Friday, January 25, 2008

India Moves from BPO to KPO


Outsourcing companies, including WNS, Genpact, Cognizant Technology Solutions, and Infosys Technologies, are rapidly moving up the value chain from business process outsourcing (BPO) to knowledge processing outsourcing (KPO).

Most segments in the KPO market space, such as legal, publishing, media services, analytics and engineering services, are growing at anywhere between 30 to 40 percent per annum. Within a few years of takeoff, the KPO industry is rapidly moving towards more innovative business models and showing signs of growing maturity.

The Indian KPO sector has been largely ignored by the investor community due to the lower scale of operations when compared to BPO companies. However, concerns about a less than rewarding exit from the KPO sector have been put to rest over the last few months due to the attractive valuations of firms such as Inductis, Marketics and marketRx.

Recent instances of funding show that the KPO sector is gaining more and more prominence:

- Sequoia Capital invested US $25 million in pharmaceutical and biotech research company GVK Biosciences in November 2007.

- Kubera Cross Border Fund invested US $17 million in Ocimum Biosolutions, a genomics outsourcing company.

- Helion Venture Partners invested US $5.1 million in Hurix Systems, an e-learning solutions, knowledge management, and publishing services company in October 2007.

- Helion also has invested in Mindworks Global, a KPO, which provides media outsourcing and custom publishing services.

- In July 2007, legal KPO Pangea3 completed a US $7 million in Series C funding by Sequoia Capital India. The company plans to utilize the funds towards recruitments, expanding its service offerings and increasing sales and marketing.

Media hype and high returns for industry pioneers have led to an explosion of service providers, and those ready to provide funds to them. Infosys BPO has recently announced its entry in the legal services outsourcing space.

Apart from lending more credibility to the legal services industry, this is likely to provide additional strength to the growth plans of several large, mid-size and small companies. With the acquisition of marketRx, Cognizant looks to strengthen its KPO practice, and increase focus on the life sciences market.

The industry has its set of challenges: rising wages, training and depreciating dollar revenues in India. However, the most important challenge at this point seems to lie in addressing a shortage of trained professionals. In fact, advisory firm TPI suggests that there is reason to be cautious about any growth rate predictions on account of shortage of trained Indian professionals and IP concerns.

Despite the challenges, the race to acquire capabilities and clients will trigger several inorganic growth actions by ambitious vendors. Over time, India will see more of the large multi-service BPOs acquiring capacity and capability, and also international firms looking for India capacity.