KPO predicted to grow by 20% this year
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SSON: Marc, you co-founded Evalueserve in December 2000, after spending a decade with McKinsey & Co where you successfully established McKinsey Knowledge Center in Gurgaon, India. Can we start by exploring your KPO offering at Evalueserve and is KPO the only services that you are currently concentrating on?
Marc: In 2000 KPO didn’t exist. Back then there was only BPO and a little bit of what we did at the McKinsey back office research center. When we started, we just took a certain amount of work from clients who wanted to save some money and avail of geographical arbitrage, so we executed this work in India. It was the lower end of the value chain, such as quick research of a company. Typically we produced company profiles, collated some data, attached some graphics and then sent it off to the client - usually these were small and discreet projects. Since then we’ve significantly climbed up the value chain, for example in equity research we can do the full initiation coverage of a company, barring the approval of the report by a registered banking analyst. We can now process valuation models and write parts of equity research reports. This is the value we can bring to the table. But KPO is much wider than just investment banking research.
We support clients in the areas of knowledge management and business development; Knowledge Management is an area becoming ever more important. In this market we work with many industry vertical sectors, for example corporates and particularly professional service firms, such as consulting firms and law firms.
Several of our teams also focus on health care and on oil and gas, where we offer similar solutions in Knowledge Management, customer insight and market research, competitive intelligence, sales support, and advanced support for Controlling and Procurement. We have developed this notion of KPO 2.0, which means that KPO has now progressed to a new stage in the industry’s life cycle. Clients want more than just geographic cost arbitrage.
In the early days a client came to us, gave us a briefing, we responded, and did the work, and hopefully they were happy. These days we are asked to propose solutions, analyze their project management processes and then come back and execute these solutions. That is what KPO 2.0 has brought – so we are moving away from geographical arbitrage and finding ways for organizations to increase client productivity, free up time for senior people, giving them new capabilities so they can improve their positioning in the market place. By using advanced re-engineering and a lot of proprietary technology we can often increase the client’s process productivity by over 30%.
SSON: Marc, you were talking about the growth of KPO and the new verticals you are currently working in, what other verticals do you cite as growing in the next few years?
Marc: Besides Banking and Financial Services Institutions (BFSI), which is of course an important one, health care and telecommunications will be verticals where we expect the highest growth. We are also looking at oil and gas, or energy in general as well as logistics and procurement.
SSON: Evaluserve has 2,300 employees worldwide between sites in India, China, Chile, Romania and London. Do you plan to move to any other sites?
Marc: India is always going to be our largest center. For us China, Chile and Romania are growing rapidly. Chile is interesting, because it supports the United States time zone. Romania is important from a confidentiality perspective, because data does not leave the EU.
When it comes to new locations, London is a new operating location for us. We have people working within the clients’ offices; similarly we do this in the US. You can argue that cost differential is not as important anymore, which is of course true. But in terms of service delivery, it is very important to have some people on-site. If 10% of resources are on-site, the overall cost advantage of a mixed onshore/offshore model is still almost unchanged. However, the quality of communication is significantly better. That’s already a pretty broad footprint, and at this point we are happy with what we have right now.
SSON: I would like to focus on the KPO industry, obviously ITO and BPO are leaders in the outsourcing space, where in your opinion does knowledge process outsourcing fit on that ladder?
Marc: In revenue terms, ITO is by far the biggest and BPO is the second. KPO will be orders of magnitude smaller. However, the revenue per head is larger. We just had a case where a BPO in India had been doing a lot of work for an American bank when the bank figured out that complex, high-end processes which are carried out by 3 to 5 people, instead of 50 to 100 people, are better off being served and processed by KPO firms. We are now the strategic vendor for high-end work. Growth in KPO is likely to be above 20% per year, while the growth of BPO has already slowed down to about 10-15% per year.
SSON: Marc, do you predict that Evalueserve will look to acquire a captive center like UBS further down the line, is that a vision for Evaluserve’s future?
Marc: Of course, we will consider such opportunities. The trouble is that these organizations run ITO, BPO and KPO processes in parallel. We are not likely to win such bids, because we are specialized in KPO, but have no capabilities in ITO. If the sellers are willing to carve out the KPO parts, we would certainly be willing to buy them.
SSON: Are organizations more reluctant to outsource their knowledge compared to other functions such as IT and F&A? Does contract negotiation become more complex when it comes to knowledge processes?
Marc: What we see in the market is hardly ever based on the thought - ‘no we don’t want to give this to you, because it is confidential’. We get access to confidential information, where of course we need to make sure that our liabilities are under control. Once they have agreed to work with us, the negotiations are actually quite straight forward. Law firms are the most sensitive; the only way to work with some law firms is to have a part of our team sitting in their offices. And I think this is becoming a pattern in the KPO industry: we don’t just sit offshore, we also have what we call ‘implants’, where some teams from Evalueserve are based in the client’s offices. So we provide a combined onshore/offshore solution.
SSON: A recent report from Evalueserve acknowledged that you did not reach your targets due to the recession. Has this made you nervous and where are the first places where you expect to see re-growth?
Marc: Between the middle of 2008 and the first half of 2009 there was very little growth for BPO,ITO and KPO. At Evalueserve, we did not meet our projected targets during that time, but since then we have seen four record quarters in a row. We attribute this to the fact that companies have a lot of pent-up demand, but couldn’t outsource during the downturn, because their budgets were frozen. When companies started recovering they re-started these projects.
SSON: Where do you expect the major regrowth to happen and from which sectors/industries?
Marc: Financial institutions have come back very strongly, for example investment banks are staffing up again. We have also developed new capabilities, so wealth managers, retail banks and commercial banks who have never outsourced before at the high end are more willing to outsource. I call it the maturity effect, just having a larger addressable market, because people have become more mature and open to outsourcing. We are seeing a lot of traction in oil and energy, also in health care. Professional services have been a huge opportunity for us, be it law firms or consultant firms. They have all come under significant cost pressure and have experienced the need for much better business development.
SSON: Marc, can you give me an idea of predicted growth for the next 5 years?
Marc: All I can give you is a rough estimate. I suspect that the market is somewhere between 6 to 8 billion dollars, maybe more. But it depends on how you define KPO. If you consider certain high-end BPO processes, you are at the higher end. About 100,000 people work in KPO. I would expect that 60% of KPO professionals are based in India. Looking at the next 5 years, I predict a 15% to 20% growth for the industry on an annual basis.
SSON: As mentioned earlier there is obvious growth in Latin America and Eastern Europe, who do you see as your main competitors on the global playing field?
Marc: The main competitor right now is what I call the unaddressed market by a wide margin, i.e. processes that clients are currently not outsourcing. We did an analysis of the addressable market in KPO, and we saw that we had good penetration in some companies. However, with most companies we work in 1 or 2 divisions, but these companies usually have 5 to 7 divisions. This implies that we could do much more work within one company. We serve about 75 Fortune 100 companies. So the real competition is not another Indian vendor, but the unaddressed divisions or companies who we could work for. We are probably serving only about 0.1 percent of the addressable market.
In the financial services space, there is offshore competition from organizations like Amba Research and Irevna - they are high quality vendors serving the same market place. In the corporate segment competition is less concentrated and it very much depends on the type of process. There are many such players, but only few of them have managed to scale beyond 200 people.
SSON: What about competition from other major Indian BPO providers, such as Wipro, WNS and Genpact - do you think they will be bigger competitors in the KPO space?
Marc: I have a lot of respect for Genpact, probably the best BPO outsourcing player I know of. We very rarely see them in a direct competitive situation. They do certain things in their area of expertise and run certain high end processes, which is not usually where we compete. There are few areas where we compete directly and occasionally meet in the market place.
WNS has tried to compete with us in a variety of areas, such as pharmaceuticals. Interestingly this year we’ve only seen them in one competitive situation where we won, so they tried to penetrate the legal segment and it seems that didn’t work out for them. We haven’t seen much of the other big vendors. TCS have come up here and there. Also Cognizant, Wipro and Infosys have tried to come up the value chain, but I think it is clearly about scale for them. If they have the choice between a thousand people engagement in the BPO- or ITO-side, and 20 to 30 people engagement on the KPO-side, they usually go for the big engagement, because that gives them growth. They have always tried to come up the value chain, but ultimately they are trying to cross-sell these services into their clients which might work well for them.
SSON: That’s a really good overview for me. What advice would you give to organizations who are considering outsourcing knowledge functions to a KPO?
Marc: Highlight the organization’s pain points and find out what solutions a KPO can bring to the table to optimize your internal processes. I’ll give you an example of a law firm that came to us with their pain points in knowledge management and business development in various geographies. We did some consulting work to figure out what sort of presentation we could do and then presented a solution to them. Just floating an RFP would not have delivered the same results.
Companies should not go through the hassle and cost of building captives, because they are really expensive, take about 18 months to 24 months to stabilize and end up with high managerial complexity. Without this responsibility for a captive, organizations are better placed to focus on the core business. Of course this comment is a bit self-serving. But just the fact that captives are being sold off by banks, for example, means that there must be something to it.
The final piece of advice is to look at global solutions with onshore elements. Clients can have small teams from the KPO-organization inside their offices, some in Latin America, some in Asia and some in Europe. For a global organization this is going to be the best long-term sustainable mix in terms of business continuity, language, culture and time zone coverage.
SSON: Finally I would like to ask you, where you see the future of Evalueserve in the next five years?
Marc: We are going to focus on industry verticals and build specific skills and expertise in these areas. Additionally, we are going to build skills in functional areas such as customer insight, data analytics, sales support, procurement analytics, and knowledge management.
We will also make much more use of technology. We already have a sizable unit which focuses on knowledge technology, such as analytic tools and mini portals for research and knowledge management - so more technology means more innovation and better productivity for our clients.
The market is unaddressed and huge. We will focus on profitable growth and will stick to our knittings. There may be the occasional acquisition of smaller US or European based companies in order to acquire skills we need for further growth.
About Marc Vollenweider
Marc Vollenweider founded Evalueserve in December 2000, after spending a decade with McKinsey & Co (including two years as a Principal in Switzerland and India). Prior to starting Evalueserve, Marc established McKinsey Knowledge Center in Gurgaon, India and grew it from 14 to 120 professionals between 1999 and end of 2000.
Evalueserve now has 2,300 employees worldwide and research centers in Gurgaon and Noida (India); Shanghai (China); Valparaiso (Chile); and Cluj (Romania) and London.
Marc has significant consulting experience in various industries such as Telecom, Pharmaceuticals/Healthcare, Banking, Insurance, Steel, Transportation and Logistics around the world. He can be termed as a person who can live anywhere in world, learn the best of cultural, social and practical aspects, and work with people from various backgrounds to achieve a common objective. Marc has spoken at many events over the last few years, and is regularly quoted on TV and print media as an Offshoring/Outsourcing Industry specialist.