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Ministry of Communication(ITES Secretariat)

With the financial support of

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6-9 November 2007

Accra, Ghana

KNOWLEDGE

PROCESS

OUTSOURCING

Global Demand StudyGlobal Demand Study

2

Contents

I . Introduction....3

II. The KPO Industry.....................................8

III. Setting up Captive V/S selecting a vendor...25

IV. Success Story: India..29

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Third party vendors surpassing Captive KPOs Companies that have not yet set up captives and SMEs with engagements sizes being much smaller are

highly likely to choose the Third Party vendor model. Third party vendors have an upper hand against the Captive KPO due to the following reasons:

Faster initial set-up Faster and easier initial staffing Better long term employee retention More flexibility Better Cost Control

Initial set-Up phase analysis shows that a Third party KPO takes just above 3 months to beginoperations whereas a Captive KPO takes over 14 months to begin operations .

FTE : Full TimeEmployees

Initial set-up time comparison between Captive and Third party vendors

7

Services rendered by the KPO industry

The KPO industry is rapidly growing and newer services are being targeted to be outsourced.

Along with the services depicted in the adjacentfigure, some of the newer emerging areas in theKPO industry are:

Audiovisual services Training services Education services

KPO Industry services

PharmaR&D

Animation &Design

Writing &ContentDevelopment

DataAnal ytics

Investment Analysis& EquityResearch

Legal Services&IP Research

LearningSolutions

Engineering &Design

Business &TechnicalServices

Business &Market

Research

By 2011 the KPO industry is expected to reach$ 17 billion industry.

The services rendered by the industry then,along with their distribution is illustrated in thepie chart.

Newer segments are being added to theindustry with a cost-benefit analysis, adding to

the ever growing KPO industry.

8

The KPO Industry

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9

An overview of the Industry

As per NASSCOM India estimates, the KPO industry isexpected to grow at 45% by 2010 to a $16 billionindustry

Some countries have started developing expertise inspecific services in the KPO industry.

Countries like India and China are major suppliers of the KPO industry and have established themselves inmost of the sectors

Although nations like India, China are well established

and are considered as the leaders in the industry theyface significant competition from countries like Irelandand Philippines, which are the new emerging nations. Russia, Ireland, India.Pharmaceuticals

New Zealand, India.Legal

China, Russia, India.IT/R&D

Russia, India.Healthcare

China, Ireland, India.Financial services

Philippines, India.Content

Philippines, China, IndiaAnimation

CountryService Segment

Northern Ireland, Bangladesh, Ghana, Korea, Mauritius, Nepal, Senegal, SriLanka, Taiwan, and Thailand

Next in Line

Brazil, the Caribbean region, Eastern Europe, Malaysia, Israel, Singapore, andVietnam

Challengers

India, China, Canada, Mexico, South Africa, Ireland, Russia, and PhilippinesOffshore Leaders

Nations that vendor to the KPO industry

Major Players in the KPO industry

10

The Future of KPO Industry

46%17.01.29Total (USD bn)39%2.00.2R&D

40%3.00.25Biotech and Pharma

N/A2.00Remote education and publishing

N/A0.30Medical content and services

N/A0.30Paralegal content and services

46%1.40.1Animation and simulation services

29%2.00.4Engineering and design

70%0.40.01Market research and competitive intelligence

N/A0.20Research and information services in HR

50%5.00.3Data Search, integration and management (Analytics)

N/A0.40Equity, finance and insurance research

CAGRFY 10FY 03KPO Sectors

Analytics is expected to be the largest segment in KPO industry

Segmental growth in KPO industry

Largest sectorData Search,integration & management

The fastest growingsector

Market research & competitiveintelligence

11

Demand Side of the KPO industry

U S , 6 0 %U K , 2 0 %

E u r o p e ,2 0%

U S U K E uro p e

KPO services help to improve the time-to-market,access to special skills, absorb peak load andenhance organizational effectiveness.

Foreign small and medium enterprises are alsolooking at KPO services to cater to their high-value project-specific activities.

Developed economies, such as the US, UK, and countries in Western Europe are increasingly facing ashortage of highly trained and specialized professionals in various knowledge-intensive high-skill sectors.Figure above shows the country-wise contribution to the demand side of KPO.

US, UK, Germany and France are the countries that drive the demand for the KPO industry. However, USearns the maximum from outsourcing and a comparison of t hese nations is shown below.

0.57

0.440.34

Cost Savings forCustomers &Investors

Direct Benefits

Value of LabourRe-Employed

0.50-

0.53

0.07

For every $1 spent For every 1 spentUS earns$1.14-$1.17

France earns back 0.86

Germany earnsback 0.74

0.36 0.36

0.05 0.03

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Benefits of KPO Along with the cost effectiveness, countries can expect more than one of the following benefits:

Legal ProtectionStructural Issues

Labour LawsUnsuitable Business Processes

Governmental PoliciesManagement Attitude and Strategies

Regulatory relatedCompany Specific

Some impedimentsto outsourcing

Organisation does not have to build their own headcount and have to spend less oninfrastructure

Peak load absorption

Complexity Reduction

Access to Global Reach

Enhancement of ServiceQuality

Accelerating Processcycle

Availability of skilledworkforce

Significantly reduce the complexities involved in managing and continuous knowledgebuilding of human resources and concentrate on core activities

Reduction in cost of investment in facilities, infrastructure and human resources to alarge extent by outsourcing to a KPO vendor having global presence

Offshore centres have been able to make dramatic improvements inp rocess qualityand productivity as compared to that in the parent location

Outsourcing non-core activities to specialized firms that are better, faster and moreefficient at managing these processes, can accelerate the process cycles and reduceturn-around time.

Supply of skilled labour in most of the countries supplying KPO has been increasingat a steady pace.

13

The Supply Side of KPO

KPO is centered on professionals possessing the right skills. Hence, KPO operations arelikely to evolve in countries with the highest educational standards, providing a largenumber of highly qualified professionals (Engineers, MBAs, CFAs, lawyers etc.).

The supply side of the KPO industry can be classified into following major regions: South East Asia-Pacific

Countries providing KPO services in this r egion include India, China, Philippines and Malaysia The Asia-Pacific region is the leader in the supply side of the KPO industry due to contribution by countries

like India and China. The labour costs are pretty low and skilled labour is available in abundance. Countries falling in this region can provide a 24X7 support to western countries.

Europe Countries providing KPO services in this region include Czech Republic, Ireland, Poland, Hungary and

Russia. Outsourcing to Europe provides two primary advantages viz. Low risk profile and Cultural and geographical

proximity to Western regions. Latin America

Countries providing KPO services in this re gion include Brazil, Chile and Mexico. Similar benefits as that of Europe.

Middle East Includes Israel, and is yet to develop itself as an outsourcing region.

14

South East Asia-Pacific

Advantages

Supportive Government policies.

24X7 support due to time zoneadvantages.

Falling telecom rates.

Availability of skilled labour.

Huge labour pool.

Disadvantages

Unreliable power supply outside thetop ten metropolitan regions.

Skilled labour mainly available in thetop ten metropolitan locations

Employee turnover ratio is high

INDIA

Advantages

A large numbers of bilingual engineerswho speak in Japanese & Chinese.Thus, it is uniquely positioned to tapthe Japanese and Korean markets.

China is building networks, particularly telecommunications.

There are excellent opportunities for 24x7 support.

Business transparency is increasing.

Low infrastructure costs.

Disadvantages

Trade policies and over regulation of Chinese government has hamperedgrowth

Intellectual property concerns linger.

Weak command over English languageacts as a strong disadvantage. There iscultural incompatibility as well.

Employee wages are on the rise.

CHINA

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South East Asia-Pacific (contd)

Advantages

Business friendly government policieswith respect to tax and set-up policies.

Large skilled labour pool at low costs

24X7 support can be provided to thewestern countries

Employee turnover is 5%

Cultural closeness to the westernregions.

Disadvantages

High corruption levels

Poor risk profile in terms of legacy of natural disasters and data theft.

Though the policies are in place, procedures are time consuming.

Strict labour laws.

Political instability.

Infrastructure is weak.

PHILIPPINES

Advantages

Attrition rates are very low.

Supportive government policies.

Strong language skills.

Perfect geographic location whichconnects the eastern and the westerncountries.

Skilled labour available.

Disadvantages

Small labour pool

Low service maturity

MALAYSIA

16

Country-wise comparison of the South East Asia-Pacific Region Although Chinas population is 16 times the size of Philippines, its pool of suitable young professional

engineers is half of the suitable candidates from Philippines. In India the overall quality of the educational system, apart from the top universities, needs to improve

significantly. A comparison showing the number of suitable candidates out of a possible 100 graduates with

relevant degree that could be employed if there was a demand for all of them is shown below.

Asia

Country Name

Engineer Finance/Accounting

Generalist

China

Philippines

Ind ia

M alaysia

20

10

15

30

15

25

25

35

25

20

10 3

Asia

Country Name

Engineer Finance/Accounting

Generalist

China

Philippines

Ind ia

M alaysia

20

10

15

30

15

25

25

35

25

20

10 3

17

Europe Eastern Europe has 40 to 50 provincial cities with universities large enough to supply a highly skilled

labour force at lower labour cost. Outsourcing here would help to spread potential risks across a portfolio of locations with different risk

profiles by taking into account the reliability of infrastructure, political stability, and the possibility thattalent might emigrate be enticed by competitors, or prove less capable than anticipated.

Countries like Russia could play a major role in the KPO industry if it were to introduce changes in itslabour policies

If proper measures are taken by the European countries for development of outsourcing, Europeanregion can catch up with Asian nations.

Advantages

Availability of skilled labour Huge labour pool

Disadvantages

Telecom infrastructure costs are high. Cultural problems. Governmental policies act as a

hindrance. At the middle and lower levels English

proficiency is relatively poor.

RUSSIA

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Europe (contd)

Advantages

Good government policies.

The telecom infrastructure is good.

Good western culture affinity.

Proficient skills in Europeanlanguages.

Political stability.

Disadvantages

Intellectual property security problem

Salaries and other costs are on the rise.

CZECH REPUBLIC

Advantages

Literacy rate is 99.9%

Low or no political risk in the country

Solid infrastructure.

Unique blend of language andcommunication skills available.

Favourable government policies

Disadvantages

The labour pool is pretty small.

Labour costs in Ireland are high.

IRELAND

19

Europe (contd)

POLAND Advantages

Business friendly governmental policies with respect to FDI.

Good public infrastructure.


Poland has a strong cultural affinitywith Germany and the rest of Europe

Good proficiency in languages likeEnglish, German, French and Spanish.

Disadvantages

Cannot provide 24X7 support to thewestern countries.

Wages are on the rise

Advantages

Liberalized telecom structure.

Good real estate availability.


Strong western cultural affinity.

Proficient skills in English, Germanand French languages.

Closely located to European countries.

Disadvantages

Labour pool is limited.

Cannot provide 24X7 services to thewestern regions

HUNGARY

20

Country-wise comparison of the European Region Job candidates from Russia are well-educated but often lack grounding in practical skills

from their university education. Poland has nearly five times suitable qualified engineers as compared to the much more

populous Russia. Figure below shows the number of graduates out of a possible 100 with correct degree

could be employed if there was a demand for all 100.

10

50

15

20

40

30

50

50

50

10

20EasternEurope

Country Name

Engineer Finance/

AccountingGeneralist

Russia

CzechRepublic

Poland

Hungary 30

10

50

15

20

40

30

50

50

50

10

20EasternEurope

Country Name

Engineer Finance/

AccountingGeneralist

Russia

CzechRepublic

Poland

Hungary 30

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Latin America Latin American regions have a strong cultural affinity with the western regions. However, due to cost factors and lack of significant talented labour pool, these regions are

lacking behind Also, these regions cannot provide a 24X7 support to the western regions since they fall in

the same time zone. Often labour policies act as a hindrance in outsourcing of services.

Advantages

Abundant real estate at cheap rates

Low operating costs for business

Excellent telecom and network services available

Labour costs are cheap

Disadvantages

Strict labour laws

Brazil had slow growth rate (GDP grew by only 2.3 % a year from 2000-2005

Weak English language proficiency

Lack of management skills

Less man power

Brazil

22

Latin America

Advantages

Low levels of corruption

Business friendly government policies

Low electricity costs

Transparent legal environment

Strong telecom infrastructure, railwaysand roads.

Disadvantages

Small labour pool because of small population

Spanish is a must for doing business inChile.

Complex banking system

Several visa and immigration problems.

CHILE

Advantages

Labour costs are low.

Cultural proximity to the westerncountries.

Disadvantages

Mexico has an underdevelopedrecruiting industry.

Poor language skills

Labour skills are poor

Countrys landscape for IT vendorsranks second worst among the lowwage countries.

MEXICO

23

Country-wise comparison of the Latin-American Region

Brazil is one of the most populated nations in the Latin-American region; however it has asmaller size of population which will cater to the KPO industry.

Figure below shows the number of graduates out of a possible 100 with correct degreethat could be employed if there was a demand for all 100.

LatinAmerica

Country Name Engineer

Finance/Accounting Generalist

Brazil

Mexico

Note: Data for Chile was not available

13

42 35 11

13 8

LatinAmerica

Country Name Engineer

Finance/Accounting Generalist

Brazil

Mexico

Note: Data for Chile was not available

13

42 35 11

13 8

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Middle East

Israel has performed extremely well in high technology areas. Software companies form a major part of Israels industr ial production and exports. However, it is a new entrant in the KPO segment and will have to develop itself in order to attract other

segments in the KPO industry. Currently there is no other nation from Middle east that vendors to the KPO industry. However, with

changes in governmental policies and tie-ups with US one can expect a major growth in these nations aswell.

ISRAEL Advantages


Highest per capita engineers.

Active government funding.

Strong education system

Diverse population

Disadvantages

Small labour pool

Politically unstable

25

Setting up a Captive v/s Selecting a vendor

26

Selection of a KPO vendor

Country Specific Elements

Cost Savings Availability of Skilled Professionals Personal Connection Project management skills and quality

certification Language and culture Telecommunication infrastructure Intellectual property protection Political stability and support Time zone difference Country image Software and hardware resources

Company Specific Elements

Company size Vision, mission, strategy and

objectives. Credibility Work ethics and culture Data security Security practices and initiatives Competitive infrastructure Skill set

There are various factors which play a significant role in choosing a KPO vendor which aresegregated into two categories viz. Country specific and Company specific elements.

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Selection of a KPO vendor (contd.)

Over and above the factors mentioned earlier, the other important aspects thecompanies should look into are: Security Practices and Initiatives

Though security certification is a minimum requirement, internal security policies andsafeguards against vendors personnel are more i mportant.

Some of the security compliances that the co mpanies look for are: Network Security Compliance Personal Security Compliance

Physical Security Compliance Competitive Infrastructure

Real estate is being developed to incorporate state-of-the-art telecommunications technology(see example) in order to create smart buildings that have fibre optic cabling, alternativepower sources, and high-capacity, high-speed dig ital networks

Easy accessibility to persons and documents Skills Sets

The human resources at the vendor should possess certain basic skills sets as per therequirement of different business segments

28

Challenges in setting up a KPO Operational Challenges

Internal (lack of talented pool, rising wage rates etc.) Competition (newer entrants, better abilities etc.) Industry (infrastructure, amenities etc.)

High Level of Demand for Quality Keen understanding of how client works and what his exact needs are. The client will not look at dollar fi gures but will be mainly concerned with quality of services.

HR related Issues Recruiting and Training Retaining and Nurturing talent

Company Branding Sales Marketing

Innovation and differentiation Offer new types of services simply not available in high-wage countries for cost reasons

Cross cultural skill requirement

Understanding and appreciating of intercultural differences ultimately promotes clearer communication, builds trust and yields tangible results in terms of business results

29

Staying Competitive

At Operational Level

Skills Upgrade Staff Retention Better Security Better Control Mechanisms Improve SLAs to Improve Quality

At Strategic Level

Attract Better Quality Professionals Bring In More Capital Form an Effective Industry Association Collaborate with Service Accrediting

Organisations Sales and Marketing Governmental Intervention and Policies

To stay ahead in the global KPO market, vendor has to develop its indigenous KPOniche to maintain its leading edge. Few ways of overcoming the challenges are:

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India, The Success Story

31

India, the Success Story India has been called the back-office of the world by several research and consulting organizations. There are certain advantages of outsourcing to India such as:

Successful BPO industry The BPO and the IT-ES sector success laid a very strong foundation for the KPO industry in India. The BPO and IT-ES sector gave a strong image to India as well.

Largest skilled labour pool Skilled labour is available in abundance in India w ith many prestigious technical universities and business schools. With nearly 60% of its population between the age of 15-59 and more than half below the age of 25, India has significantly large

number of people in working age group.

Competitive labour costs Although the labour costs are on the rise, they are still considered very cheap as against the western regions. Despite wage inflation averaging 10-15% annually, companies are able to leverage declines in telecom and other overhead costs,

productivity gains and economies of scale to sustain cost advantage.

Supportive Governmental policies There is a stable and supportive political environment in India. The labour policies are liberal as well. Proactive measures are taken by NASSCOM and Government of India to realise success in KPO sector like BPO and IT-ES sectors.

Competitive Infrastructure Reliable telecom and utility infrastructure support within Indias special IT parks. India has started taking measures in ensuring that it can match international standards of infrastructure. It has one of the most

competitive telecom rates world wide and several IT majors are now well established in India.

Conducive business environment The government has taken initiatives to focus on the issues of data privacy, information security, and Intellectual Property Rights with

acts such as Information Technology Act 2000 etc.

Companies are ensuring certification of standards like ISO and matching their framework to the CMM levels.

32

Future of KPO in India India has already employed over 25,000 professionals in the KPO sector and this figure is expected

to grow to over 250,000 professional by 2010. Figure below depicts services that will be outsourced to India along with their break-up, 5 years from

2006.2 % 9 %

3 3 %

1 %1 3 %

1 3 %

2 0 %6 %

2 %

F in a n c e A n im a t io nD a t a & M a r k e t R e s e a r c h H R & C o m pL e g a l D e s ig nE d u c a t io n P h a r m a a n d M e d ic a lR & D

According to Evalueserve, Indian KPO sector will increase its sh According to Evalueserve, Indian KPO sector will increase its sh are in the global KPOare in the global KPOsector to 71% by 2010. The KPO market in India is expected to insector to 71% by 2010. The KPO market in India is expected to in crease to USD 12crease to USD 12billion by 2010 reflecting a CAGR of 49.5%billion by 2010 reflecting a CAGR of 49.5%

Full study available upon request: [email protected]

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