Thomas Friedman rendered us Indians a huge service when he wrote his now famous bestseller - The World is Flat. It outlined the phenomenon, the advantages and the mechanics of a previously little-known phrase “Outsourcing”, and the rest, as they say, is history.

The first wave of outsourcing resulted in what we all know as the BPO industry—this is now an US$8.4 billion industry, employing roughly 5,53,000 employees. The rationale behind the BPO movement was an understanding that companies could focus on core competencies while taking advantage of labour arbitrage, and hence save costs.

This worked well and, as we know, the BPO industry has been at the forefront of the new ‘Indian Revolution’ resulting in the corporatisation and globalisation of urban India with a completely new face to the world.

As buyers and suppliers became more comfortable with the idea of outsourcing per se, there came the realisation that more and more work could be outsourced, thus honing even further the ability of a business to focus on core competencies.

This got an added impetus with suppliers creating an opportunity to further mine a client for additional work. This was better and cheaper than acquiring a fresh client (classical wisdom states that it is seven times more expensive to acquire a fresh client than work with an existing one). This resulted in the beginning of the Knowledge Process Outsourcing (KPO) industry, an industry that is forecast to grow to a $16.7 billion worldwide industry, employing nearly 3.5 lakh professionals by 2011 .

The early pioneers of this industry were the following:

Segment I: Existing multinationals that used cheaper destinations with readily available knowledge oriented talent pool for setting up captive knowledge units—GE with Genpact is the best example of this phenomenon.

The kind of work that this breed of ‘KPOs’ did was a little more ‘high end,’ and analytical; less transaction oriented, but more business oriented

Segment II: Erstwhile BPOs that logically extended offerings to include higher end / analytical / knowledge-oriented services. In many cases, these companies took / are taking the acquisition route to acquire the expertise that a knowledge organisation should possess.

Segment III: Almost at the same time, the industry saw the rise of ‘pure play’ KPOs—those that specialised in the knowledge game. These are boutique operations, very often still start-ups, specialising in niches of the knowledge research and analytics spectrum.

These operators have all contributed to the growing realisation amongst clients based in the western world—that India has a talent pool that goes beyond mere proficiency in the English language—that the educational standards are similar to those in the West, and the analytics that arise out of the Indian pool is actually adding value beyond merely saving costs.

Emerging sector

The KPO industry is currently just past the “introductory” stage of its Life Cycle Curve, and is now stepping into the next phase - growth.

Following the classical ‘S’ curve, this phase now entails many more players, many more clients, higher ramp ups of existing organisations, many more services offered. In fact, in some ways the industry is already showing atypical behaviour—it is seeing many consolidations / buyouts as well, a phenomenon typically characterising the maturity phase of the Life Cycle. These acquisitions are motivated sometimes by the desire of the Segment II players to acquire knowledge-related expertise (recent news talked of Infosys and Wipro eyeing a possible buyout of MarketRx; WNS recently acquired Marketics Technologies); and sometimes by the sheer realisation by clients that this is a useful service offering to have in-house rather than outsourced (R R Donnelley’s acquisition of Office Tiger).

But as the industry enters the growth phase, it has to start thinking of some scalability related questions - How do I grow faster? How do I make sure that productivity increases? And, most importantly, what will make me different from other players in this space - i.e., what is my edge, in other words, my sustainable competitive advantage?

If you look at the BPO industry, in the beginning the standard value proposition was obvious—cost (due to labour) and time arbitrage, aided by linguistic abilities. But, to derive sustainable competitive advantage, the players in the industry had to do the following two things:

*Set in place repeatable processes (to improve productivity)—hence the emphasis that you see on a processised organisation. There are various certifications in place for precisely this (software organisations have the CMM certifications, which maps, at various levels starting from 1 to 5, where has the organisation reached - initial, repeatable, defined, managed, optimised)

*Acquire scale to prorate investments

Similarly, in the KPO industry, the players have to move from providing great insights/ R&D, etc, to a model where they develop proprietary, yet repeatable properties. This, of course, is a challenge. KPO, by definition, have services as offerings. So, the effort has to be to “productise” revenue—how does an organisation make sure that entry barriers are so high that what that organisation offers is not replicable by another organisation. At the same time, internally, what that organisation offers, continues to be repeatable and scalable.

EmPower Research, a pure play start up in the business research space, rode the introductory phase a while back. It has a stellar list of clients; it has repeatedly proven the value of its offerings to these same clients who keep coming back for more. However, the challenge as it scales up in the growth phase is the classical one of productising revenues, and of ensuring repeatability of its service offerings.

The dilemma here is that one of the main reasons for its continuing success is that one of the divisions delivers consulting quality research and analytics, for that, read very creative / customised solutions to business processes. This process is highly people focused—so how do you convert it to repeatable/ scalable revenue?
The management has resolved this problem in two ways—for its more process business, by investing in a lot of automation - proprietary automation, so people keep getting better and quicker at their jobs.

For the more customised business research part, the organisation is looking at building products - offerings that can still leverage its core strength, which is fast, cheap, insightful research and analytics, and yet enable a syndicated/ licensed / “one-to-many” revenue model rather than a project (or retainer) “one-to-one” based model.

Hedging risks

This two-pronged approach allows the business to hedge its risks, at the same time to build in entry barriers.If you were to go back to Michael Porter’s famous Five Forces model, “entry barriers” and “threat of substitution,” as well as “competition” get tackled by this move. But, companies have to continue to look at other “forces”:

Suppliers:

In this case, use it as a proxy for employees - the business is all about people. The industry has a lot to offer in terms of the kind of work, learning and exposure that employees receive. But, at the end of it, this is the real world—attrition is as much an evil as it is in other industries, and the drive to make sure your people capital is not eroded is as important as making sure your clients are yours.

I think the most innovative examples of initiatives to achieve retention are empowerment related, leveraging on the inherent strengths. In a BPO, you are a cog in a wheel, a Jack or Linda in a “body” that operates on shifts. In sharp contrast, KPOs that are smart, specially the pure play ones, actually empower their employees to become mini entrepreneurs—ideate branding for their organisation/ are involved in training and recruitment. In short employees in KPOs have a far higher span of control than what their peers in other organisations have.

Buyers:

For most KPOs, in their introductory stages, clients have been an exclusive domain—there just hasn’t been enough competition to worry about. But, in the growth phase, it will all become an open field—this is where engagement models / annuity-based revenues, and proprietary yet productive tools and models become important. For EmPower Research, the very vertical that they serve (professional services) is a source of competitive advantage. It is a space where they were pioneers and therefore have tremendous early mover advantage. But, they are constantly working at spreading their eggs across different baskets to undermine the power that a single client will have.

In sum, what the above implies is that unlike a BPO where you need to “sweat the assets” a smart KPO needs to work at both. This is what will drive sustainability, client advantage, people empowerment and make the KPO industry really a force to reckon with.