Indian Knowledge Services Outsourcing Industry Creating Global Business Impact
Executive Summary Knowledge Services Outsourcing: A Global Perspective The growth of the Indian BPO industry has been both phenomenal to behold, and inspirational for other countries to follow. The most defining aspect of this story has been the industry s ability to continually expand horizons, enter new markets, offer a wider range of services, and at the same time, keep moving up the value chain to successfully deliver higher value, complex business critical services that are not transactional and require deep domain expertise. Markets worldwide are becoming knowledge-intensive, with an organisation s ability to harness knowledge increasingly shaping their decision making processes and determining a sustained competitive difference. As this reality sets in, organisations are driving demand for globally dispersed talent pools in an endeavour to offshore skill-oriented work to regions that offer a compelling value proposition. This in turn is creating a Global Knowledge Services Outsourcing industry that was valued at USD 2.9 billion in FY2010, more than double from USD 1.2 billion in FY2006, and represented a 24.7 per cent CAGR over this period. While the industry s ability to deliver core operational benefits and consequent adoption by organisations led to a robust compounded annual growth of over 41 per cent over FY2006-08, the growth moderated to 10.0 per cent CAGR over FY2008-10 as a result of the financial crisis of 2008 that led to worldwide economic declines. This represents the next wave of outsourcing as organisations push the envelope to exploit cost efficiencies by outsourcing elements of their core operations as opposed to outsourcing of supporting business processes. These include services like Market Research, Business Research, Data Management and Analytics as well as outsourcing of Legal Process Outsourcing, each of which is critical to a cohesive decision making process. These activities lack a standardised process-based approach and have a high element of intellectual intervention and personal judgement that leverages a combination of academic rigor and expertise. Western organisations, ever in the pursuit of competitive advantage, were swift in recognising India s ongoing transition to a knowledge economy. Their continued leveraging of a younger India for thought oriented and high skill jobs has placed the country at the forefront of Knowledge Services Outsourcing industry, with India occupying a staggering 70 per cent share of the global market. The industry s success is being replicated in other countries of Latin America, Eastern Europe and APAC, where transnational corporations and Indian Knowledge Service providers are establishing operations to leverage niches, like availability of mathematicians or lawyers, as well as develop those markets for domestic Knowledge Services. 4
Knowledge Services Outsourcing: An Indian Perspective India has evolved to become the most preferred destination for sourcing of Knowledge Services. This reflects its increasing integration with client workflows and ability to help address challenges of compressing time-to-market and driving cost competitiveness. Rising client adoption has positioned the Knowledge Services industry in India as a USD 2.0 billion market in FY2010, generating employment for ~70,108 people in over 100 firms. The Knowledge Services industry has had an immense impact on the overall Indian IT-BPO industry and its customers. It has been instrumental in broadening the scope of BPO services, with providers now able to offer a complete bouquet of outsourcing services and thus present themselves as end- to-end service providers and simplifying the entire sourcing programme for prospective clients. With most of the Knowledge Services activities classified as core by customers, the growth of this industry has enabled the overall BPO industry, which focused on non-core activities, to address core activities of customers. Additionally, since scale is not often the requirement for Knowledge Services delivery, it has actually helped the industry penetrate and understand new geographic and vertical markets, and develop other offerings for these new markets. Further, in addition to offering already established services such as market research and business research, the Indian Knowledge Services industry has emerged as pioneers in areas such as analytics, data management and Legal Process Outsourcings. They have proactively driven adoption of new applications in these areas leading to significant business impact, hitherto non-existent, for clients. Additionally, it has also led to the emergence of niche firms that offer business excellence in a complete set of services for a particular vertical, geography or sub serviceline. The Knowledge Services industry plays a key role in offering gainful employment to India s diverse talent pool of engineers, statisticians, lawyers, doctors, commerce and science graduates, postgraduates, and diploma holders, in addition to offering clients access to a multitude of skill sets. In addition, the highly complex nature of work enables service providers to offer credivle experience and career path to employees and a proper career path, leading to high employee satisfaction. Business Models: While global in-house centres of multinational organisations commenced and shaped the Knowledge Services Outsoursing industry in India over the past decade, the industry s growth trajectory has been markedly defined by service providers. Indian service providers garnered a dominant market share of 73-75 per cent in FY2010 as they ramped up operations, driven by lower set-up and operational costs, shorter gestation period, and high operational expertise Geography: North America stands as the largest client outsourcing region with ~65 per cent market share, (USD 1.3 billion) of revenues, in FY2010 and Europe followed with ~30 per cent share Verticals: The Outsourcing industry s composition is weighed towards Banking, Financial Services and Insurance (BFSI), which contributed ~34 per cent (USD 573.9 million) to the industry s revenues in FY2010. As service providers seek to diversify, they have heightened focus on other verticals like Healthcare and Hi-tech & Telecom, which now account for ~17.5 per cent and ~12.5 per cent revenue shares, respectively 5
Servicelines: Knowledge offerings comprise multiple servicelines such as Business Research, legal research and Market Research. Among these, Business Research dominates with a substantial share of ~43.5 per cent (USD 883.6 million) in FY2010. This partly owes to the rapidly changing dynamics that businesses confront today, which necessitates continuous flow of business intelligence, as also the larger share of BFSI that drives financial research. Data Analytics follows with an 18.5 per cent share amounting to USD 375.2 million. It is also one of the fastest growing servicelines as businesses increasingly leverage data-driven measures for decision making. Legal Process Outsourcings, with a share of 17.5 per cent, i.e., USD 356.5 million, in FY2010, is the fastest growing segment, driven by impetus from a post-recession environment characterised by higher bankruptcy cases, regulatory compliances, and cost pressures. Client requirement for customised data views, managing unstructured data and synthesising, and increased digitisation is supporting the growth of Data Management services, which accounted for 11.4 per cent (USD 231.7 million) of the India Knowledge Services Outsourcing market. Market research held 6.8 per cent share (USD 137.6 million) in FY2010. Bolstered by the success of key Knowledge Services, service providers are driving new services lines like marketing & sales outsourcing, procurement outsourcing, and social media research outsourcing. These other services together accounted for ~2.4 per cent share of the Knowledge Services Outsourcing market in FY2010 With Knowledge Services being more than a decade old in India, services like Data Management, Business Research, and Market Research are well-established, while verticals like the BFSI have been well-penetrated. As services providers prepare for the next wave, they are leveraging acquisitions to augment service portfolio, expand presence to other geographies, and diversify operations. Slow in recent past owing to the global economic crisis, M&A has gained pace since recovery. Still further, Indian service providers are establishing presence in emerging destinations like China, Philippines, Latin America and Eastern Europe. These locations offer niche advantages, such as specific talent pool and government incentive to the industry, and are supporting India s global delivery model. To maintain their competitive advantage and tap a larger talent pool, service providers are expanding beyond Indian metros to Tier II and Tier III cities in India. Given the advantages a service provider brings, multinational organisations are evaluating a hybrid business model that marries global in-house centre investment with management team, infrastructure and capabilities of the service provider to reap combined synergies. While India s Knowledge Service proposition continues to remain compelling, the momentum could be moderated by wage inflation, which is pressurising margins in the face of almost flat billing rates. Knowledge Services Outsourcing: India Leads India has gained significant headway over other destinations, with over a decade s experience and maturity in the delivery of Knowledge Services. Being an industry pioneer, its service portfolio comprises both breadth and depth built over the years that other locations are yet to offer. This is being supported by a robust education system that produces ~750,000 postgraduates and ~2.0 million English-speaking graduates annually. India s ready-to-hire pool substantially exceeds that of other countries, making it a formidable player in the market. Still further, its cost competitive infrastructure, with occupancy costs in Tier I and II cities almost one-third that for prime cities worldwide and a compensation differential at half to one-third compared to that in the west is vesting the country with significant bill rate advantages. This coupled with a favourable time zone provides natural advantages for establishing operations for delivery to the US and European clients. It also benefits from an established services outsourcing industry 6
exemplified by the global success of BPO. These are positioning India as a hub, with other locations like Latin America, Easter Europe, and Philippines offering select advantages that compliment India s position and together make for a global research centre. As India builds on these positives, it is stepping up to the next phase of Knowledge Services Outsourcing. This represents a shift in value delivered as service providers work on unstructured projects that reflect real-world challenges faced by clients, proffer ideas and recommendations on likely actions, apply high-end analytics on volumes of data to identify patterns, and help design go-to-market strategies in real-time. As this necessitates both domain expertise and deep client knowledge, service providers are increasingly placed as core extensions of client operations. This integration helps client organisations institutionalise knowledge-driven decision making to leverage transformative impacts organisation-wide. Knowledge Services Outsourcing: A Compelling Future As India transforms the Knowledge Services landscape, it is expected to drive the global market to a USD 7.9 billion opportunity by FY2015. This represents an accentuation of Knowledge Services across multinational organisations that are increasingly competing on knowledge and expected to outsource complex work streams to India. This is expected to prompt small and medium enterprises to start leveraging Knowledge Services. As service providers continue to work with clients across sectors, they are developing domain expertise and vertical-specific offerings. This would necessitate a global delivery platform underpinned by a multi-shore presence across emerging locations that offer complimentary advantages. While this would foster preponderance of larger, broad-based service providers, boutique firms would continue to co-exist for their niche expertise. These developments are expected to evince interest from ITO/BPO players seeking a play in the knowledge market. Success of Knowledge Service Outsourcing may see global in-house centres expanding in scale as their knowledge delivery finds wider adoption across the organisation. Their expertise may position them as Centres of Excellence and lead to the model being replicated across complimenting locations. North America would continue to be dominant sourcing destination given its longer experience with services outsourcing. This would be supported by rising adoption across Europe and the Middle East regions. However, APAC region s uptake of Knowledge Services is expected to be embryonic and develop over the longer term. India: A Knowledge Services Outsourcing Hub by 2015 Knowledge Services Outsourcing industry in India is expected to grow at a 22.2 per cent CAGR over FY2010-15 to a USD 5.6 billion market. Business Research would continue to be the most widely adopted serviceline with a 39.4 per cent share, representing a USD 2.2 billion opportunity. Share of Data Analytics is expected to increase from 18.5 per cent to 20.6 per cent (USD 1.15 billion) over the period. Legal Process Outsourcing is also expected to record robust growth to a USD 1.3 billion market by then. 7
Financial Services would continue to be the largest contributor with a 32.0 per cent share (USD 1.4 billion) of the market. It would be followed by Healthcare at 19.5 per cent and Hi-tech/Telecom and Retail at 13.0 per cent each. Media sector is expected to exhibit the highest growth of 24.5 per cent over the period to become a USD 322.1 million opportunity. This would be followed by Healthcare at 23.3 per cent growth. As the UK and Continental Europe (excluding the UK) gain traction in adopting Knowledge Services, they are expected to drive down the share of North America from 65.0 per cent to 55.0 per cent of the market. This global expansion is seeing Indian service providers expand to other locations, thus building the domestic knowledge market in these regions. Indian Knowledge Services Outsourcing Industry: Moving Ahead While India s case for an expanding and world-class Knowledge Services market remains compelling, the momentum may be challenged by the country s IP legal framework, rising attrition rates experienced by service providers and global in-house centres alike, and talent management concerns. Maintaining the growth trajectory would necessitate concerted efforts by involved stakeholders to address the challenges and create an enabling environment for service providers, NASSCOM, and the government to collaborate across issues. Holistic focus on training and development of talent: Establishing accredited and intensive training programmes and provisioning viable career growth options to channelise and nurture talent Academic changes that recognise new opportunities: Inclusion of Knowledge Services within the curriculum to apprise students of alternative career options, while providing for industry exposure at the higher education level 8
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