Outsourcing and SMEs

I had a conversation the other day with Marc Vollenweider, chief executive of Evalueserve. Evalueserve is well known for their research into the phenomenon known as KPO – Knowledge Process Outsourcing. In fact, I have often asserted to anyone who will listen that I believe the Evalueserve India head – Ashish Gupta – created the term KPO. At least, I cannot find any earlier use of the term before Ashish started talking about it, so I guess that’s decided.

Marc is Swiss, but he lives in Austria. I have often talked to Marc in person and on the phone in various countries, but I don’t think I’ve ever managed to call him and find him at home in Austria before – so that’s a first. Maybe his wife told him to stop living on airline food - for a couple of weeks at least!

Marc explained a couple of interesting things during our chat. We talked a lot about KPO in general and the market growth at present and then looked a little more at the sustainability of the sector. To begin with, look at what Marc said about KPO today in India: “We believe there are now about 75,000 KPO professionals in India – that depends on your definition of KPO – but if you look at people with two degrees then in this type of high-end task I really think it is around 75,000 people, right now generating around $3bn in revenue for the companies they work for.”

Marc also explained that he felt the build vs buy model – should you have your own ‘captive’ operation in India or outsource to a suppler – was a very different question in KPO: “At the moment, about two-thirds of KPO professionals still work in captives, however this is going to change significantly in the future. The remaining third work with vendors and about 70 per cent of those work for large and medium companies and the rest are focused within the small to medium-sized enterprise (SME) segment – that’s interesting because it shows that KPO is far more able to serve SMEs than IT or BPO type outsourcing has been.”

This is a really interesting observation. SME outsourcing is often talked of as the next wave, the place where everyone should be focused, yet the realities of outsourcing – the controls and contracts and agreements and monitoring – don’t lend it to work well in the small company environment. However, where a company needs just a few people offering a very high-end bespoke service, Marc is arguing that there are KPO vendors now developing expertise in managing that kind of SME requirement.

Evalueserve predict that KPO will grow to employ around 200,000 people in India alone by 2011 – generating $9.9bn in revenue in that market. From today to those numbers is significant. It’s even more significant when you consider that KPO did not exist at all until 1999 or 2000, when major captives such as GE and McKinsey started asking their offshore operations to perform complex work they would normally have always done locally. They were forced to do it for themselves, but soon the vendor base grew and over the last couple of years the stable of KPO vendors has been maturing.

I asked Marc about the issues of recruitment in India. Everyone asks about staff attrition in outsourcing suppliers, but recently Nasscom published some worrying research that indicated India may struggle to keep supplying graduates to the industry if things keep growing at the present rate. He expressed some concerns for those involved in BPO, but suggested that KPO is an entirely different beast.

He said: “I do believe that people and recruitment is crucial for KPO, but KPO players won’t be exposed too much to any crunch. KPO companies are far more attractive to work for. We are seeing a lot of people coming to us from the high end of BPO, IT, or consulting - all trying to join us. I think this is partly because of the exposure the KPO segment gets in the press and from groups such as Nasscom. We recently won the Nasscom award for most innovative business model in India and got an award from the Prime Minister – we had 600 job applications arrive the next morning.”

Marc has some interesting views on the salary increases in India. Many commentators have pointed to the double-digit percentage pay increases in India leading to an erosion of the cost advantage. Marc believes that this is true in the more commoditised services, such as BPO, but he feels the pay gap is actually getting wider in KPO. He explained: “Look at absolute cost increases in the West and with India – the gap is widening, not closing. Last year in the UK, an employee in a similar role with two degrees might have expected something like a six per cent raise on $80 an hour – now compare that to a 15 per cent increase on $20 in India. These are average numbers, but in general you can see that in KPO it is more likely that there is not an erosion of cost advantage – the gap is actually getting wider.”

These are some quite important comments. If the cost advantage is increasing for higher value services in offshore locations and these services can be more focused and controlled for SMEs then there is a vast market in the UK just waiting to be tapped.