KPO is gaining momentum …
KPO is still at its very beginning – to put it simple, it hasn’t seen the dawn yet. The oldest of the non-captive firms are not more than about 5-6 years in age. While the largest BPO firms have 30000 employees, its hard to find a standalone KPO with more than 2000 employees in size. India has about 15 KPOs which are around 3 years old and others are still at an incubation stage. About 90% of them seem to be operating with a name plate capacity of less than 250 employees. Unlike the BPO sector, the scale up period here is much larger. The incremental time for client addition and execution is far higher due to the intensity and relevance of the output to the client’s business. However, the billing rates are twice of the BPO sector and there is a chance to differentiate the services. To scale up quickly companies have followed multiple tricks – focus on low end work for cash flows, and focus on high end work for margins.
The KPO sector, like the BPO, exhibits a good potential. Most databases predict the market potential to be upwards of $10 billion by the mid of the next decade. This seems to be driving the KPO participants as well as the PEs who intend to leverage on this growth. Many BPO companies that seem to have achieved scale and wish to increase their spectrum of services have added KPO under the umbrella. Some interesting trends have emerged in the KPO space:
- Most KPO firms have a definite skill-set which they could claim as unique. Some such areas are Analytics, Financial Research, Primary research, IPR etc
- The large BPOs are interested in taking over KPOs that have a distinct identity, to expand their service portfolio. The valuations in some cases have touched the sky
- KPO firms seem to offer services by focusing on work that result in bespoke and regular assignments
- New areas seem to be emerging – legal research, IPR, Primary research, Clinical research, HR etc
- Some KPOs seem to focus on product models for subscription based growth
From a PE standpoint, industry is at a highly nascent stage. It is still an experimenting process, but the vibes are positive. PE firms have invested in a few KPOs, whose size has varied between 200 and 1500. They have also funded some companies with the seed capital, where there has been a distinct intellectual property. The size of investment has varied significantly based on the equity stake participation, typically exceeding $2 million and moving up to $20 million. Again, like the case of BPOs, the funding typically has been to fund scale up.
Some PEs that have participated in the mid-size KPO domain include Norwest Venture Partners, Charles River Ventures, Helion Ventures, Baring Private Equity, and Sequoia.
The KPO sector is lagging the BPO sector by about 3 years in its growth cycle. This sector would be more value driven that scale driven. The PE firms are yet to hold the ground due to huge valuation expectations being set up the KPO companies. The benchmark deals so far have been at exuberant multiples more driven by hope as there isn’t much of past history in the Indian scenario to claim as a benchmark. The early birds would certainly drive out with more meat, but the industry is far from being characterized as stable.
Like the BPO sector, we are still to know what the right benchmark is and what could be the different areas that would emerge as potential knowledge service domains! The industry would continue to see irrational valuations for the next 3 to 4 years before there are blinkers.
The views expressed in the article are my personal points of view about the market and not intended to represent the views of the organization I work with.
I work with a global consulting, technology services and outsourcing firm in Mumbai, India. I have been tracking the outsourcing market for over three years. I have over 6+ years of experience in consulting, market research, business intelligence, and market and competitor intelligence. I have worked with global firms like Tata, GE and Aranca.
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