Over the last decade, the KPO industry in India has grown at a frenetic pace. However, the last two years have been challenging for several service providers due to the financial crisis and the global economic slowdown. Revenues from the KPO industry were estimated to be $7.5 billion for the year 2008. Segments such as publishing, media services, legal, analytics and engineering design services, that were growing at 30-35% per annum, showed signs of slowing down and the growth rate slipped to 20-22% last year.

Some of the challenges and opportunities that will impact the KPO industry going forward:

Emerging niches within knowledge services

The low levels of activity over the last year may appear discouraging to some. However, post 2010, the industry will pick up pace as the global economy recovers. While the economic downturn has impacted certain segments, the scenario has also thrown up newer and multiple opportunities within several segments. The digital revolution has also boosted upcoming opportunities.
Providers will find opportunity in new "horizontal" niches. The crisis that resulted in the collapse of the financial services industry has led to a tighter regulatory environment for businesses. As the newer regulatory compliance processes are streamlined, more banks and financial institutions will aim to outsource elements of compliance legal work including documentation, document review, contract review, accounting, reporting, etc.

Increased focus on the mid-market segment

Large BPOs in the industry primarily cater to verticals such as banking, financial services, insurance, manufacturing, pharma, etc. These verticals are more mature in terms of outsourcing/offshoring. While the large companies in these verticals have been offshoring services, the mid-market segment has not entirely opened up for a variety of reasons including lack of awareness about offshoring benefits.
However, with growing awareness and maturing of offshoring in the mid-market segment, large and mid-sized KPOs will be better positioned to address the opportunity.

Building multi-lingual capabilities to cater to multiple markets

The primary advantage of offshoring to India is cost arbitrage and the English speaking skills of Indians. Some KPOs are gearing up to service the non-English outsourcing needs of their (existing and prospective) customers. As Indian service providers diversify their geographical client base, moving from the US to Europe and Asia Pacific, adding foreign language capabilities is becoming essential. Providers, in segments such as publishing, legal and market research, are looking to build capabilities in several European and Asian languages including French, German, Chinese and Japanese.
Going forward this trend may even trigger acquisitions of small yet niche onshore service providers with multilingual capabilities, particularly in Europe. Some large publishing KPOs are already on the lookout for such opportunities.

Re-structuring of the KPO model

Shake-out in the industry as smaller undifferentiated KPOs will be badly hit

Due to the economic downturn, mid-sized and smaller service providers in the Indian KPO industry are the worst affected by margin pressures. These companies will find it difficult to raise prices and will be unable to pay enough to retain skilled talent. Smaller players will be forced to either differentiate their services or fade away.

The industry has already witnessed many weaker players in segments like LPO, MRO and analytics, exiting the business. Smaller knowledge services providers in the research and analytics segment (particularly those focused on the financial services sector) were badly hurt. Even the LPO segment (which was experiencing a 40+% growth rate over the last few years) saw more than 20% of the total number of service providers in the segment discontinuing their operations over the last two years.
In order to mitigate the impact of the difficult business environment, corporations across verticals are looking at cutting costs and shrinking their marketing and R&D budgets. Fewer contracts in the knowledge services segment over the last one year has added to the troubles of some service providers. The slowing global economy will further hasten the shakeout of undifferentiated players, which in turn will prove to be a strengthening force for some of the leading and established KPOs as they implement greater strategic initiatives.

Emergence of ‘large KPOs’

At a broad level, there are two distinct models in the KPO industry - ‘specialists’ and ‘generalists’. The former focuses on specialized services, while the latter offers multiple services.
Except for some of the larger and established players, very few service providers currently have the capability to offer end-to-end services. With the slowdown in the global economy, service providers offering multiple services to multiple verticals were better positioned to weather the storm last year. Several service providers who initially started as specialists in their respective segments (CPA Global and Pangea3 in LPO; Aptara and Integra in publishing) are transforming into end-to-end service providers. While some of these players are branching out within their respective segments, others, such as Evalueserve, Integreon, RR Donnelley and SPi, are expanding across segments.

There will be a few large companies, with adequate capital and the ability to scale, which will follow the BPO model and successfully position themselves as end-to-end service providers. This will help them attract more business from existing, and tap into large corporations who are increasingly looking for providers who can offer a mix of knowledge and support services.

While there is room for both these models, there will be an emergence of stronger and much larger KPOs working towards developing scale and widening their scope of offerings. In line with this trend, we will see accelerated consolidation in the industry. Small service providers will be forced to partner with other onshore or offshore service providers.