Graduate School of Management COVER SHEETCOURSE NAME: GLOBAL MARKETING SERVICES. Faculty Member and Supervisor: Professor Tarun Das DUE DATE: 15 JANUARY 2007 Submission of this assignment constitutes a declaration that: • • • No part of this work has been copied from any other person’s work except where due acknowledgement is made in the text; and No part of this work has been written by any other person except where such collaboration has been authorised by the course lecturer concerned, and No part of this work has been submitted for assessment in another course in this or another part of the University except where authorised by the lecturer(s) concerned. STUDENT NAME and SIGNATURE (and ROLL NUMBER in brackets): Names 1. DEEPTI SUDEVAN 2. DHEERAJ DUGGAL 3. FARAH AHMED 4. VIJAY SINGH Roll Numbers FT-05-552 FT-05-554 FT-05-561 FT-05-721 Signatures D.S D.D F.A V.S Date 10-01-07 10-01-07 10-10-07 10-01-07 Date: 10 Jan. 07 1 KNOWLEDGE PROCESS OUTSOURCING – (KPO) Introduction Knowledge Process Outsourcing is a highly value added process in which the achievement of goals is highly dependent on the skills, knowledge and experience of the people carrying them out. KPO deals with executing standardized processes, involves higher-end services which require advanced analytical and technical skills, knowledge process outsourcing involves legal works carried out at law firms like patent document writing, global filing, search, trademark search, trademark registration, prior art searches, legal advise on infringements, invalidation search, freedom of use search, etc. By 2010, INDIA would emerge as a major knowledge process outsourcing (KPO) destination. The Confederation of Indian Industry (CII) study predicts that KPO would grow at 46 per cent to become a $17 billion dollar sector of which $12 billion will be outsourced to India. NASSCOM projects that the KPO sector in India may reach $15.5 billion by 2010, up from $1.2 billion currently. What KPO can deliver to you? KPOAsia.com work in close association with the client and provide services that are predefined in terms of quality and standard of work. With a good firm you get the following: • • • • Good quality work. Lower costs. On time delivery of services. Uninterrupted services. 2 Why should your company invest in knowledge process outsourcing? The fundamentals of outsourcing apply to knowledge based services as well. A shortage of trained professionals shoots up the cost of maintaining such services in the host country when the same job can be done with similar precision and quality and at less than half the cost abroad. Benefits of KPO Standardized technical education is now widely available to all in the developing countries. This trained manpower is also accessible at very low cost as well. It therefore makes sense to utilize their services. Outsourcing to KPO firms can provide the following benefits: • • • • • • Valuable cost savings that can be utilized elsewhere. Standard operational efficiency. Trained professionals at work. Savings in time and management energy for maintaining in house services. Increase in profits. Option to recruit a larger work force without raising costs. KPO Skills Defined The following skills form the basis of knowledge-based firms and their workforce. • • • • • Analyzing data and information to produce meaningful documents. Researching information from various sources. Converting raw technical data into presentable documents. Use of high levels of conceptualization and theoretical knowledge. Proficiency with various advanced software and hardware devices. 3 According to a report by GlobalSourcing Now, the Global Knowledge Process Outsourcing industry (KPO) is expected to reach USD 17 billion by 2010, of which USD 12 billion (almost 70%) would be outsourced to India alone. Indian KPO sector has already taken steps in employing highly educated and talented people and number of KPO professionals is expected to cross more than 250,000 by 2010 compared to the current figure of 25,000 employees. The graph on the right suggests that Expected Growth in Global BPO and KPO Markets (2003-2010). Scope and Future of KPO According to a report of National Association of Software and Services Companies (NASSCOM), the Indian chamber of commerce that serves as an interface to the Indian Software industry, Knowledge Process Outsourcing industry (KPO) is expected to reach USD 17 billion by 2010, of which USD 12 billion would be outsourced to India. Another report predicts that India will capture more than 70 percent of the KPO sector by 2010. Apart from India, countries such as Russia, China, the Czech Republic, Ireland, and Israel are also expected to join the KPO industry. According to a recent study by “Evalueserve, a Gurgaon based outsourcing company having service chart for global world”, the global KPO market is expected to grow at a cumulative annual growth rate (CAGR) of 46 per cent, from $1.2 billion in 2003 to $17 billion in 2010. Compare this with the prediction for the low-end outsourcing services 4 market. This is expected to have a CAGR of 26 per cent, from $ 7.7 billion to $39.8 billion in the same period. Evalueserve says India provided $3.5 billion of BPO and KPO (but non-IT) services in 2003 and is expected to grow at a CAGR of 36 per cent during 2004 to 2010. Hence, it is likely to earn $30 billion in 2010 by providing these services. Says country general manager, Kelly Services, Achal Khanna “India still maintains the competitive advantage for providing, the combination of the most cost-effective and high quality manpower- this is India's strength in the off-shoring business”. In the future, it is envisaged that KPO has a high potential as it is not restricted only to Information Technology (IT) or Information Technology Enabled Services (ITES) sectors, and includes other sectors like Intellectual Property related services, Business Research and Analytics, Legal Research, Clinical Research, Publishing, Market Research (Market research KPO), etc. "Over the past year or two, the outsourcing industry has been throwing up jobs for Doctors, Engineers, CAs, Architects," says Jacob William of the Bangalore-based Outsource2India, which employs 500 people and offers services in the big-buzz, bigbucks area of knowledge process outsourcing. "Unlike the first wave which was more about entering data and answering phone calls, these jobs involve skill and expertise." Also, of course, the talent is much more affordable. "Law firms in the US charge an average of $400-450 per hour, and we do the same work for $75 to $100 an hour" says Kamlani" who is an outsourcing provider in the same area. In the Indian context, KPO salaries could be 25-50 per cent higher than those offered to the same domain experts such as Engineer, Doctor, CA, Lawyer, Architect, Biotechnologist, Economist, Statistician and MBAs, it said. 5 In its annual publication Strategic Review 2005, Nasscom has said the high-end activity of the BPO industry—the KPO or knowledge process outsourcing could be worth $15.5 billion by 2010. According to earlier estimates, the BPO industry itself was expected to be about $20bn by 2008, hence a very significant portion of the sector—in excess of 50% is now projected to be knowledge based. This represents significant metamorphosis of call centre sector business to completely different model. Interestingly, Sunil Mehta, Nasscom vicepresident research, distances himself from the estimates. The projections are based on a white paper released by Evalueserve. The paper cites reasons for a possible KPO boom. It says higher savings by outsourcing knowledge based activities combined with the scarcity of specialized talent in developed countries could lead to growth in the KPO sector. Billing rates for KPO are higher at $30-45 per hour compared to just $10-14 in the BPO business. However, the paper also warns of several challenges like higher quality standards, greater investments and inadequate talent. The study estimates that while the compounded growth rate of BPO till 2010 would be just 26% KPO is expected to be grow at almost 46%. Bottlenecks in Future Growth A study on Knowledge Process Outsourcing (KPO) sector shows a huge supply gap that threatens to cripple its growth. Rocsearch, a UK-based research services company, has gathered evidence suggesting that the KPO market may just about reach a size of $5 billion by 2010, manned by 100,000 people instead of projections of a $12 billion market supported by 250,000 employees. This accentuates Nasscom's projections of a shortfall of 500,000 workers in ITES and BPO sectors by 2010. 6 Assuming an average revenue per person of $55,000 over the next four years, 100,000 knowledge workers point to a $5 billion market. This size, though based on a CAGR of 32%, is still 60% less than the $12 billion potential projected by big KPOs, like Evalueserve, last year. Rocsearch COO, Ashish Sinha says the sector is restricted by low employability despite high graduate turnout, and competing demand from other sectors as jobs grow faster than the workforce. For example, all the 2,000-odd IIM and top 10 B-School graduates are employable, while less than half the 84,000 graduates from Tier-II B-Schools would make the grade. The study sees only 500,000 of the over 3 million workers added to the labour pool in 2005 as employable in global firms and of these, just 2 in every 100 are likely to opt for work in knowledge space. Major differentiating characteristics of KPO’s from BPO’s 1. KPO (Knowledge Process Outsourcing) implies outsourcing of knowledge intensive business processes that require specialized domain expertise. Unlike BPO (Business Process Outsourcing), which follows pre defined and structured processes that can be performed by virtually anybody, these processes demand advanced analytical and specialized skill of knowledge workers who have specific domain proficiency. 2. Therefore, outsourcing of knowledge processes face more challenges than BPO. KPO’s employ highly qualified professionals. For instance, a legal outsourcing firm employs lawyers; a pharma R&D outsourcing company recruits doctors, PhDs in life sciences and an auto engineering outsourcing firm requires engineers with CAD/CAM expertise. Unlike traditional BPOs where relatively low-level skills were required, here knowledge and professional education is the key. 7 3. In BPOs, there is a pre-defined way to solve a problem which the employees can be trained to learn. In KPO’s no pre-defined process can be created and replicated each time as every project is unique. How Buyer’s chose the KPO market The reasons that usually influence buyers' decisions regarding choice of destination for outsourcing a high knowledge related work are: • • • • • • • Availability of qualified manpower Political stability Infrastructure IPR/Data security issues Communication skills Lower wages(not as important as in case of BPO) Proven delivery capabilities Many countries are now trying to build capabilities in specific KPO areas. Russia claims to be a good destination for healthcare- and technology-related KPOs. The Philippines has established itself as a successful animation outsourcing destination. But India, however, remains the proven and favored destination, way ahead of other competitors in most areas, especially financial research, legal and healthcare/pharma research. Segment Animation Content Financial services Healthcare IT/R&D Legal Pharma Country Philippines, India, China India, Philippines India, China Russia, India India, China, Russia New Zealand, India India, Russia 8 The NASSCOM (National Association of Software and Service Companies) estimates the KPO market to grow by gargantuan proportions to US$ 15.5 billion by 2010. The number of Indian KPO professionals is set to leap from 25,000 to 250,000 employees by 2010. Major KPO Players in India Since 2004, India has seen a proliferation of vendors in every niche. Apart from the large number of entrepreneurs and professionals starting KPO outfits, almost all the large multi-service BPOs (like WNS and MphasiS) are joining in, attracted by growth and higher margin business. Some of the prominent KPO segments and players in India are given below. Segment Research/analytics Legal research Finance accounting Pharma/Biotech research Clinical research Telecom R&D Software R&D Chip design Auto/engineering Publishing E-learning Animation Leading companies in space Evalueserve, SmartAnalyst, Netscribes, ValueNotes, Ugam Solutions, marketRx, Inductis, Allsec, Scope eKnowledge, Pangea3, Atlas Legal, Manthan Services, Intellevate & Outsource Partners International, Sureprep, Karvy Biocon, Avesthagen, Eli Lilly, Saintlife, Pfizer, Bayer, AstraZeneca, GlaxoSmithKline, Novo Nordisk Clingene, Avesthagen, Ranbaxy Alcatel, Nokia, Qualcomm, Ericsson, Lucent Technologies Microsoft, Google, Baan, Yahoo, Adobe, SAP Labs, BMC Software, IBM, HP, Phillips, Sun Microsystems Cisco, Intel, Texas Instruments, Motorola, AMD Delphi, DaimlerChrysler, General Motors, Whirlpool, Neilsoft, Plexion, Quest TechBooks, Thomson Digital, Macmillan, Knowledgeworks Global, Newgen Imaging Brainvisa Technologies, NIIT Smartserve, Lionbridge, Tata Interactive Systems, Maximize Learning Pentamedia Graphics, Crest Animation Studios, Entertainment 9 KPO : Skills for Success Segments Services Skill sets required Reviewing litigation Legal services & due transactional documents; diligence & Knowledge in US/UK laws; adept in legal application; ability to reason & research drafting reports; contracts; research memoranda prosecuting patents; negotiations 3D modeling; conversion: 2D to Engineering R&D 3D; finite analysis; computational fluid dynamics CAD/CAM; drafting & modeling; product design analysis; technical specifications for tenders; value engineering Secondary & primary research; Market research conversion & analytics of findings to Statistical tools; research techniques; report writing knowledge; writing & editing; & presentations; database research formatting client reports Editorial; content delivery; Writing content development & digitization press template of content; data communication skills; journalism; enrichment & warehousing; pre- English work; designing; text proofreading; experience in writing Pharma R&D Healthcare services Education training composition Research & development; drug discovery; clinical research Diagnostic; genetic profiling; Doctors; master's degree in science, PhDs Medical degree; specialized subject knowledge oncology tests; HIV & allergy & K-12;private tutors; pedagogy Teaching methods/techniques; cultural sensitivity; currclm &content Devlopment online teaching methods The Problem Solving Process in a KPO 10 The problem solving process involves collection of the relevant data and sometimes even its creation when ready data is not available. Aggregation and organization of the data is then done so that the mountain of data would provide useful information ( This process is called data mining- when useful information is derived out of mountains on seemingly useless data). The information is then analysed and interpreted by experienced professionals. This is then provided to the client as intelligence for making vital decisions. 11 DEMAND - SUPLY SIDE FACTORS DEMAND SIDE FACTORS: • Large potential for SME customers KPO started initially in captive centers of large companies, but has today moved on to specialised vendors, who provide such services to large companies such as Investment Banks. This sector holds immense potential for the SMEs in the longterm. There are millions of SMEs, which can benefit from KPO. While large companies predominantly use KPO for gaining access to talent and cost reduction, SMEs can further benefit from buying KPO services from specialised vendors by being able to gain access to very large resource pools quickly at no upfront costs. 12 Additionally, it allows them to vary their cost base in the face of short-term demand swings, which creates the possibility of new business models. • Customers want focus rather than breadth or size Buyers of offshoring services are increasingly looking for those KPO players, which have the necessary expertise, depth and experience in focussed areas of KPO. KPO players need to focus on particular market segments, in terms of services provided, industry verticals, functional skills as well as the type of clients served. Typically, customers look for the skill rather than for the size of a vendor and prefer focussed vendors over vendors offering large varieties of BPO, IT and KPO services. They want vendors who will totally customize their solutions and offer both project-based delivery models as well as dedicated centres. Flexibility and speed are critical. SUPPLY SIDE PERSPECTIVE OF KPO. KPO is centred on professionals possessing the right skill sets. Therefore, access to a large, high-quality skill pool is a precondition for successful KPO operations, captive or third party. The ingredients of successful KPO are recruiting and training the right professionals, providing consistent quality over time, improving productivity to or beyond Western levels and successfully marketing the services to sceptical customers. Setting up successful KPO companies, captives and third-party vendors, is very difficult and there are significant barriers to enter have been reflected in the past and the huge list of unsuccessful entries clearly reflect this. 13 • People Philosophy and Development KPO companies are professional services companies and not white collar factories ( like BPO’s). Therefore, world-class people development processes are at the root of successful KPOs. Developing professionals faster and better than anyone else will translate directly into better quality, productivity, retention and success in the market place. Meritocracy and true employee care are only a few elements of such a philosophy. • Recruiting Recruiting the right people is critical and requires significant hiring, building brand equity at the right schools and in the open market. Successful players can attract better people. The interview-to-offer ratios of successful players are about 25:1 and the offer acceptance rates are as high as 80%. Hiring mistakes inevitably translate into quality issues further down the road and need to be eliminated immediately, which can affect up to 5% of new hires. • Training One of the Best practices in KPO is the huge investment in training (about 15% of the total work time) and developing skills sets such as, functional skills, cross-cultural skills, as well as managerial skills. • Quality and Expertise The objective must be to deliver world-class quality and often even improved service levels. Successful KPOs measure quality and get feedback for each individual project (sometimes projects as small as a few thousand US dollars in value). In-depth expertise is required as well. For example, customers require Junior Equity Research analysts to understand the market dynamics in Oncology when creating a valuation model for a pharmaceutical company active in Oncology. 14 The expertise required can be in industry verticals, functional areas (e.g. Risk Management) or in geographic knowledge (e.g. understanding mid-sized German companies). Retention and managing attrition Unfortunately, many young professionals do make naïve, short-term decisions during the first 2-5 years of their careers (‘job hopping’), which results in unnecessary attrition, damaging the professionals’ CVs and the KPO’s ability to provide continuity of service, a highly critical factor in KPO. These professionals do not take a five year perspective in optimising their careers, but feel that they have to move on for short-term gains of a few percent more in salary or because of peer pressure. More successful KPOs can retain their people for longer. • Focus The ‘Jack in all Trades’ approach is not likely to work in KPO. The work at KPO requires domain expertise and therefore the culture and customer requirement of KPOs and BPOs vary significantly. Hence, it is important that KPOs develop expertise in few areas and excel in them. There is a reason for why Western Law Firms, for example, do not offer R&D and Insurance Claims Analytics and Call Center Operations at the same time. • Innovation and Differentiation KPO companies have the unique opportunity to create new markets, since their price points allow them to offer new types of services simply not available in high-wage countries for cost reasons. However, players who provide innovative services will differentiate as successful KPO companies from players who offer cost-arbitrage, as they too have a niche that cannot be replicated by low cost players. This ensures them a sustainable place in the world markets. 15 • Marketing & Sales and Branding Selling KPO services in the West will require a Western sales force and significant branding efforts in the medium-term. As of now, tapping the SME potential and selling into Continental Europe, requires local support. Successful branding will be another necessary ingredient to generate a sufficient ‘pull’ in the market. BILLING RATES FOR KPO’s - - The Key driver The fact that qualified professionals in India are paid approximately half the salaries earned by their counterparts in the US has been one of the biggest drivers for the sector. This has resulted in lower billing rates per hour from vendors in India. The diagram below gives approximate billing rates across various segments. 16 Captives Outnumber Third-party Vendors in the KPO Space Keen to reap the benefits of outsourcing yet not willing to expose themselves to risks, a number of companies have opted for the captive route. This enables them to protect themselves against possible IPR threats and feared loss of patented material. For instance, several pharma and legal companies that deal with sensitive data have opted for captives. (Nineteen of the top 20 global pharma R&D companies have established R&D centers in India.) These captive KPOs are expanding their India presence: • Google has set up its second research center in Hyderabad; the first center is in Bangalore. Goldman Sachs is expected to grow its India headcount to reach employee strength of approximately 2,000 by the end of 2007. JPMorgan Chase plans to double its headcount in India from the current 3,000 by 2007. • • New Verticals and New Markets Though the US has traditionally been identified as the single largest market, other countries such as Japan have also commenced outsourcing of knowledge activities. Some of the latest verticals that are traveling the outsourcing route include architecture and civil engineering. Hitachi, provider of software development and systems maintenance services, established a niche outsourcing captive in India to increase its overseas business and revenue from foreign operations. The joint venture between Harris Smriga & Associates and Taj Design Services will cater to the infrastructure design needs of HS Associates. The decision was taken keeping in view a shortage of civil engineers in the US owing to the growth of the IT sector. 17 Challenges Ahead... With significant hype surrounding the industry, the KPO ring will only grow louder with time. However industry experts envisage a shortage of qualified personnel in the next couple of years. Increased employee attrition will also make KPOs innovate their recruitment and retention strategies. The industry needs to take significant initiatives to grapple with the shortage of quality supply of professionals and ensure strong training methodologies for their recruits. To get more complex jobs, hence higher billing rates, issues of data security and patent infringement need to be addressed more proactively. With a positive buildup and expectation from India in the KPO space, the onus on the industry to deliver weighs even heavier. Given that projects can be relatively small and infrastructure requirements minimal, entry barriers are low. Domain expertise and qualified personnel rather than size are the keys to success. Owing to this fact new KPOs emerge on the outsourcing scene every other day. For every single large KPO player in an area, there are an estimated 10 small players offering similar services -- usually at lower billing rates. While entry in KPO is easy, surviving and winning is what will set apart the stronger players in the long run. We expect a wave of consolidation in the industry between 2006 and 2008. We will see a far greater number of small deals, driven by acquisitions in the knowledge services space, as acquirers will find it worthwhile to do small deals to obtain specialized knowledge, capabilities and customers. 18 The mushrooming of small niche players will, in turn, create a large pool of acquisition targets. High degrees of specialization and innumerable niches will allow even relatively small firms to exist profitably. So even as consolidation picks up pace, the explosion of new service providers will create further fragmentation. Overall, fragmentation will become a stronger wave than consolidation among the KPOs, leaving the industry with even more players by 2010. However, the abundant availability of these small vendors as acquisition targets will lower valuations. This will be more so for the small, multi-service outfits without the financial muscle to scale. Challenges Faced by KPO – with specific reference to Financial services The political, infrastructural, and legal issues that BPOs encounters are also challenges that KPO’s faces. But the advent of KPO have brought along a few additional challenges unique to the industry. Using the Internal and External Environment scanning Model, the key challenges that have been selected are: Internal Challenge: Recruiting and Retaining the Right Talent Customer Challenge: Demand for Quality, Data Security and Compliance Competitor Challenge: Other Countries and Global KPOs Operating in India Industry Challenge: Information Infrastructure and Branding Access to a large, high-quality skill pool is a precondition for successful KPO operations. But the requisite skill pool is not easy to get. Reasons being: 1. High competition for access to a limited superior - quality pool - Few of the graduates and MBAs India produces every year actually possess the high quality and functional competency that is essential in a knowledge intensive project - primarily due to ineffective government monitoring of the quality of colleges 19 2. Successful players attract better people - Global MNCs like Evalueserve and GE manage to attract better talent than Indian players in the financial KPO domain because of better brand name and pay. 3. High attrition rates – This occurs as a result of poaching by competitors and frequent job hopping by young employees looking for better job opportunities. 4. Lack of domain expertise - Graduates in India may not be aware of the client’s business environment E.g. US system of accounting (US GAAP). 5. Incorrect perception of the KPO profession as low grade – Qualified professionals mistake a KPO job to involve low level work and a 24x7 pressure environment similar to that of a BPO and refrain from undertaking it. Customer Challenges 1. Demand for Quality In BPOs, there is a pre-defined way to solve a problem which the employees can be trained to learn. Clients have an OLA (Operation Level Agreement) or SLA (Service Level Agreement) with the Outsourcing Company where both parties decide on certain metrics for quality adherence – for example, a customer service call pick up time should be less than ten seconds. In contrast, KPOs require keen understanding of how a client works and what his exact needs are for each assignment. No pre-defined process can be created and replicated each time there is an assignment since every project is unique. As a result of this, defining an ideal metrics to measure the quality of work can be quite a difficult task. For example, an analyst may target twenty factors of importance for a market research study whereas another analyst may shortlist just five. The client may be pleased with the preciseness of the latter though the number of factors seem inadequate compared to the former. Thus, the difficulty lies in accurately determining whether you met client expectations or not. 20 Ultimately, the client in a KPO will not look at dollar figures but will be mainly concerned with quality of services. That is where Indian companies may fail. 2. Concern over Data Security and Client Confidentiality In an opinion poll Conducted by NASSCOM and the Information Technology Association of America (ITAA) in 2004, greater than 75 percent of respondents agreed that offering sophisticated information security provisions and practices provide a competitive advantage because security has become a critical selling point. According to Ernst & Young's 2004 Global Information Security Survey, companies have identified major viruses, spam and employee misconduct as the key concerns in India. The data and information a KPO business works with is extremely sensitive. Clients such as banks, insurance companies and corporations trust KPO providers with company financial data, treasury and cash management functions and investment portfolio decisions. Thus, KPOs are privy to information not otherwise public knowledge. Thus, clients often hesitate to offshore research and processing of sensitive financial data and information involving strategic decisions. A big challenge is to convince clients that their confidential data will be treated with extreme caution and will not fall into the hands of unscrupulous or unauthorized individuals. Thus, the fundamental and near-term challenge facing Indian companies is to provide the necessary security and data protection while working on client data. To keep up with the increasing demand from clients to maintain information security, KPOs will need to balance the escalating costs of maintaining global security standards while staying competitive in a cost-driven market. 3. Compliance and Corporate Governance With legislations such as Sarbanes-Oxley (which requires companies’ executives to provide personal assurances as to the completeness and accuracy of the financial figures they publish), companies that outsource finance functions are facing increasing business risk. A greater emphasis on governance and greater direct control of finance processes is acting as a barrier in the way of a decision to outsource finance functions. 21 The client concern is that outsourcing might lead to a loss of control, which might in turn lead to a weakening of corporate governance and subsequent breaches of compliance with regulatory requirements. Competitor Challenges 1.Competition from Other Countries Countries such as China, Philippines, Mexico, and Ireland are fast emerging as alternative KPO Services destinations. Although, according to McKinsey analysis, India is comfortably placed in the Location /People attractive metrics, other countries like China are fast catching up. A positive foreign investment climate, favourable government policies and an educated, yet low cost workforce are encouraging foreign financial firms to offshore their KPO needs to these countries. 2. Competition from Global KPO Units Operating in India Thus far, MNCs like GE and Evalueserve, with their huge resources and large scale have been doing well in India. Many of the financial number crunching for firms like Fidelity, Reuters and are also done by captive units in India. These firms take advantage of the low cost Indian knowledge worker, simultaneously leveraging their specific domain expertise, huge scales of operation and higher employee remuneration. Industry Challenges Information Infrastructure KPOs need 24/7 Internet connection to collect data, perform secondary research and transmit data back and forth, either nationally or internationally. According to the Telecom Regulatory Authority of India (TRAI), internet bandwidth prices account for almost 40 per cent of a KPO's total costs, thus being a critical differentiator between its success and failure. Although, major reforms have been undertaken by the government to spur the growth of IT infrastructure, there are a few significant roadblocks, such as: 22 India’s high international bandwidth prices - Leased line is the most preferred mode of internet connectivity due to its permanent “Always on” connectivity, reliability and speed. Unfortunately, India’s international bandwidth prices are the highest in the world, the main reason being market control by an oligopoly of few players such as VSNL, Reliance, Bharti. In contrast, in highly competitive Western and East Asian markets (e.g. 14 in Korea and 32 in Germany and U.S.), a large number of players force prices down and keep bandwidth charges minimal. High entry fee for Internet Service providers (ISP) who provide Virtual Private Network services (VPN) – which is a viable alternative to leased line connectivity. The entry fee for the cash strapped ISPs is around Rs. 10 crore for an all-India license, apart from an annual revenue-share license fee of 8 per cent. Low Cost -Low Quality Image India’s unique positioning as a low cost, low down the value chain service provider in the form of its BPO operations has turned out to be a double edged sword – It is a cash cow for Indian firms but when it comes to the choice of processes outsourced to India, Indians cannot seem to shed their ‘Cost Effective Service Provider’ image. Foreign companies also worry about the quality of work that a low wage country like India can deliver. Thus, more and more foreign companies contemplating outsourcing to India consider outsourcing only the trivial back office operations in order to cut costs because of their prejudiced view on India. Thus, organizations are finding it increasingly difficult to migrate from their cost effective standardized service offerings (which are low in the value chain and also earn lower margins) to a more differentiated financial service offering (-A major KPO that has developed in India, which can command a premium by virtue of the intellectual value add and knowledge of industry). This is also the roadblock existing BPO companies may face as they try to scale up their operations and move higher up the value chain to offer KPO services. 23 AN INDUSTRY EXAMPLE: As a part of the project our team members had an industry interaction with Top Management of Inductis, an EXL Company, a leading KPO in Gurgaon. We were able to get our hands on the process they follow to solve the problems of their clients using Analytical skills. ANALYTICS CONSULTING IDENTIFIES MISSING REVENUE Overview: In order to understand why revenues were dropping in one business line, a large business services company turned to Analytics. Analytics is the discipline of accessing and analyzing significant (but typically difficultto-handle) data from multiple sources in order to understand historical performance or behavior, or to predict a particular outcome. In so doing, the data is converted into knowledge that enhances an organization's ability to make effective business decisions. Situation A global $1 billion business services company was facing consistently declining income in a line of business that accounted for more than 60 percent of U.S. revenue. There was no obvious reason for the drop-off that had begun with the new fiscal year. Among the company's senior executives, there was a range of opinions as to the reason for the decline. While the economy was an obvious scapegoat, the sales force blamed the product group for introducing new lower priced products that were cannibalizing the revenue from high-priced older products; the product group blamed the sales force for not acquiring enough new contracts; and both blamed the technology group for failing to develop appealing product features already adopted by the competition. 24 The company had the information needed to find the answer for solving the problem. But getting to the right data was not a straightforward matter. As in most large organizations, a significant amount of valuable information resided in separate systems. Transaction level details were stored in several discrete legacy databases, one for telesales, others for web-based sales, third-party sales, and the like, as well as the accounting general ledger. Information accumulated at the rate of 4.5GB of raw data every month. Staff tried to aggregate this transaction-level information in order to explain the revenue drop-off. However, given the complexity, traditional data collection tools proved inadequate. The presence of irrelevant data and exceptions further complicated the effort. No clear viewpoint emerged; in fact, the limited evidence was contradictory. Applying Analytics Three months into the fiscal year, with continuing disappointing results and an earnings release looming, the company asked Inductis to examine the problem. In initial interviews with management, it became apparent that the insights of individual team members in the company were colored by their individual biases and that there was no way to reach a plan of action that everyone would buy into given the existing level of understanding. Inductis set out to collate and analyze transaction-level data from various legacy databases, including the general ledger, and discrete databases for each sales channel. Next, the team formulated the "usual suspect explanations" as hypotheses to be statistically tested. Discovery After working through the hypotheses, Inductis concluded that the revenue decline was largely a mirage. More than 55% was due to a change in the way revenue had been allocated among business lines. The classification change actually had been implemented by an outsourced technology contractor. This had occurred during a fast-turnaround IT project towards the end of the prior fiscal year. Moreover, the contractor had not fully 25 documented the change, which was therefore overlooked by accounting and business line management. The next largest component was revenue that had not been realized because a handful of large customers in certain segments had been subject to severe economic difficulties and, in some cases, bankruptcies. Finally, a recently introduced, lower-priced web-based product-line, aggressively promoted by the field sales force, was cannibalizing its higherpriced equivalent. Bottom Line Results As a result of the analysis and collation of detailed customer segment/product segment information, everyone was able to reach the same conclusion about the relative contribution of each factor. (Of course, it required a couple of iterations to assure everyone that the analysis had taken into account all the relevant data sources.) Once there was agreement on the causes of decline, the recommendations for action were straightforward. Over the next 6 months as the recommendations were implemented, business line revenue rose by nearly 8%, reversing a business-as-usual declining trend of 4%. Ultimately, Inductis' strategies gave the CFO a positive story for Wall Street: a steady recovery in revenue despite the economic downturn. And, the finger-pointing among product groups, technology and sales came to an amicable end. SWOT ANALYSIS - - KPO’s Everyday your business is faced with new challenges, strengths, weaknesses, opportunities and threats. The good thing is, what happens to be a threat for your competitor could turn into a golden opportunity for you. All you need to do is keep your eyes open and take the right action! SWOT Analysis (Strengths, Weaknesses, Opportunities, Threats) is also known as TOWS analysis. SWOT Analysis is a powerful technique to throw light on your business 26 possibilities. SWOT Analysis helps you chisel out your strategies in a more streamlined manner and create a niche in the market. Strengths • • • • What do people in your market see as your strengths? What advantages does your company have? What do you do better than your competitors? What unique or lowest-cost resources do you have access to? Look at your strengths in the context of the competition. If you are comparing your product with a competitor who has a large share of the market, your own large share of the market is not a strength but a necessity. Weaknesses • • • What should you avoid? What could you improve? What are people in your market likely to see as weaknesses? You might need to get into your customers' or competitors' shoes to check if there are weaknesses that they perceive but you overlooked. It is more an internal versus an external view. How could you turn your weaknesses into strengths? Opportunities • • Where are the good opportunities your company could leverage? What are the interesting and promising trends you are aware of? Opportunities could come your way through: o o o Changes in the technology you use Changes in the market Changes in government policies that are relevant to your business 27 o o Changes in your target audience such as lifestyle Events in your industry You can discover new opportunities by analyzing your strengths. You could also look at your weaknesses and think about the potential opportunities opening up if you eliminate your weaknesses. Threats: • • • • • • What obstacles do you face? What is your competition doing? Is changing technology threatening your position? Do you have bad debt or cash-flow problems? Could any of your weaknesses seriously threaten your business? Are the required specifications for your job, products or services changing? Such analysis will often throw light on the future course of action, both in terms of putting problems into perspective and pointing out what needs to be done. Strengths and Weaknesses are internal and Opportunities and Threats relate to external factors. THE WAY AHEAD India may start to lose its low-cost advantage in future. Low-end services may move to even cheaper destinations. For India to stay ahead in the global outsourcing market it will have to develop its indigenous KPO industry and maintain its leading edge. Few ways of overcoming the several challenges ahead of the financial service KPO industry would be: Steps at the Operational Level 1. Skill Upgrade - More focus on training, constructive feedback; appropriate coaching, mentoring and building domain expertise. 28 2. Staff Retention - Identifying right career paths for their professionals - the central theme being nurturing professionals, not poaching. 3. Better Security - Need to invest heavily to adopt and enforce best practices in information and data security - Measures may include biometric security, and employee background checks. 4. Better Control Mechanisms - Organize methodical status reporting for outsourced processes, ensure continuous evolution of the control structure, and review of the defined contract specifications, in order to maintain quality of KPO deliverables. 5. Improve SLAs (Service level Agreements) to Improve Quality - Need to utilize comprehensive, continuously updated service level agreements to quantify and effectively measure the quality of services provided. Outsourced processes should be better defined and documented – leading to greater clarity. Steps at the Strategic Level – 1. Attract Better Quality Professionals By Involving Government to Enlarge the Pool Keeping in view the tremendous need for academically qualified personnel in the KPO sector, the Indian education system needs to be given a major face-lift. The government needs to invest more in education, allow more private sector participation and monitor the quality of colleges more diligently. 2.Creating More Awareness About the Nature of Work KPO Involves – There is a need to create awareness that KPO is different from BPO and involves high end knowledge intensive work. 3.Bring in More Capital By entering into Partnerships with Big Financial Service Organizations – This step can help in two ways - provide much needed cash to Indian financial services KPO’s and also impart the requisite domain expertise. 29 4.Getting more Venture Capital – Another viable option to gather funds for cash strapped Indian KPO units. 5. Form an Effective Industry Association to Lobby with the Government to bring on - Better regulations in the form of more stringent IT acts - Better enforcement of laws by creating regional regulatory bodies to help in diligent monitoring - Improving the information infrastructure by taking adequate steps to reduce prevailing bandwidth prices. 6.Build Brand India – There is a need to lobby for and increase the value of ‘Brand India’ as a potential high end financial services outsourcing destination. Selling KPO services abroad and helping it scale up to a global size would require significant branding efforts in the medium-term. 7. Collaborate with Institutes like Carnegie Melon or Other Financial Services Accreditation Organizations – In order to develop process or quality standards for the KPO industry, similar to the creation of CMM standards for the software industry. This would not only help KPOs gain credibility with their clients but also fight multinationals entering this domain. Conclusion The ingredients of a successful KPO business in the future would be recruiting and training the right professionals, developing domain expertise, creating value for clients by offering highly differentiated services, providing dependable quality over time and building credibility alongside competing countries. To achieve these, many steps need to be taken at the strategic and operational level by both the government and the individual KPO. Also, it is suggested that a dedicated body promote India’s expertise in the KPO domain and help create a formidable brand in the international market. 30 BIBLIOGRAPHY Reports NASSCOM's Handbook - ITES-BPO Industry - 2005 Background and Reference Resource Evalueserve-NASSCOM report: ‘The Impact of Global Sourcing on the US Economy: 2003-2010’ Websites (1) http://www.nasscom.org (2) www.business-standard.com (3) http://economictimes.com (4) www.google.com 31