner and put it to better use. Given this perspective, the numbers being provided on the overall KPO market may be highly understated says Jaswinder. If you take a global perspective, the world is generating so much data. The people who have made money are the people who actually help collect, store, and search for that data.

Benefits:

The benefits gained by KPO users are more than just cost savings. As with BPO, KPO users save time and are able to gain more operational efficiencies by focusing on core business activities while having access to a breadth of skills, technology and service offerings.

Given the large number of engineers, doctors, lawyers, accountants, and scientists in India, they have the ability to generate KPO services worth USD 12 bn by FY 2010 instead of USD 720 mn that it provided in FY 2003 as eValueserve estimates. This would represent a cumulative annual growth rate of approximately 50% and 250,000 such professionals would be hired by Indian KPO providers by FY 2010, which would therefore provide direct employment worth 300,000 people.

Risks:

There are challenges around providing KPO services, specifically offshore. Major on this list is the security and confidentiality of data, customer information and proprietary IP. The regulatory environment may cause certain information to stay with the Company. However, multi-national companies may develop or buy their own captive in an offshore location to eliminate these risks and leverage the advantages of the location.

As well, executing KPO projects is not easy and requires a professional services culture rather than a BPO culture. Processes executed within the KPO domain require higher quality standards because the stakes for the clients are high. Furthermore, the clients are likely to have apprehension about the quality of the services delivered (especially by low-cost destinations) and these may be difficult to alleviate. To manage these perceptions and ensure smooth delivery, vendors work in an "80-20" mode which involves providing leverage to senior professionals.

The Road Ahead:

Behind the success and benefits of the BPO markets, KPO is already being considered a necessary process for companies large and small to stay competitive. Therefore, we are seeing a large number of start up and small companies such as Pangea3 and Mu-Sigma looking to capitalize within a niche area of the KPO markets through a high level of domain focus. Mid-sized companies such as Integreon, SPI Technologies, eValueserve and Office Tiger are seeking to scale through strong platforms and domain expertise with a few vertical markets. Large global BPO providers seeking to leverage their current infrastructure and network and scale into providing higher margin KPO services leveraging their domains, customer base and large sales support teams. Groups like WNS, Wipro-Spectramind, Progeon, Accenture and Bearing Point are all aggressively creating their business model and strategizing on growth opportunities. So far, the large BPO providers have not been effective in thwarting competition from even small players as they are predominantly horizontally integrated and have trouble in vertically focused growth. Investors are also taking notice and will help to create the market and the scale needed to provide a stable, efficient and mature market in the future.

In my view, the winners in the KPO market will poses robust seamless technology platforms with core workflow/document management, analytics, and other integrated solutions to create ownership of the customers as you embed your technology into their infrastructure and wrap services around these processes. They will have multiple delivery (services) centers (onshore, nearshore and offshore) backed by highly skilled and trained professionals with low retention rates (under 15%) and the offshore location in cost efficient markets like India where a large work force of professionally educated, English speaking talent are accessible at nominal cost compared to economies like the US.