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Process offshoring: The next wave - Views on News from Equitymaster
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  • Apr 10, 2007

    Process offshoring: The next wave

    There is a general perception in the industry that BPOs are just about low-end work. Five to seven years back it would have been true but the same view cannot be held correct in today's time. In this article we try to provide an insight about two high-end verticals of BPOs i.e. the KPO (Knowledge Process Outsourcing) and LPO (Legal Process Outsourcing).

    KPO- Knowledge Process Outsourcing

    KPO is a new high growth industry and is growing at a rapid pace in India. In simple words, it is the upward shift of the BPO industry in the value chain. While BPOs are process driven, the KPOs are knowledge driven. KPO involves business processes requiring domain expertise and high-end qualifications such as the MBA and/or engineering, medical, law, accountant degree or other highly skilled professional qualifications.

    KPO is about moving away from the simple execution of standardised processes to the implementation of processes that demand advanced analytical and technical skills together with some decision-making. India, China, Russia and the Philippines are some of the major KPO service providers today. As per NASSCOM estimates, the KPO industry is expected to grow at a rate of 45% per annum by FY10. Out of the US$16 bn, which the KPO industry is estimated to earn by FY10, India's share in it would be around US$12 bn.

    Apart from offering scalability, KPOs are also higher on revenues as well as margins. Revenue from KPOs is at least twice that of BPOs - US$ 22 to US$ 25 per hour earned by KPOs compared to US$ 8 to US$ 12 per hour earned by BPOs. The expenditure that is required to be made in KPOs is the same as that of BPOs, which generally ranges from US$6,000 - US$ 8,000 per seat. KPO executives also earn almost 46% - 50% more than BPO executives. A BPO executive in India earns about US$ 6,000 per year whereas his KPO counterpart can earn over US$9,000 per year (Source: Evalueserve).

    Clients of KPO services include market research and consulting firms, investment banks and financial services institutions, patent filing companies, and legal claims and insurance claims processing companies. Most of the services are project based, which also helps small and medium sized enterprises to avail KPO services. Attrition is and would be one of the biggest problems facing KPOs. It is not easy for companies to attract and retain the right kind of employees. Most qualified professionals perceive it to be low-grade work.

    In India most of the global players have their own KPOs. Infosys has its own KPO for accounting and equity research (formerly Progeon Ltd.), TCS as a part of its overall expansion plan is only concentrating on its KPO operations and have already divested its stake from its various joint ventures, which primarily was focusing on low-end BPO services.

    LPO- Legal Process Outsourcing

    LPO is the rapidly developing industry that outsources legal work from countries where it is costly to perform, such as the US, to countries where it can be performed at a significantly decreased cost, primarily India and China.

    LPO covers the following services in general:

    • Legal research

    • Document drafting like standard contracts, agreements, letters to the clients, patent applications etc.

    • Legal billing activities like preparation of invoices, collation of time sheets etc.

    • Intellectual Property research

    • Secretarial activities like following up with clients.

    Experienced professionals are employed to perform the work with the help of standard industry databases. The main criteria for deriving value from these services are the level of maturity of delivery processes of the service provider, which is not available in the BPO job. Also sufficient control should be exercised on the operations to ensure that the work is delivered to the level of expectation of quality of the client and the data is secure.

    India is set to achieve significant growth from its current share of 3% - 4% to 6% - 7% in the US$ 250 bn global LPO market by FY10. Moreover, more than 200 top US companies alone are looking for offshore locations towards achieving saving of 30% - 70% (Source: ASSOCHAM- BPO Council). As per the Indian Patent Office there are over 600 patent agents registered with it and about 300 Intellectual Property professionals who are non-registered. Almost one-third of these 900 professionals are currently providing patent services to European and American clients, and this number is likely to double to 1,800-2,000 by FY10. Major countries providing legal services market include USA, UK, France, Australia, South Korea, Japan and China.

    Offshore outsourcing of patent prosecution is also increasing. Patent applications and litigation support are the two areas of focus for offshore legal outsourcing to India, New Zealand, South Africa and other low labour cost locations around the world. Much of this outsourcing is occurring directly from corporations, many of which have in-house legal and patent departments. Much of the patent application process is deemed by clients to be commodity in nature, with only the claims portion of the patent application requiring real US patent law expertise.

    Fees from offshore outsourcing averages to as low as US$ 2,000 per application, as compared to law firm in US which charge between US$ 8,000 and US$ 12,000 for the same applications.

    The road ahead

    With more and more MNC opening up their captive KPOs in India, the competition, for business and talent, seems to be intensifying for Indian companies offering such services. The ITES arms of leading domestic technology companies like Infosys, Wipro and Satyam are also likely to feel the heat. However, considering the fact that these companies are being aggressive on providing integrated IT-ITES services through their BPO/KPO arms, it might stand them in good stead over the long term.



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