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Home » Articles » KPO » The five most likely Outsourcing trends

The Five most likely Outsourcing trends

With the opening of the world economy, many surprises have taken place in the business scenario. This is true for countries across the globe. The western world has started realizing the capabilities of smaller Asian countries in providing quality services at much lesser rates.

Within the Asian countries, revolutionary trends are taking place in terms of expansion and spread of service providers to small cities. ‘BPO‘ is giving place to a new name i.e. Knowledge Process Outsourcing (KPO) and the global economy is geared to take advantage of the outsourcing boom.

In India, several trends have emerged that are likely to shape the future of the outsourcing industry.

1. Need of Experts

A boom in the knowledge process outsourcing industry is an established fact now and as per estimates of various studies, the industry should range from anywhere between $12 billion and $15.5 billion for 2010. This envisages a growth rate of 40 to 50 percent for the industry for the next five years.

The above growth will necessarily mean a quantum increase in the workforce engaged in providing KPO services. There have been predictions of looming labor shortages for the Indian outsourcing industry and the beginning of the trend is likely to be witnessed from the year 2006, at least in KPO. Higher level compensation than BPO for employers and the high-end work requirements will help KPO jobs remain hot through 2006.

The hiring of professionals such as chartered accountants, doctors, lawyers and engineers will see a sharp rise. In fact, a recent Value Notes report on legal offshoring predicts that employment in legal outsourcing in India will grow more than ten-fold by 2010. Another Value Notes research shows that the number of employees in publishing outsourcing will grow 5.6 times by 2010.

2. Diversification of outsourcing fields in KPO

The emergence of "KPO" will see a proliferation and entry of new service providers in various arenas of the industry. The emerging opportunities in knowledge services are likely to attract a new breed of entrepreneurs - professionals like lawyers, chartered accountants, doctors, engineers, scientists, etc. into the outsourcing business.

Minimal entry requirements, low infrastructure and set-up costs will encourage the smaller and technically strong companies to establish KPO set-ups. Unlike commodity services of BPO such as call centers, CRM or large-scale back-end processing, the minimum critical size for KPOs need not be very large. What is more important is to have a high degree of specialization which will allow even small firms to function profitably.

Further, since the knowledge process outsourcing business is not necessarily scale driven; smaller business entities having total strength of around 20 professionals are also gaining popularity along with the concept of freelance work. This style of functioning is driving the increasing fragmentation of service providers.

3. Small Towns -New areas joining the outsourcing buzz

India ‘s status as the No. 1 destination in the offshore business is not in doubt. However, the growth has been concentrated in a few cities, like NCR Delhi, Mumbai, Hyderabad, Bangalore, Pune and Chennai. But rising wage costs and rising attrition in the larger cities coupled with attractive benefits being offered by many state governments are driving BPOs to move to the hinterland.

Various state governments in association and coordination with STPI India are developing IT/software parks with complete infrastructure to encourage companies to move to smaller cities.

States like Punjab, UT Chandigarh, Rajasthan, and Uttar Pradesh have taken the cue from Maharashtra, Andhra Pradesh and Karnataka, and have started taking initiatives to invest heavily in IT Parks.

Identified Hotspots

Jaipur, Jodhpur (Rajasthan), Gandhinagar, Ahmedabad (Gujarat), Amritsar, Mohli, Patiala (Punjab), Nasik, Nagpur, Navi Mumbai (Maharashtra), Lucknow, Agra, Kanpur (Uttar Pradesh), Hubli, Mangalore (Karnataka), Bhubhaneshwar (Orissa), Gurgaon (Haryana), Vishakhapatnam (Andhra Pradesh), Kochi, Thiruvananthapuram (Kerala), Coimbatore, Madurai (Tamil Nadu)

4. Expansion of offshore centers in India

As the benefits of offshoring businesses become evident, large multinational corporations are expediting the process of spreading their offshore presence.

The bulk of this is towards fully owned captives, driven by two factors. i.e. firstly, the increasing sensitivity towards data security, IPR, and confidentiality; all of which make captives center the most preferred choice.

Added to this, many large companies that have been merely testing the waters until now are ready to take the plunge. In the recent past, several Fortune 500 and FTE 100 have already established their captive centers in India. The trend is to further accelerate keeping in mind the changing forces and dynamics of the industry.

However, after a certain size, the economics of captive offshore centers becomes unfavorable as compared to contracting and outsourcing to third-party vendors; and many corporations will prefer this route as they expand in India.

5. Acquisitions and mergers to increase

Acquisition and merger activity have reached new heights and are expected to be much higher in the coming years. However, alongside mega deals, a large number of small deals are also likely to become fruitful. This will be driven by acquisitions in the knowledge services domain, where acquirers will find it worthwhile to enter into small deals to acquire domain knowledge, new clients and position themselves in this small, but fast growing segment.

Indian IT companies have been entering the both BPO and Knowledge Process Outsourcing (KPO) industry in a big way, and Systems integrators and IT companies formed the maximum percentage of acquirers. The acquisitions are found to be an easy way to acquire domain specific capabilities.

Cognizant, KPIT and Patni were among the larger IT companies that are examples in the category of BPO. In the coming years, we expect KPO to become a major target area for acquisitions. KPO acquisitions and mergers will form the growth strategy of two types of companies:

  • Already existing KPO companies which want to get benefited from specific domain expertise, or clients in a particular area or geographic region
  • Multi-service and multi directional BPO companies wishing to climb the value chain by adding high-end capabilities to their portfolios.

Deal sizes will be smaller, mainly because KPO outfits are normally smaller than CRM or back-end processing service providers, as their business is dependent more upon domain knowledge than on scale.