Knowledge Process Outsourcing (KPO) is the outsourcing of business processes that require significant domain expertise. In the early 2000s, India saw a boom in KPO activity, with the Western multinationals sourcing their high-end information processing requirements (such as analytics, data management, legal services and human resource management) to captive entities/ third-party KPO units in developing countries. According to ASSOCHAM, India’s KPO market is growing at a CAGR of 30% in spite of the global slowdown. By taking care of non-core functions of the multinationals, the KPOs have freed up their time to focus on core business activities. At the same time, the sector has opened new employment avenues for the large pool of young and highly skilled professionals in the country, thus augmenting the GDP growth.
Critics argue that increased level of outsourcing activity would lead to inflation and expose us to global business cycles. However, these risks can be minimized if growth in the KPO sector is matched with a focus on enhancing domestic demand. Therefore, in spite of these criticisms, the knowledge sourcing activities should be encouraged.
Although India performs the major share of knowledge processing activities globally, it is gradually losing its attractiveness as the preferred outsourcing location to the upcoming KPO units in South-East Asia, Eastern Europe and South America. Various reasons have been cited for this shift, namely, increasing real estate costs in India; difference in time zones, language and culture; domain expertise & lower costs offered at other locations; and a high employee attrition rate in India. The Indian KPO sector needs to overcome these challenges in order to sustain and enhance its current global share.
First, high real estate prices in India, especially in the Tier 1 cities, have become a major concern for the multinational firms. A possible solution might be to shift some of the KPO units to smaller cities. Many units have already taken steps in this direction. The government can encourage this shift by providing incentives (such as tax benefits) to the firms moving to smaller cities. In the long run, such a shift would lead to infrastructural development in these areas. The economic benefits will get evenly distributed across the country, and the KPO firms would be able to tap more talent.
Second, the difference in time zones is an important factor driving the companies’ operations to other locations. The U.S. companies, for instance, now prefer South American locations for sourcing their activities. For the same reason, the European companies prefer Eastern Europe as their outsourcing location. The Indian KPO units can address this problem by identifying areas, such as research, that do not require long hours of contact with on-shore teams. At the same time, focusing on selected segments would help us develop expertise and hence, get more sophisticated work assignments.
Third, because of the high attrition rate in most KPO units, the multinationals feel that they are frequently incurring costs in hiring and training new employees. This problem can be overcome by developing in-house hiring & training facilities, rather than relying on third-party hiring agents. Furthermore, KPO entities and multinationals should invest in the latest communication technologies, such as video conferencing, in order to keep the offshore employees integrated into the business. Greater involvement would enhance their motivation levels and lower attrition rates to a great extent. Negotiating performance-based remuneration contracts with the multinationals, whenever possible, would also attract and retain talented individuals.
Finally, as the industry is becoming more competitive, the professionals should possess good managerial, communication and decision-making skills in addition to technical expertise. KPO units should focus on all-round development of their employees. The employees should be encouraged to take initiative & identify areas where they can add value. Well-rounded employees would give the Indian KPO sector a competitive edge.
A systematic approach towards addressing these issues would make the Indian KPO sector more competitive and allay some of the concerns of the foreign multinationals. The industry leaders, policy makers and employees should work together to bring out the desired changes.
Ashima Setia is a PGP1 student at IIM Ahmedabad, and a member of the Consult Club. Prior to joining IIMA, she worked with Deutsche CIB Centre in Mumbai in its Fixed Income division. She holds a bachelor’s degree in Civil Engineering from IIT Delhi.