The Knowledge Process Outsourcing (KPO) industry has been around for less than 10 years, but has already achieved significant milestones in terms of revenue, headcount and customer impact. The next five to 10 years of the KPO industry’s growth will be even more dramatic as firms build scale, develop new capabilities and innovate their business models.

Demand to Rise Exponentially
While the KPO industry has historically targeted the professional-services segment, there is an increasing demand from the “corporate” segment, i.e. large companies in a variety of industries. Demand from these new verticals, fueled by increased global competition, could be many multiples of the demand from professional services.

Of course, the demand-supply mismatch could lead to rising billing rates, increased employee attrition, rising salaries, pressure on service delivery and rising profit margins.

Customers to Buy Suite of Services
On the demand side, companies are building market-intelligence cells that integrate multiple components (market research, competition research, marketing-performance metrics and statistical modeling), and need providers to support them with a suite of intelligence services. Offshoring makes it easier for the customer to achieve centralization of research/analysis functions at the KPO firm’s location. For example, a customer may need a solution that includes horizontal services (industry research, statistical modeling, competition research) at different levels of complexity (research, analysis, modeling).

On the supply side, providers are combining multiple components of intelligence. For example, Marketics Technologies, the analytics division of WNS, has developed the “M-Scan” methodology for building scalable “assembly line” analytics teams using centers of excellence for analytics discipline.

Global Services PREDICTIONS

As the KPO industry booms, the supply side will struggle to meet demand. It will be difficult to find “highly skilled” people for the required work at competitive salaries

While parent companies will hive off BPO captives, KPO captives will continue to be set up because such work has confidentiality and IPR issues

Providers will acquire small firms globally to gain domain knowledge and new customers.

Need for Verticalization
The KPO industry specializes in a few key “horizontal” offerings — R&D, analytics and support services — for the professional-services segment. By 2010, KPO firms will develop verticalized offerings for specific industries, such as pharamceuticals (competition analysis, sales-force optimization, product pipeline analysis) and mortgage banking (pricing of mortgage-backed securities, pre-payment risk modeling). Instead of telling customers “we offer these four horizontal services,” the pitch will become “we offer the standard industry-specific services but with unique personalized attention.” KPO firms will develop deep industry-specific skills in pre-sales, diagnostics, solution design, transition and service delivery.

Rise of the “Factory Model”
One big trend is the move from an effectiveness focus (“can you do this work from India?”) to an efficiency focus (“can you do it with high quality, low costs and continuous improvement?”). To cater to this, KPO firms are likely to move away from the “offshore body shopping” model to a “factory model,” which involves large teams of analysts with similar skills, following a structured process, and being managed in a BPO-like environment. Some results of this model are:

• “De-skills” the research process by breaking up a business problem into structured, less complex components that can be addressed through specialized techniques
• Enables the KPO firm to hire from a large and inexpensive pool of talent, including from tier-2 cities
• Reduces attrition because analysts are easy to hire, and are inter-changeable
• Allows KPO providers to build capabilities to meet more client requirements. While scale and efficiency type work will increase, niche KPO firms will also offer new services.

Consolidation in the Industry
Much growth in the KPO industry will be captured by large “hybrid” (blend of BPO and KPO) providers. Niche, pure-play and captive KPO firms will grow, but may be unable to maintain their market share due to their inability to build “vertical” competencies. Large hybrid firms are likely to undertake three kinds of M&As: One, horizontal India-based KPO firms in order to build capabilities, reduce administrative costs and expand to tier-2 cities to source talent; two, vertical U.S.-based firms to build industry-specific offerings and acquire clients, for example boutique research firm focused on a particular industry sector; three, KPO units of captive BPO firms that may face pressure due to rapidly rising employee costs, high attrition and stagnating career paths for employees.

Multiple Pricing Models
With the growth of KPO processes, the industry will move  to a range of pricing models. At the top end of the spectrum, consulting work (risk-management analytics, equity research) will follow a value-based pricing; the idea is that the KPO helps customers achieve substantial revenue growth or cost reductions, and it is entitled to a share of that value. At the next rung, research/analysis work will continue to be priced on a “per FTE” or “per hour” basis. The “factory model” work will move to a “per transaction” pricing, for example per company profile for a research firm.

“White-labeled” Services
KPO firms will offer end-to-end outsourced services for global market-research firms, allowing them to handle almost 100 percent of the market-research work in the U.S.A. (except client service and commercials). This could happen by an offshore KPO partnering with a small U.S.-based market-research agency that handles the front-end work, while the KPO does the back-end work; or by using Web-enabled services. The KPO firm can beam insights directly over the Web for business managers at the client site to access in real time.  

Recognized as a power thinker on business technology, Professor Krishnan’s work has revolved around IT strategy and the business value of IT investments, business-process architecture and the business of software and services.