Trends in Knowledge Process Outsourcing - Growth Opportunities in High-Level Processes

STRATEGIC FOCUS REPORT
Trends in Knowledge Process

Outsourcing – Growth Opportunities
in High-Level Processes (Strategic
Focus)
How can vendors take advantage of the growth potential of KPO through the
recession and beyond?
Reference Code: DMTC2287
Publication Date: March 2009
OVERVIEW
Catalyst
The maturing knowledge process outsourcing (KPO) market represents a significant growth opportunity for vendors. As
well as defining KPO, in relation to the broader outsourcing market, this report will assess how vendors can best position
their offerings in order to take full advantage of the sector’s blossoming potential.
Summary
• KPO represents the next stage in the evolution of the business process outsourcing market;
• The KPO market continues to grow in maturity;
• Offshore delivery has remained a constant feature of KPO;
• Clients have concerns over the outsourcing of core business functions;
• The KPO market remains extremely fragmented.
Trends in Knowledge Process Outsourcing – Growth Opportunities in High-Level Processes DMTC2287/ Published 03/2009
© Datamonitor. This brief is a licensed product and is not to be photocopied Page 1

Key Messages
KEY MESSAGES
KPO represents the next stage in the evolution of the business process outsourcing market
Knowledge process outsourcing (KPO) represents the next step in the evolutionary cycle of the outsourcing market. Just as
the success of IT outsourcing paved the way for the growth of business process outsourcing (BPO), so the growing
maturity of the BPO industry has led to the development of KPO. Unlike BPO, which refers to the transfer of mainly
transactional, non-core processes to specialist providers, KPO involves the outsourcing of core business processes, which
require a high level of domain expertise.
The KPO market continues to grow in maturity

The origins of the KPO industry can be traced back to the late 1990s, but it was not until 2003 that the market really began
to take off. At that time, KPO was the subject of a large amount of hype which led many within the industry to make bold
claims about how fast it would grow. The intensity of this hype has gradually died away and, since 2006, a more mature
KPO market has begun to emerge, with a significant amount of consolidation taking place and a growing awareness,
among both vendors and clients, of the full extent of what could be achieved through KPO services.
Offshore delivery has remained a constant feature of KPO

Throughout the development of the KPO market, the leveraging of offshore delivery locations has remained a constant
feature. India remains the pre-eminent offshore location for KPO delivery, but increasingly IT services and BPO vendors
are adopting a multi-sourcing approach to global delivery, and this trend has already impacted on the KPO market.
Locations such as China, the Philippines, Sri Lanka, Czech Republic, Hungary, Canada, Mexico and Brazil have emerged
as attractive locations for KPO delivery.
Clients have concerns over the outsourcing of core business functions

Unlike the established horizontal BPO areas, such as F&A and HRO, which focus on non-core aspects of the client’s
business, KPO involves the outsourcing of core business functions. Clients are often reluctant to relinquish control over
areas such as planning, auditing, analysis and research and development to third-party vendors, with quality and security
being the major areas of concern. Vendors can take steps to alleviate customer worries, such as aligning themselves with
established business standards that cover process quality or security capabilities, or by offering services on a short-term,
single-project basis.
The KPO market remains extremely fragmented

Despite recent consolidation, a large number of providers continue to operate in the KPO market. These include: global
outsourcing providers such as IBM and Accenture; offshore outsourcing specialists like TCS, Wipro and Infosys; BPO
providers with KPO operations, including Genpact and WNS; KPO specialists such as Evalueserve; and captive operations
of major multi-national organizations like UBS, Goldman Sachs and Ford.

Table of Contents
TABLE OF CONTENTS
Overview 1
Catalyst 1
Summary 1
Key Messages 2
KPO represents the next stage in the evolution of the business process outsourcing market 2
The KPO market continues to grow in maturity 2
Offshore delivery has remained a constant feature of KPO 2
Clients have concerns over the outsourcing of core business functions 2
The KPO market remains extremely fragmented 2
Market opportunity 6
Defining Knowledge Process Outsourcing 6
KPO vendors aim to go beyond cost arbitrage 10
Service Evolution 12
The Origins of the KPO Market 12
Offshore delivery has remained a constant feature of KPO 13
Evaluating emerging KPO delivery locations 14
Customer Impact 19
Clients have concerns over the outsourcing of core functions 19
KPO offers clients a range of potential benefits 20
Large organizations consume the most knowledge-based services 20
Competitive Landscape 22
Global giants have struggled to establish themselves in the KPO market 22
India’s leading outsourcers have well-established KPO offerings 23
The leading pure-play BPO vendors have strong presence in the KPO market 23
KPO specialists are able to target specific industries and service areas 24
Captive operations remain part of the KPO landscape 25
Go to Market 26
Scale is of lesser importance in KPO than BPO 26
Technology as an enabler for KPO 27
Potential impact of the current recession on the KPO industry 27
Recommendations 29

Table of Contents
APPENDIX 31
Methodology 31
Further reading 31
Ask the analyst 31
Datamonitor consulting 31
Disclaimer 31

Table of Contents
TABLE OF FIGURES
Figure 1: Rate the importance of the following factors in your decision to enter into a BPO
contract (1 – Least Important; 4 – Most Important) 10
Figure 2: Total Contract Value of Outsourcing Deals ($m) against Number of Contracts, January
2008 to February 2009 28
TABLE OF TABLES
Table 1: India’s Top 10 BPO Providers, 2007-2008 7
Table 2: Acquisitions of KPO Vendors Since 2006 8
Table 3: Assessment of emerging KPO locations 15
Table 4: Analysis of key KPO vendors by service line 25

Market Opportunity
MARKET OPPORTUNITY
Defining Knowledge Process Outsourcing

Knowledge process outsourcing (KPO) represents the next stage in the evolution of the outsourcing market. Just as the
success of IT outsourcing paved the way for the growth of business process outsourcing (BPO), so the growing maturity of
the BPO industry has led to the development of KPO.
The definitions below illustrate the key similarities and differences between BPO and KPO:
• BPO: Generally refers to the transfer of mainly transactional, non-core processes (such as human resources,
finance & accounting and procurement) to specialist providers. These providers typically deliver the majority of
these services from offshore locations such as India, delivering significant cost savings to customers;
• KPO: Involves the movement of core business processes, which require a high level of domain expertise, to
third-party vendors. Once again, in the majority of cases there is at least some offshore delivery element.
Definitions of KPO include a broad range of services
The definition of KPO shown above is extremely broad, and can be tailored to cover a wide variety of service areas,
including (but not limited to):
• Market Research: Covers primary and secondary research, data processing, presentation / report writing and
data analysis and reporting;
• Analytics: Covers an extremely wide range of functions, often focusing on specific industries or key parts of the
client’s business. Major areas include data analytics, financial analytics and risk analytics;
• Equity, Credit and Investment Research: Services include debt maturity profiles, risk profiles and analysis,
earnings forecasts, cash-flow valuation models and the preparation of company profiles;
• Research and Development: High-level R&D services in verticals such as high-tech engineering,
pharmaceuticals and biotechnology;
• Legal Process Outsourcing: Covers patent drafting and patent litigation services, contract drafting and
management systems, document review services, deposition summaries and legal research and support
services;
• Other Vertical Services: KPO can deliver services across a wide variety of industries. Those in which it has
already made an impact include creative design and animation, healthcare and pharmaceuticals and education
and training.
The list above illustrates the complexity and specialization inherent in most KPO functions. In the past, these
functions were off-limits for outsourcing, with clients unwilling to relinquish control over such vital business functions
and uncertain of the ability of outsourcers to deliver such services to the level of quality required.
However, as the KPO industry has matured, so the proposition has become more compelling. Vendors have been
able to demonstrate that many locations are already heavily utilized for BPO work (most notably India), and offer a

Market Opportunity
significant pool of highly educated workers, at a markedly lower cost than clients will be able to find in their own
country.
Contract signings and M&A activity illustrate growing maturity of KPO
Due to the sensitive nature of much of the work being outsourced, the majority of KPO agreements are not made
public. However, over the last two years Datamonitor has tracked three key KPO deals, which illustrate the growing
maturity of the industry:
• March 2007: Tata Consultancy Services (TCS) was selected by pharmaceuticals giant GlaxoSmithKline to set
up a global drug development center in India. Under the terms of the deal, TCS provides services around clinical
research, including clinical data management and clinical submissions support;
• March 2008: Infosys Technologies won a deal with private equity and venture capital firm 3i to provide
research services, along with other BPO functions. Infosys provides global research services to support 3i's
investment business, as well as managing the company’s knowledge and resource center in Bangalore;
• August 2008: Pipal Research, the KPO subsidiary of Indian BPO vendor Firstsource Solutions, secured a
deal worth $30m over six years from BT Global Services, to provide KPO services including market, segment,
country and customer research, proposition support and other numerical-analysis work.
All three of the vendors involved in the deals listed above are based in India, illustrating the importance of that region
to the KPO industry. All three are also among the 10 biggest Indian BPO vendors, according to figures provided by
the country’s IT trade association Nasscom.
Table 1: India’s Top 10 BPO Providers, 2007-2008
Rank Company Name Position in Previous Year

1 Genpact 1
2 WNS Global Services 2
3 IBM-Daksh Business Process Services 4
4 Aditya Birla Minacs Worldwide 3
5 Tata Consultancy Services BPO 5
6 Wipro BPO 6
7 Firstsource Solutions 7
8 Infosys BPO 9
9 HCL BPO 8
10 EXLService Holdings 10
Source: Nasscom, July 2008 DATAMONITOR
KPO acquisition activity
Firstsource is an example of a BPO vendor which has invested significantly in its KPO offering. In September 2004
the company, then known as ICICI OneSource, acquired a 51% stake in Pipal Research, a US-based vendor
specializing in providing customized business research, analytics and information services to customers in the
financial services, life sciences consumer packaged goods and IT industries.

Market Opportunity
In the less than five years since that takeover, a number of other BPO companies have looked to increase their KPO
business through acquisition. The table below summarizes the major activity.
Table 2: Acquisitions of KPO Vendors Since 2006
Buyer Target Main Activity of Target Employees Price Date

Litigation support and electronic
Integreon Datum Legal Not disclosed Not disclosed Jun 08
data discovery
Caterpillar’s Market Research Market research, customer
Satyam Not disclosed $60m Apr 08
and Customer Analytics analytics
Analytics for the life sciences
Cognizant MarketRx 430 $135m Oct 07
industry
Quatrro BPO High-end KPO, inc. patent filing,
Scope eKnowledge 500 Not disclosed Apr 07
Solutions market research
WNS Global
Marketics Technologies Marketing analytics systems 200 $65m Mar 07
Services
Strategy and analytics to financial
EXLService Inductis 250 Not disclosed Jul 06
services sector
High-end KPO, inc. legal services,
RR Donnelley Office Tiger 4,000 $250m Mar 06
financial analytics
Source: Datamonitor DATAMONITOR
An increased level of M&A activity is generally considered to be a good indicator of growing maturity in a market.
Thus the number of deals tracked by Datamonitor suggests that the KPO market is moving beyond the early stages of
development.
The fact that major BPO vendors such as WNS Global Services, Cognizant, EXLService and RR Donnelley have
made significant purchases also suggests that the industry is being taken more seriously by well-established players.
Despite this activity in recent years, the KPO market remains extremely fragmented. A large number of boutique firms
still operate in this space, either providing services across one specific area of KPO, such as legal process
outsourcing, or delivering a range of services to one specific vertical market, such as financial services.
Many KPO vendors focus on specific vertical markets
The high level of domain expertise required for the delivery of KPO services means that it lends itself to vertical-specific
focus more readily than horizontal BPO areas such as F&A BPO and HR outsourcing. KPO has gained significant traction
in areas such as pharmaceuticals and life sciences and manufacturing, but it is in financial services where the majority of
niche vendors have chosen to concentrate.
The financial services industry is an ideal market for KPO
The financial services industry has been key in driving the development of both the IT outsourcing and BPO markets. In
both cases, the willingness of major banks, insurance providers and private equity groups to outsource to third-party
providers was vital to the development of each industry. Financial services is therefore one of the most mature vertical
markets when it comes to outsourcing, and also more savvy when it comes to global sourcing. This makes it an ideal
market for KPO.

Market Opportunity
Added to this is the fact that, at a basic level, much of the analytical work that forms the bedrock of the majority of KPO
deals is highly standardized – areas such as competitor analysis, profitability analysis and sector analysis. These kinds of
services can be provided at a significantly lower cost from offshore locations, epitomized by (but not limited to) India, which
boast large pools of workers with qualifications and experience in the necessary skill sets.
KPO also enables the different domains within the broad heading of ‘financial services’ to obtain services that are directly
tailored to their needs. BPO deals in areas such as F&A and HR outsourcing tend to be generic, with similar services
provided whether the client is a retail bank or an insurance provider. Conversely, KPO deals can be tailored to the client’s
individual domain, whether it is insurance, investment banking, retail banking or corporate finance.
As a result, many KPO vendors do not simply focus on the financial services market; they drill down even further, and focus
on a specific domain. As an example, Amba Research provides investment research support services to the capital
markets industry.
The current recession represents a major challenge for providers focused on the financial services sector
The turmoil that engulfed the financial services industry, beginning with the sub-prime crisis in 2007, is already having, and
will continue to have, major implications for KPO vendors focused on that market.
In research conducted for this report, one vendor told Datamonitor that, prior to 2008, it was recording compound annual
growth rates of between 70% and 80% on its revenue. Since then, however, there has been a major slowdown, and growth
for the coming year is expected to be less than 5%.
The main reason for this dramatic drop in demand is that the industry remains in a state of flux. Clients are no longer
certain of how their business is going to look in six or 12 months time, and so are reluctant to commit to deals. The result is
lengthening sales cycles and a general uncertainty about how the market is going to look in the future.
However, most vendors focused on financial services that Datamonitor spoke with remain upbeat about the long-term
prospects for KPO. The consensus view was that the cost-cutting potential of KPO meant that it remained an attractive
proposition for clients. Also, KPO work can be performed on a short-term, project-by-project basis, which does not require a
major commitment from a customer.
This positive outlook is not unique to vendors focused on financial services either. Most of the vendors with which
Datamonitor spoke forecast double-digit growth for their operations in the coming fiscal year, and were equally bullish about
their prospects for the next 24 to 36 months. However, Datamonitor cautions that that the majority of KPO operations are
building from a small base, in many cases less than $50m. It is therefore easier to deliver significant growth on revenue of
this scale than it is to grow, for instance, a $200m BPO business by 20% in the current climate.
Just two years ago, research agencies and analyst houses were eager to predict that the KPO industry would be worth
anywhere between $10bn and $17bn by 2010. This estimate now looks overly generous, as the reality of the current
economic situation begins to impact on the outsourcing market. In February this year, for example, Nasscom downgraded
its forecast for IT and BPO export growth from India by several percentage points.

Market Opportunity
KPO vendors aim to go beyond cost arbitrage

Cost savings are obviously top of any prospect’s list of priorities, but traditionally it has not been the main selling point
put forward by KPO evangelists. Rather, they prefer to focus on the potential for KPO services to create value for the
customer, by augmenting the knowledge already available within the client’s own organization and adding further
expertise in highly specialized areas.
This practice is not unique to KPO. Across the BPO industry, vendors are attempting to move up the value chain and
provide higher-value, more strategic services to customers. So, for example, a provider of F&A BPO services may
look beyond providing basic transactional processes, like accounts payable and receivable services and travel and
expense reporting, and offer clients strategic functions such as financial planning and analysis and budgeting and
forecasting.
The reasoning is clear - this kind of work offers higher margins and enables vendors to build closer relationships with
clients, which in turn leads to longer deals and more predictable revenue streams.
There is also demand from the customer side as well. In Datamonitor’s study Business Trends 2008 – Understanding
Your BPO Customer (DPTC0050), a survey of 177 BPO clients from North America, Western Europe and Australia
and New Zealand, found that cost is just one of many factors taken into account when deciding to outsource a
business process. Just as important to end-users are goals such as improving efficiency and quality of service to
customers.
Figure 1: Rate the importance of the following factors in your decision to enter into a BPO contract (1 –
Least Important; 4 – Most Important)
3.4 3.4
3.3
3.2 3.2
3.2
3.1
3.0 2.9
2.9
2.8
2.8
2.7
2.6
2.5
Cost reduction Improvement in Improve quality Technological Enabling
efficiency of service to innovation business
customers expansion
As the BPO market matures, cost arbitrage is becoming a standard expectation, and clients are increasingly looking
to derive other, less easily quantifiable, benefits through the outsourcing process. More and more, they are looking to
their outsourcing provider to drive improvements in efficiency and productivity, as illustrated by the graph above.

Market Opportunity
However, it is important to note that this survey was carried out before the full impact of the global economic downturn
became apparent. As the recession deepens, Datamonitor asserts that it is likely that cost-cutting will once again be
the main driver behind client’s decision-making.

Service Evolution
SERVICE EVOLUTION
The Origins of the KPO Market

The origins of the KPO market can be traced back to the late 1990s. With IT outsourcing well-established and the BPO
industry rapidly expanding, several multi-national companies, including General Electric, American Express and McKinsey,
began experimenting with offshoring research and analytics services to India. Rather than using third-party vendors, these
corporate giants preferred to utilize their own captive operations.
In December 2000, three former employees of IBM and McKinsey came together to form Evalueserve, one of the first pure-
play providers of research and analytics services from India. The company rapidly picked up clients, boasting fifty just two
years after its formation. Even still, there remained a lack of momentum around the nascent KPO market.
The KPO hype begins to grow
That began to change in 2003, as the level of interest around KPO began to grow exponentially among prospects. The
market became increasingly crowded as new vendors were formed and established BPO providers looked to take
advantage of the opportunity by setting up KPO operations of their own. Clients also became increasingly aware of the
potential benefits of KPO. As an example, Evalueserve claims to have added 150 clients in the twelve months to the end of
December 2003 and a further 300 in 2004, taking its total to approximately 500 by the end of that year.
Estimates suggest that the KPO market was worth just over $1bn by the end of the 2004 fiscal year, with growth on the
previous year of about 50%. The level of hype about the industry at the time led many to make bold claims about how fast it
would grow, with some even suggesting the KPO sector could be worth upwards of $11bn by the end of fiscal 2011. Start-
ups eager to jump on the bandwagon flooded the market, making it even more difficult to separate the reality of the
development of KPO from the increasingly hysterical publicity surrounding it.
Growing maturity opens up significant opportunities
By 2006, a more mature KPO market was beginning to emerge. As shown in Table 2, a significant amount of consolidation
began to take place, as major BPO players looked to establish themselves in the sector and smaller vendors tried to grab
market share. There was also a growing awareness, among both vendors and clients, of the full extent of what could be
achieved through KPO services.
The early days of KPO had seen clients, still wary of handing over control of core processes to third-party vendors, clearly
define the parameters of KPO work. Providers were often restricted to handling specific data sets, with methodologies and
even conclusions prescribed from the outset, and as such were unable to utilize their full range of capabilities.
However, as the market has matured, the restrictions placed on vendors have been lifted somewhat. Outsourcers are no
longer simply called on to handle specific ‘number-crunching’ processes, but are trusted to draw their own conclusions from
data, make recommendations and design processes to improve client performance. The process is now far more
consultative and collaborative, and represents a significant opportunity, which may actually be larger than that originally
envisioned in the early days of KPO.

Service Evolution
Offshore delivery has remained a constant feature of KPO

Throughout the evolution detailed above, one feature of the KPO market has remained constant: that of leveraging offshore
delivery models. Chief among the factors that make KPO an attractive proposition to clients is that the services can be
provided cheaper abroad than in the prospect’s own country. This promise can only be fulfilled if the vendor utilizes low-
cost locations.
India remains the pre-eminent offshore location
While the number of locations capable of offering low-cost outsourcing services has increased significantly over the last few
years, India remains the pre-eminent offshore location for KPO delivery. The advantages of delivering work from the
country are clear, and include:
• Cheap, plentiful labor: Despite experiencing wage inflation due to ongoing high levels of demand, labor costs
in India remain significantly lower than in major Western economies such as the US, Australia/New Zealand and
UK. The supply of qualified workers also remains healthy. India’s labor force is estimated at well over 500
million, and the country produces over 3 million graduates annually, including half a million technical graduates
and 300,000 post-graduates;
• Excellent English language skills: With the US and the UK by far the most mature markets when it comes to
use offshore delivery models, strong English-language skills are vital for a low-cost location. While Hindi is the
national language and the primary tongue of approximately 41% of the population of India, English is the most
important language for commercial communication;
• Cultural affinity with key Western markets: Language is not the only aspect linking India with key markets.
For example, the country’s legal system is based on English common law, which makes it easier for UK
companies setting up in the region. Cultural links also exist between India and the UK which are less easy to
quantify but just as important in guiding sourcing decisions;
• Maturity of India’s offshore delivery model: India’s global delivery model is well established, having been
honed over many years of delivering a wide range of services to customers all over the world. As a result, the
risks for clients are lower than they would be if they were outsourcing to a relatively immature market;
• Political and economic stability: India’s stability, at both a political and an economic level, is a strong selling
particularly when compared to other countries in the same region of Asia, such as Pakistan, Thailand and Sri
Lanka.
Unsurprisingly, given the factors mentioned above, India has been the focal point of the KPO industry since its
inception. The vast majority of the industry’s major vendors were founded in India, have their headquarters in the
country and deliver the lion’s share of their services from Indian cities.
Multi-shoring models are gaining traction
It is unlikely that India will face a significant challenge to its position as the leading location for KPO services in the
near future. Increasingly, however, IT services and BPO vendors are adopting a multi-sourcing approach to global
delivery, and this trend has already impacted on the KPO market.

Service Evolution
While still preferring to have one central sourcing hub, located in India, a growing number of vendors are setting up
centers in other low-cost locations, located across Asia-Pacific, Eastern and Central Europe and Latin America. There
are a number of advantages to this approach for both KPO vendors and their clients:
• Enables greater proximity to clients: One of the main drawbacks to sourcing KPO work from India is its
distance from the US and Europe. Clients can feel very detached from their offshore center, and communication
issues are further exacerbated by incompatible time zones. These problems can be alleviated through the use of
nearshore centers, based in close geographical proximity to the customer’s own locations. For example, Latin
American countries such as Mexico and Argentina can be used as nearshore hubs for US-based clients, while
services for customers based in Germany could be delivered from Eastern European locations like Poland or the
Czech Republic;
• Greater flexibility: Vendors are increasingly working with clients who have operations in more than one region.
Taking a multi-sourcing approach allows vendors to be more flexible when providing services to a client
operating in multiple locations;
• Easing the pressure on India’s labor pool: While India’s labor force is significant, and the country is producing
a large number of highly-qualified graduates every year, there are concerns that the country could already be
suffering from saturation of the talent pool. This is a particularly pressing concern for the KPO industry, where
the quality of labor available is of the utmost importance and vendors are under increasing pressure to keep
prices down. While Datamonitor is not suggesting that the Indian talent pool is in imminent danger of running
dry, spreading out into new locations will help to ensure that the supply lasts even longer, and will enable
vendors to access previously untapped reserves;
In the broader IT services and BPO markets, the number of potential global sourcing locations is very large. However,
due to the complexity of knowledge-based work and the level of domain expertise required to deliver these services
successfully, the list of possible delivery centers, outside of India, is significantly smaller.
Evaluating emerging KPO delivery locations

Datamonitor has identified eight key delivery locations that have emerged in recent years as viable options for KPO
service delivery. In the table below, these countries are evaluated against a number of criteria, including population,
literacy, labor pool and language proficiency.
These locations are drawn from four main geographic territories: Asia-Pacific (China, the Philippines and Sri Lanka),
Eastern Europe (Hungary, the Czech Republic), North America (Canada) and Latin America (Mexico and Brazil).
They range in size from the extremely large (China, with a population of around 1.3 billion), to the relatively small
(Hungary and the Czech Republic, both of which have populations of about 10 million people).
All eight countries are currently used as delivery centers for KPO services.

Service Evolution
Table 3: Assessment of emerging KPO locations
% of Labor Pool in
Country Population Labor Pool Literacy Major Languages
Services
China 1.3bn 807.7m 32% 90.9% Mandarin, Cantonese
Philippines 96.1m 36.8m 50% 92.6% Filipino, English
Sinhala (74%), Tamil

Sri Lanka 21.1m 7.6m 39% 90.7%
(18%), English (10%)
Hungary 9.9m 4.2m 63% 99.4% Hungarian (94%)
Czech Republic 10.2m 5.4m 56% 99.0% Czech (95%)
English (59%), French

Canada 33.2m 18.2m 76% 99.0%
(23%)
Mexico 110m 45.5m 59% 91.0% Spanish (93%)
Brazil 196.3m 100.9m 66% 88.6% Portuguese
Source: Datamonitor / CIA World Factbook DATAMONITOR
China
China has many attractive features as a location for KPO services. As in India, labor is abundant and cheap. The country
produces the most tertiary graduates of any country in the world – about 2.4 million in 2006 – meaning that fit is relatively
easy to find a large supply of workers with good analytical skills.
However, there are a number of drawbacks which have inhibited the country’s progress as a sourcing location, including:
• Maturity: As mentioned above, India’s global delivery model is well established and the country has been at the
forefront of the development of the KPO industry. While China is rapidly gaining experience in the KPO sector, it
still lags some way behind India in terms of maturity;
• Depth of experience: While China undoubtedly boasts a large number of highly qualified employees, a number
of vendors indicated to Datamonitor that the country’s talent pool lacks the necessary experience in knowledge-
based functions sustain a large amount of KPO work;
• Language capabilities: It is estimated that less than 1% of the population of mainland China can speak English
as an additional language. China’s total of about 10 million English speakers compares unfavourably with not
only India (about 90 million English speakers), but also the Philippines (over 42 million) and Canada (where over
25 million people speak English as either a first or second language).
Philippines
The Philippines has established itself as a popular location for call center outsourcing work, helped by its large
English-speaking population and close cultural ties to the US. The country has looked to build on that foundation, and
move up the value chain into providing KPO services.

Service Evolution
There are signs that KPO is beginning to gain a foothold in the Philippines. KPO providers such as Integreon have set
up facilities in the region, often at the specific request of clients who felt over-exposed to India and/or wanted to tap
into a region that was closely aligned with the US but also gave ready access to Asian markets such as Japan.
The Philippines is also well-established as a center for animation outsourcing. The country’s animators have been
providing services to major Western companies such as Walt Disney, Warner Bothers, Cartoon Network and Hanna
Barbera for over 20 years, and the size of the industry has been estimated at about $65m.
Aside from this highly specialised area, a major problem for the Philippines KPO industry is the perception that the
region will struggle to deliver high-end services on a large scale. One vendor told Datamonitor during the research for
this report that, while workers in the Philippines had excellent customer service mentality, it was much more difficult to
recruit in higher-end processes.
High attrition is also a problem that has afflicted the Philippines for a number of years. It is a considerable challenge
for KPO providers, as, due to their complexity, they require a much higher level of training than other BPO functions. If
employees are leaving on a regular basis, the costs associated with training new joiners will be high, and could erode
some of the cost advantage the region holds over other locations.
Sri Lanka
Located less than 20 miles off the southern coast of India, Sri Lanka’s budding offshore industry has inevitably been
overshadowed by its larger neighbor. Yet Sri Lanka shares many of the attributes which make India such an attractive
location for outsourcing work. These include a low-cost of labor, a plentiful pool of educated, English-speaking workers,
high literacy levels and a legal system that is based on a Western model.
In order to maximize its potential as a sourcing location, Sri Lanka has opted to focus on just a few domain areas, including
F&A BPO and KPO. KPO providers that have opened facilities in Sri Lanka, such as Amba Research, tend to focus on the
financial services market, looking to tap into the country’s significant labor pool of qualified accountants.
Major challenges that Sri Lanka faces in becoming a major location for KPO service provision include:
• Scale: The global sourcing industry in the country is heavily centered on the Colombo metropolitan region and
there are question marks over the ability of second tier cities to support this kind of work. No Sri Lankan city has
a population of over one million, which means there is a lack of depth in the labor pool outside the country’s
capital;
• Security concerns: A sporadic civil war has been fought in Sri Lanka since the early 1980s. About 70,000
people are estimated to have been killed in the conflict. The issue of security is one which is certain to deter
many foreign investors.
Hungary and the Czech Republic
Many of the KPO vendors Datamonitor spoke to as part of the research for this report indicated that they expected Europe,
and particularly continental Europe, to be a major growth area in the next 12 to 24 months. The UK has always been
Europe’s most mature outsourcing market, while major territories such as France and Germany have lagged behind. In
recent years, however, the levels of outsourcing in these regions has risen inexorably, making it more likely that the KPO
proposition will gain traction in the very near future.

Service Evolution
In order to take full advantage of this anticipated trend, KPO vendors are setting up nearshore facilities in Eastern
European countries, and Hungary and the Czech Republic have emerged as popular locations.
The Czech Republic has been utilized for BPO work for a number of years now. For example, in 2005 Indian vendor
Infosys opened a facility in Brno to provide back-office financial work, sales order management, and F&A BPO services.
Hungary, and in particular the capital, Budapest, has also established itself as a center for BPO activity in the last few
years, as it offers a highly-skilled and multilingual workforce.
The main challenge for both Hungary and the Czech Republic is differentiating themselves from their neighbors, such as
Poland, Romania, Russia and former Soviet states such as the Ukraine and Belarus. Most, if not all, of these countries
boast well-educated workforces, and language skills which vendors are eager to tap into.
Canada
The advantages of locating a KPO operation in Canada are clear: the country boasts a large, highly-educated workforce
with excellent English-language capabilities. Its close proximity to the US and close cultural ties with that country also make
it an ideal nearshore location, while the presence of a large French-speaking population, located mainly in Quebec, make it
ideal for providing native language services to customers in France.
The main issue that has held back Canada’s emergence as a key location is labor cost. The country will always compare
unfavorably in this regard with countries such as India, China and the Philippines, and the situation was not helped by the
strength of the Canadian dollar against the US currency for most of 2008. However, having traded at a 1:1 ratio for much of
that year, the Canadian currency has since fallen again to a more helpful valuation of just under 80 cents. The outlook for
the Canadian dollar is tough to predict, however, which makes planning for the long-term difficult.
The outsourcing sector in Canada also faces strong competition for labor from the country’s major natural resources
industries, including oil and gas extraction and logging. These markets can attract qualified graduates away from careers in
technology, particularly when commodities prices are high.
Mexico and Brazil
Latin America is becoming increasingly popular as a global sourcing location, with a large number of vendors now using it
as a nearshore location to serve clients in the US. As well as favorable geographical location, Latin America also offers a
large pool of Spanish and Portuguese speaking workers, enabling vendors to not only tap into the Southern European
market, but also provide services to the growing Hispanic population in the US.
Mexico and Brazil are two of Latin America’s most developed economies and, along with Argentina, represent the most
attractive global sourcing locations in the region. Both boast large, well-educated populations, have experience of providing
outsourcing services and many major outsourcing companies already have a presence in one, or both, of these countries.
However, Latin America as a whole still has some perception challenges to overcome in its development as a sourcing
location. The region’s IT sector is not as mature as India’s, and the infrastructure is still being developed to attract investors
to the region, something its Asian rivals have had in place for a number of years. Looking at Brazil specifically, the country’s
population is predominantly Portuguese-speaking, which has hindered its progress as a nearshore location for the US.

Service Evolution
Also, concerns about stability (both economic, and political) and security continue to hang over many Latin American
countries, including Brazil and Mexico, which may cause vendors to think twice before setting up in those locations.
For example, the Mexican currency, the peso, has been volatile since the beginning of 2008, which could give potential
investors reason to pause. In Brazil, crime is a serious problem, particularly in urban areas. The US Department of State’s
travel guide for Brazil notes that the country’s murder rate is four times higher than that of the US.

Customer Impact
CUSTOMER IMPACT
Clients have concerns over the outsourcing of core functions

Unlike the established horizontal BPO areas, such as F&A and HRO, which focus on non-core aspects of the client’s
business, KPO involves the outsourcing of core business functions. For a number of reasons reasons, clients are often
reluctant to relinquish control over areas such as planning, auditing, analysis and research and development to third-party
vendors. The major areas of concern include:
• Quality: KPO services require a high level of skill and domain-centric knowledge, often in industries such as
financial services and pharmaceuticals which offer little or no margin for error. Due to the relative immaturity of
the KPO market, a significant proportion of potential customers remain skeptical about the ability of outsourcers,
many of whom are based in developing economies, to deliver work to the level of quality required to drive
business benefits;
• Security: Ensuring the security of data has always been a major issue for customers considering using offshore
delivery models. With KPO, the fear of data loss is even more acute, as the information being handled by
vendors can be incredibly sensitive and relates directly to the client’s own business. KPO vendors can be called
upon to handle high-level revenue figures, confidential competitor analysis, new product designs and even legal
documents, so they must work ever diligently to reassure clients that their facilities and processes are secure.
Vendors can take steps to alleviate client concerns
Vendors can help to alleviate these concerns by aligning themselves with established business standards that cover
process quality or security capabilities. These can include, but are not limited to:
• ISO/IEC 27000 series: A family of information security standards published jointly by the International
Organization for Standardization and the International Electrotechnical Commission.
http://www.27000.org/ismsprocess.htm;
• CMMI certification: The capability maturity model integration (CMMI) in software engineering and
organizational development is a process improvement approach that aims to provide companies with the
elements necessary for process improvement. It was developed by the Software Engineering Institute.
http://www.sei.cmu.edu/cmmi/;
• Six Sigma: A business management strategy that aims to identify and remove the causes of errors in business
processes. It uses a set of quality management methods, including statistics, and creates an infrastructure of
people within the organization who are experts in these methods. http://www.isixsigma.com/
It is also easier to reassure clients if they already have experience of using an offshore outsourcing partner. Then, the
move to KPO can be presented as a natural progression in the evolution of the relationship, rather than being a leap
into the unknown. It also helps if there is an existing level of trust between client and vendor.
KPO can also be delivered on a short-term, single-project basis, which allows clients to ‘dip their toe into the water’
before deciding whether to commit to a long-term contract. Unlike other areas of BPO, there is not a long wait-time
before the benefits of KPO become apparent. From a vendor perspective, then, running a short trial project can serve

Customer Impact
to increase business in the long-term, as clients not only become comfortable with the services being provided, but
begin to appreciate the resultant benefits.
The main disadvantage of short-term KPO contracts is that it does not give vendors time to garner detailed knowledge
of their client’s business. As a result, some of the main benefits of KPO, that tend only to result from an extended
period of collaboration, will not be forthcoming.
KPO offers clients a range of potential benefits

So, what are the key benefits to an end-user of outsourcing its knowledge services? As mentioned previously, cost issues
are at top of the list of priorities for prospective clients, and KPO is able to deliver significant savings due to its use of
offshore delivery.
Vendors place focus on ‘intellectual arbitrage’
However, KPO vendors are eager to shift the focus away from simple labor cost arbitrage and on to so-called ‘intellectual
arbitrage’. In other words, KPO enables clients to tap into large pools of talent and to leverage skills in niche areas, which
otherwise would not be open to them.
One KPO vendor indicated to Datamonitor that, in its experience, many companies are frustrated by the lack of research
and analytics skills available within their own internal organizations and are therefore keen to work with an outsourcing
partner who can assist them when it comes to making key decisions.
As well as providing skills that are absent within the client’s own business, KPO vendors can help improve the efficiency of
many core processes. For example, by providing data mining, processing and analytics services, KPO vendors allow the
client’s own staff to concentrate on drawing conclusions from the analysis and adjusting their business accordingly.
Vendors can even go beyond that and produce the conclusions themselves, meaning the client only has to act on their
recommendations.
By improving efficiencies and freeing up resources within the client’s own organization, KPO can help to improve
customers’ time-to-market, a business benefit which goes beyond simply delivering ‘your mess for less’ services in the style
of transactional outsourcing.
Large organizations consume the most knowledge-based services

The benefits of KPO mentioned above are available to clients of all sizes. Traditionally, though, it has been large
organizations that have been most willing to outsource their knowledge services to a third party – for example, the two
deals publicly announced in 2008 (and listed earlier in this report) involved 3i, a private equity firm that operates in 14
countries worldwide and has a market capitalization of approximately $1.2bn, and BT Global Services, the outsourcing arm
of telecommunications giant BT, which generated sales of $11bn in its most recent fiscal year.
Drivers behind dominance of KPO industry by large corporations
A variety of factors have contributed to the over-representation of large companies in the KPO market.

Customer Impact
• Enterprises consume more knowledge services: Large companies, with operations in multiple geographic
markets and, often, with interests in multiple industries, are in greater need of research and analytics services. It
is therefore inevitable that they will be more interested in outsourcing this part of their business;
• Greater experience of consuming knowledge services: As large companies consume more knowledge
services, it follows that they will have more experience of the processes involved and the potential benefits
available. As a result, they tend to grasp the KPO concept more quickly than smaller organizations;
• Large corporations were instrumental in the development of KPO: The foundations for the KPO industry
were laid back in the late 1990s by large corporations such as General Electric, American Express and
McKinsey. Corporations of this size continue to dominate the market;
• The KPO industry focus favors large corporates: The vertical markets that KPO has played most
successfully in include financial services and pharmaceuticals. These tend to be dominated by multi-national
companies, such as GlaxoSmithKline, Pfizer and Bayer in the pharmaceutical space and banking giants like
HSBC and Bank of America;
• Large corporations have more experience of outsourcing: This report has already established that it is
beneficial for KPO vendors, in terms of winning business, if prospective clients have experience of outsourcing
and offshoring. In general, this type of experience is more likely to be present among large corporations.
Breaking into the mid-market is a challenge for many vendors
If the KPO industry is to reach its full potential, it needs to penetrate further into the mid-market, targeting small and
medium-sized companies. This could present a challenge to vendors, particularly in the current economic climate.
Aside from the factors mentioned above which have contributed to a general focus on large corporates by KPO vendors,
the global recession means that mid-size prospects, struggling to compete in a depressed market, could be even less
willing to risk embarking on a KPO project, at least until their short-term survival is assured. Also, at a time when
unemployment is increasing across the board, customers are more likely to regard increased spending on areas such as
research and analytics as an unnecessary expense.
It may be that boutique KPO vendors, of which there are many, will find it easier than their larger counterparts to win
business in the mid-market. Part of the reason for this is that, by their very nature, small, focused vendors (who themselves
might have only a relatively small number of clients) are more capable of addressing the unique needs of their customers.
This is an attractive proposition for small and medium-sized organizations, who might be concerned that they would be
overlooked in favor of more well-known multi-nationals were they to partner with a larger provider.
Broad-based KPO vendors also tend to put an emphasis on the scale of their business when pitching to prospective clients,
which is much less of a priority for small and medium-sized businesses who might have operations in just one country and
require domain expertise in just one specific area.

Competitive Landscape
COMPETITIVE LANDSCAPE
Despite recent trends towards consolidation, the KPO market remains extremely fragmented. When the hype around the
industry was at its height during 2004/2005, new vendors claiming to provide KPO services would appear on an extremely
regular basis. While many of them have not survived, a significant number did, and are still operating.
Datamonitor has split KPO providers into five broad categories:
• Global outsourcing providers: Includes those global IT services and BPO providers who have KPO
operations, such as Accenture, HP, IBM and Capgemini;
• Offshore outsourcing specialists: Includes India’s outsourcing giants, namely TCS, Infosys, Wipro and HCL
Technologies;
• BPO providers with KPO operations: Companies that specialize in providing BPO services and have a
dedicated KPO operation. These include (but are not limited to) Genpact, WNS Global Services, Aditya Birla
Minacs, EXLService and Firstsource;
• KPO specialists: Includes providers that offer services across multiple functions, such as Evalueserve, as well
as vendors that focus on specific skill sets. There are numerous examples of the latter type of company, ranging
from the small (less than 100 employees) to the larger player (more than 1,000 employees);
• Captive operations: Instead of outsourcing to a third-party vendor, some enterprises prefer to set up a captive
center in an offshore location, which delivers services back to the parent company. Examples of companies that
have gone down this route include General Electric, American Express, ABN Amro and JP Morgan.
Global giants have struggled to establish themselves in the KPO market

Whereas global giants like IBM and Accenture lead the way in horizontal BPO areas such as F&A BPO and procurement
outsourcing, they have failed to fully establish themselves in the KPO market. However, they certainly have the scale to
build up in this area, and are formidable competitors in the areas in which they are present
• Accenture: This firm is strongly positioned as a KPO provider in a number of key verticals, including energy and
utilities and telecommunications. It also has an offering focused on the capital markets sector, which provides
services such as such as furnishing information for clients' origination, research, sales, structuring and trading
activities across a wide range of debt, foreign exchange, derivative and money market products;
• IBM: IBM is able to leverage skills within its own organization for its KPO business. For example, IBM Research
is an advanced research and development organization which operates laboratories in the US, India, China,
Japan, Switzerland and Israel. It is worth noting that, prior to forming KPO provider Evalueserve in 2000, Alok
Aggarwal was director of emerging business opportunities for IBM Research, working out of both India and the
US;
• Capgemini: France-based Capgemini has been building up its KPO offering in recent years. The company now
has dedicated KPO centers in Mumbai, India and Krakow, Poland and its KPO services portfolio includes
reference data management and investment research for financial services clients, master data management for
the manufacturing sector and engineering services for the aerospace market;

• HP: The world’s second-largest outsourcer following its acquisition of EDS in 2008, HP delivers KPO services
through its Decision Support and Analytics Services operation. The division boasts over 400 employees and
provides services such as around marketing, sales, finance, supply chain and HR. Through the acquisition of
EDS, HP also acquired Mphasis, an Indian-based BPO vendor which provides KPO services including market
and risk analytics.
India’s leading outsourcers have well-established KPO offerings

India’s leading outsourcers – TCS, Wipro, Infosys and HCL Technologies – have all established KPO operations, often as
an adjunct to their existing BPO operations.
Another Indian vendor, Satyam, also had a significant stake in the KPO market, which it had recently expanded with the
acquisition of Caterpillar’s Market Research and Customer Analytics operation for $60m. However, Satyam is currently
embroiled in a major financial scandal after its CEO revealed in January 2009 that he had been running the company on a
fraudulent basis for an unspecified number of years. Satyam’s immediate future is uncertain, although Datamonitor expects
that the company will be acquired in the coming months.
• TCS: India’s largest indigenous outsourcer, TCS has developed a major KPO operation. Areas of expertise
include customer analytics, spend and procurement analytics, equity research and statistical analysis. TCS’ KPO
business received a major boost in October 2007 when, as part of its 10-year, $1.2bn deal with media
information giant Nielsen, it took on responsibility for a team based in the Indian city of Vadodara (formerly
Baroda) with expertise around information-management processes for Nielsen’s Retail Measurement Services,
one of Nielsen’s core products for packaged goods manufacturers and retailers;
• Wipro: Delivered under the banner of ‘Knowledge Services’, Wipro’s KPO offering includes services in the areas
of investment banking operations, research, analytics, reporting, planning and analysis and professional
services. In November 2006, Wipro appointed Ramit Sethi, formerly vice president of Infosys’ KPO operation, to
head up its own KPO arm;
• Infosys: Infosys’ KPO offering covers four main areas, namely research, analytics, financial planning and
analysis and publishing. The company claims to have around 500 staff currently working in its KPO division, and
it focuses on a range of industries, including banking and capital markets, resources, energy and utilities and
telecoms and media;
• HCL Technologies: HCL created its KPO business unit in 2005. In broad terms, it provides services around
supply chain management, business intelligence and analytics, telecom expense management and legal
process outsourcing. The company’s largest vertical market is manufacturing, but it also operates across most
other major verticals. However, its presence in the financial services space is relatively small, compared to some
of its rivals in the KPO market.
The leading pure-play BPO vendors have strong presence in the KPO market
In a similar fashion to the offshore outsourcing vendors, the majority of the pure-play BPO players in the KPO market have
well-established KPO offerings (with India as the global sourcing hub) that cut across a number of service lines and vertical
markets. Key players include:

• Genpact: India’s biggest BPO provider also has a sizable KPO offering, largely based around analytics. The
company’s services include business opportunity assessment, customer acquisition, growth and retention, risk
mitigation and operations improvement. Genpact itself grew out of the offshore captive operation of General
Electric, one of the first companies to experiment with outsourcing knowledge-based services, and its
experience has helped the company, now independent, compete in an increasingly crowded market. Genpact
claims to have 1,500 staff in its analytics business, working out of Gurgaon, Kolkata, Hyderabad and Bangalore;
• WNS Global Services: Formerly a captive operation of British Airways, WNS has grown into a major player in
the BPO market and is ranked second, behind Genpact, in the list of Indian BPO vendors. The company’s KPO
services encompass a broad spectrum, from supply chain and procurement services to marketing and brand
analytics, sales force and loyalty analytics, data management and reporting and primary and secondary
research. WNS expanded its offerings in this area in 2007 with the acquisition of Marketics Technologies, a
provider of marketing analytics;
• Aditya Birla Minacs: Formerly known as TransWorks Information Services, Aditya Birla emerged as a major
player in the offshore BPO market with the acquisition of Canadian contact center services provider Minacs
Worldwide in 2006. Minacs was particularly active in the automotive sector, and that focus is carried over in the
expanded company’s KPO offering (although it also has expanded into the financial services market). Aditya
Birla Minacs provides knowledge services around areas such as governance and process re-engineering, as
well as offering marketing services including research and analytics;
• EXLService: EXLService’s analytics operation came through its acquisition of Inductis, a provider of strategy
and analytics services to financial services industry (including insurance), in 2006. Prior to its takeover, Inductis
had annual revenue of about $20m and had some 250 employees based out of India, the US and Singapore.
Research and analytics continues to form the core of EXLService’s KPO operation, and financial services
remains the key vertical, although the company also has clients in the utilities, transport and telecoms sectors;
• Firstsource Solutions: As noted earlier in this report, Firstsource established itself in the KPO market with the
purchase of Pipal Research in 2004. The company’s KPO offering now runs from corporate intelligence and
financial research to analytics and enterprise marketing services, with clients drawn from verticals including
financial services (including investment banking and retail banking) technology media and telecoms, consumer
packaged goods and manufacturing.
KPO specialists are able to target specific industries and service areas
There are an extremely large number of specialist KPO vendors currently operating in the market. However, only a
relatively small number provide a full range of services across multiple industries.
Evalueserve, for example, is a KPO-specific company whose services range from investment, business and market
research to data and financial analytics and legal process outsourcing and whose customers are drawn from the
automotive, life sciences, energy and utilities, financial services and manufacturing industries, among others.
Most other vendors prefer to pick one or two specific parts of the KPO industry in which to specialize. Key areas of focus
include business and financial services research, market research, legal process outsourcing and publishing & content
services, and key vendors in each of these lines of business are shown in the table below.

Table 4: Analysis of key KPO vendors by service line
Business and financial Publishing and Content

Market research Legal Process Outsourcing
services research Services
Copal Partners Ugam Research Pangea3 Innodata Isogen
Amba Research Exevo Mindcrest Aptara
Adventity Tecnova Clairvolex Contech BPO Services
RocSearch Annik QuisLex DiacriTech
Aranca ValueNotes Clutch Group Apex CoVantage
This list above is far from exhaustive, and there is often overlap between the service lines, but it illustrates the
diversity of vendors operating within the KPO space.
Captive operations remain part of the KPO landscape

Captive operations have played a vital part in the development of the KPO industry, and they remain an important part of
the market. Many clients prefer to set up their own KPO operation (most often in India), rather than outsource to a third-
party, when the data to be analyzed is particularly sensitive, or it involves core intellectual property.
The most notable examples of captive KPO operations come from the financial services market. Institutions including ABN
Amro (now owned by a consortium including Royal Bank of Scotland and Banco Santander), UBS, Deutsche Bank and
Goldman Sachs have all gone down the captive route when outsourcing their knowledge-based services.
The captive model has also been utilized by companies looking to harness engineering skills in low-cost locations, including
firms operating in the automotive and aerospace industries, telecommunications providers, technology vendors, energy and
utilities firms and construction and industrial machinery manufacturers. Major examples include Ford, Intel, Motorola,
General Motors, Texas Instruments and Oracle.
In the wider outsourcing market, many former captives have either become independent companies in their own right (as
was the case with Genpact and WNS Global Services, formally owned by General Electric and British Airways respectively)
or been acquired by stand-alone vendors (for example, the purchase of Citigroup Global Services by TCS in 2008).
This general trend towards consolidation is likely to impact the KPO market over the next 12 to 24 months. It may already
have begun – Datamonitor notes the acquisition by Satyam of industrial equipment manufacturer Caterpillar’s market
research and customer analytics operation in April 2008. However, the sensitive nature of large proportions of KPO work
means that captives will remain an attractive option for firms concerned about the risks of outsourcing to a third party.

Go to Market
GO TO MARKET
Scale is of lesser importance in KPO than BPO

As shown in the previous chapter, the KPO market is extremely fragmented, with boutique stores serving a single service
line or industry co-existing alongside major multinational BPO vendors. In part, this competitive landscape is indicative of
the relative immaturity of the KPO sector, and Datamonitor expects further consolidation to occur over the next few years.
However, the existence of small-scale, highly focused vendors also illustrates one of the fundamental differences between
KPO and BPO: whereas BPO vendors typically harness economies of scale to deliver significant cost savings, the main
selling point of KPO is its ability to deliver targeted, domain-specific knowledge, with scale playing less of a part in a
vendor’s go-to-market proposition. It is worth noting that KPO vendors can deliver significant cost savings with just 10 or 20
employees.
Size does bring advantages
That is not to say that scale is unnecessary for success in the KPO industry. Size brings with it a number of advantages,
including:
• Access to talent: Larger companies may be able to attract more talent than their smaller competition, due in
large part to their greater ability to offer higher wages, greater benefits and more stability. Many workers are also
attracted by the chance to work for a prestigious organization, such as IBM, or by the company’s powerful brand
name (as part of the Tata Group, for example, TCS’ name is very influential);
• Ability to scale-up quickly: Large vendors tend to boast significant existing talent pools, which can be drawn
on should a client wish to scale up an existing deal in a short space of time. Smaller vendors may find it harder
to attract staff with the necessary skills at short notice;
• Dilution of risk: The size and experience of large KPO providers means that many customers tend to feel more
confident handing over confidential data and intellectual property. Smaller providers can be viewed as more
financially unstable and more susceptible to security breaches;
• Ability to provide services in a number of areas: Many clients prefer to utilize one vendor across multiple
functions, in order to maximize cost savings. This is only possible when using a larger service provider, whether
that be a BPO specialist like Genpact or WNS, or an IT services provider with BPO expertise, such as IBM or
Accenture.
Niche providers can outperform industry giants
Despite the advantages mentioned above, niche providers are capable of competing with, and even outperforming, the
giants of the outsourcing industry, for reasons such as:
• Flexibility and responsiveness: Larger companies tend to impose their methodologies and best practices on
clients, offering a ‘one-size-fits all’ approach, rather than responding to their individual needs, whereas a small
company can be more flexible and responsive;

Go to Market
• Domain-specific expertise: Niche vendors, by their nature, have highly targeted knowledge and expertise,
either in a specific service line or vertical industry. While a BPO vendor may provide, for example, legal process
outsourcing as just one part of its KPO offering, a pure-play LPO provider will have no distractions from its main
area of focus. Many clients will prefer to outsource its legal services to a vendor that does nothing else, rather
than partnering with a firm where expertise is spread across service areas;
So, provided they remain profitable and manage their business effectively, niche KPO providers should continue to
make up a large and significant part of the industry. There is also the possibility that, as the KPO sector continues to
grow, more boutique providers will appear, looking to take advantage of the expansion.
Technology as an enabler for KPO

KPO is a heavily people-oriented area, as it relies upon the knowledge and expertise of employees. However, vendors are
increasingly looking at ways in which they can harness technology as an enabler for improving KPO processes. At a simple
level, this can take the form of using data mining and warehousing tools, but there is also potential for specific systems to
be developed around KPO service lines.
The use of technology to improve performance is increasingly common in the BPO market. In F&A BPO, for example,
providers have been experimenting with using SAP systems to optimize ERP functionality for F&A processes. This is in
addition to developing platform-based offerings, where a proprietary software system is used to deliver a range of
processes. While such approaches are not readily applicable to all areas of KPO, a number of vendors indicated to
Datamonitor that they were looking into the potential of developing platforms for analytics services.
Platform-based delivery is a concept that has gained a great degree of traction among India’s BPO vendor community, as
its fits with their philosophy of providing the lowest cost services in the market, and plays to their strengths in software
development.
Analytics is the area of KPO which fits best with this approach, as it involves handling data from disparate sources, often in
diverse formats, using clearly-defined methodologies. Through delivering standardization across these processes,
technology platforms can improve efficiency and reduce costs.
The concern for many in the KPO industry is that increased standardization will hinder vendors from handling the individual
needs of their clients. This may be particularly true of large clients, who are more likely to demand a service tailored to their
own demands rather than accepting a homogenous service delivery model.
Potential impact of the current recession on the KPO industry

The world’s major economies are currently in the grip of an extremely damaging recession. Nearly two million jobs were
lost in the US in the three months to the end of February 2009, leaving the total unemployment figure at 12 and a half
million people (as of March 9, 2009). In January 2009, the International Monetary Fund cut growth forecasts for the world
economy to just 0.5%, including a 2% contraction in advanced economies.
The received wisdom, before the full scale of the recession became apparent, was that the outsourcing industry would
prosper during the downturn as customers looked to cut costs in order to remain competitive. In reality, the devastating

Go to Market
impact of the market turmoil on industries such as financial services, retail and manufacturing has meant that clients and
prospects are more worried about securing their very survival than they are about reducing costs through outsourcing.
Figure 2: Total Contract Value of Outsourcing Deals ($m) against Number of Contracts, January 2008 to
February 2009
25000 250
230
Total Contract Value ($m)
20000 210
Number of Contracts
190
15000 170
150
10000 130
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5000 90
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Total Contract Value Num ber of Deals
As shown in Figure 2 above, there has not been an overall increase in the total contract value of outsourcing deals signed
since January 2008. Indeed, total contract value in each of the three months to the end of February 2009 was lower than at
any time in 2008. If the predictions made at the beginning of the downturn had been accurate, the graph would have shown
at least one, if not both, of these indicators trending upwards as the months went on.
The number of outsourcing contracts being signed has also not increased appreciably as the recession has worsened.
Indeed, having peaked at over 200 deals in July, September and October, the level of activity has fallen under 150 in
January and February 2009.
The situation is, if anything, even worse in the BPO market. The total contract value of deals signed in 2008 was $15.1bn,
down 33% on the previous year. The only positive aspect was that the number of deals awarded did not suffer such a
precipitous fall, finishing at 151 compared to 172 in 2007.
The conclusion that can be drawn from this is that clients prefer to sign smaller BPO deals. Adding weight to this
hypothesis is the fact that five mega-deals (worth over $1bn) were tracked by Datamonitor’s IT Services Contracts
Database in 2007. In 2008, there were just three mega-deals.
Yet this trend towards smaller contracts could actually end up benefitting the KPO industry. Most KPO deals are relatively
small in value (less than $10m) and so should be more insulated from the general downturn in demand for large awards.

Go to Market
As mentioned previously in this report, KPO services could be well positioned in the current downturn as they deliver
benefits more quickly than some other areas of BPO, which can take up to 18 months to generate cost savings. Services
can also be delivered on a short-term project basis, which requires less of an outlay on the part of the client, allowing them
to reduce overall expenditure as well as cutting costs around their knowledge-based processes.
In general, most vendors are adopting a ‘wait and see’ approach, rather than making any more rash predictions around
future growth. The impact of the downturn has been so devastating and wide-ranging that it is extremely difficult to forecast
what the situation in key vertical markets, such as financial services, will be in six to 12 months time.
Unfortunately from a vendor perspective, most end-users are adopting a similarly cautious approach. This has led to an
increase in sales cycles, as clients take their time before making decisions around their outsourcing strategy. This will
certainly affect the performance of many KPO vendors in the short term, and could have more serious implications for the
market if, having delayed their decisions, potential clients then decide not to outsource after all.
Vendors may need to look beyond financial services
The financial services sector has been particularly badly hit by the recession, with the largest institutions suffering
particularly badly. This has been bad news for the KPO industry overall, which has a significant focus on the financial
services sector in general and on large banking providers in particular.
As a result, some vendors (generally those with a broader vertical spread of clients, rather than those focused specifically
on the financial services sector) have begun to look at opportunities in other industries. In the course of its research for this
report, Datamonitor noted that various vertical markets were suggested by vendors as possible growth areas including
manufacturing, where there is significant scope for outsourcing R&D services, and retail, where market research and
analytics could play an important part, but that the areas most commonly identified were healthcare, life sciences and
pharmaceuticals.
These industries are not just forecast to be growth areas for KPO services. In Datamonitor’s Global BPO Services
Interactive Model – 2009 (IMTC0297), both the healthcare and life sciences BPO markets are forecast to grow at a CAGR
of 7.5% between 2009 and 2013, compared to a CAGR for the overall BPO sector of 5.7%.
KPO has the potential to take full advantage of the growth in these areas. Vendors have already begun to make inroads in
areas such as clinical research, clinical data management and clinical submissions support, and there is scope for further
expansion in areas such as drug development and testing. Also, there is significant overlap between the healthcare and life
sciences industries and areas of legal process outsourcing such as patent drafting and litigation.
Pharmaceuticals companies are also experienced users of outsourcing services. GlaxoSmithKline already has a KPO deal
with TCS, signed in March 2007, as well as other outsourcing deals with Genpact and ACS, while Pfizer has awarded
contracts to HP and Cognizant and Johnson and Johnson outsourced its HR to Convergys in 2007 in a 10-year, $1bn deal.
Recommendations
While much of the hype that surrounded the KPO market in 2004/2005 has now dissipated, it continues to offer significant
growth opportunities for vendors. In order to ensure that they derive the most value from their KPO offerings, Datamonitor
makes the following recommendations to vendors looking to expand their presence in the market:

Go to Market
Investigate potential for growth in vertical markets outside of financial services
The current recession has created a great deal of uncertainty in the global economy. It had a particularly damaging effect
on the financial services market, which has been the backbone of the KPO market throughout its short history.
Consequently, vendors with a focus on this industry have seen drops in demand and are also experiencing growing
uncertainty over the future of their business. Datamonitor notes that, for those companies able to diversify their business
models, opportunities for growth still remain in other verticals, most notably the healthcare and life sciences sectors, and
these should be explored thoroughly.
Look to develop a multi-shore delivery model
India is, and will continue to be, the world’s major global sourcing hub. However, it is becoming increasingly necessary for
KPO vendors to be able to provide support to clients from a range of geographies, and in a number of different languages.
This is particularly relevant in the KPO space, where a significant proportion of customers are global corporations with
offices in multiple locations. High-level KPO work also requires a large amount of customer interaction, often face-to-face,
which makes having a location in close proximity to the client’s own facilities a top priority. Fortunately, there are a number
of potential delivery locations available, including China, Hungary, the Czech Republic, Mexico and Sri Lanka.
Use multi-shore delivery model to target emerging geographic markets
The growth of the KPO market has been driven by the mature outsourcing markets in the US and UK. Setting up in low-
cost locations, whether they be in Central and Eastern Europe, Asia-Pacific or Latin America, affords KPO vendors both the
ideal location and the necessary skills to also target opportunities in emerging geographic markets. Demand is increasing in
continental Europe, for example, with countries such as France and Germany offering significant potential for growth. Other
increasingly attractive markets include Australia and New Zealand, which can be served from near-shore centers in Asia-
Pacific.
Recognize that strong client relationships are vital to the success of KPO deals
As part of a KPO deal, clients are required to hand over extremely sensitive data, often of vital importance to their business,
to a third-party. Therefore, it is vital that the client trusts its outsourcing partner not to abuse the privileged information it has
been given, and to ensure that the data is not lost or stolen. This kind of trust can only be built up over time and requires a
high level of effort on behalf of both the vendor and client. The vendor can also reassure the customer by demonstrating
the resilience of its methodologies and the security of its processes, either through demonstration or by aligning themselves
with established business standards that cover process quality or security capabilities.

Appendix
APPENDIX
Methodology
• Primary research – Briefings with leading KPO vendors;
• Secondary research – Industry associations, vendor publications and existing Datamonitor research.
Further reading
Global BPO Services Interactive Model – 2009 (IMTC0297, January 2009)
2009 Trends to Watch: Business Process Outsourcing (BFTC2185, January 2009)
Finance & Accounting Outsourcing – Moving to Higher Value Services (DMTC2186, September 2008)
Business Trends: Understanding Your BPO Customer (DPTC0050, August 2008)
Global Delivery Locations for BPO – Focus on Latin America (DMTC2181, April 2008)
Ask the analyst

The Technology Knowledge Center Writing team
Ed Thomas, Analyst, Business Process Outsourcing
ethomas@datamonitor.com
Datamonitor consulting
We hope that the data and analysis in this brief will help you make informed and imaginative business decisions. If you
have further requirements, Datamonitor’s consulting team may be able to help you. For more information about
Datamonitor’s consulting capabilities, please contact us directly at consulting@datamonitor.com.
Disclaimer
All Rights Reserved.
No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form by any means,
electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher, Datamonitor plc.
The facts of this report are believed to be correct at the time of publication but cannot be guaranteed. Please note that the
findings, conclusions and recommendations that Datamonitor delivers will be based on information gathered in good faith
from both primary and secondary sources, whose accuracy we are not always in a position to guarantee. As such
Datamonitor can accept no liability whatever for actions taken based on any information that may subsequently prove to be
incorrect.

Trends in Knowledge Process Outsourcing - Growth Opportunities in High-Level Processes

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STRATEGIC FOCUS REPORT

Trends in Knowledge Process

• The KPO market continues to grow in maturity;

• Offshore delivery has remained a constant feature of KPO;

• Clients have concerns over the outsourcing of core business functions;

• The KPO market remains extremely fragmented.

© Datamonitor. This brief is a licensed product and is not to be photocopied Page 1

The KPO market continues to grow in maturity

Offshore delivery has remained a constant feature of KPO

Clients have concerns over the outsourcing of core business functions

The KPO market remains extremely fragmented

© Datamonitor. This brief is a licensed product and is not to be photocopied Page 2

The KPO market continues to grow in maturity 2

Offshore delivery has remained a constant feature of KPO 2

Clients have concerns over the outsourcing of core business functions 2

The KPO market remains extremely fragmented 2

Defining Knowledge Process Outsourcing 6

KPO vendors aim to go beyond cost arbitrage 10

The Origins of the KPO Market 12

Offshore delivery has remained a constant feature of KPO 13

Evaluating emerging KPO delivery locations 14

Clients have concerns over the outsourcing of core functions 19

KPO offers clients a range of potential benefits 20

Large organizations consume the most knowledge-based services 20

Global giants have struggled to establish themselves in the KPO market 22

India’s leading outsourcers have well-established KPO offerings 23

Captive operations remain part of the KPO landscape 25

Scale is of lesser importance in KPO than BPO 26

Technology as an enabler for KPO 27

Potential impact of the current recession on the KPO industry 27

© Datamonitor. This brief is a licensed product and is not to be photocopied Page 3

Ask the analyst 31

© Datamonitor. This brief is a licensed product and is not to be photocopied Page 4

Table 2: Acquisitions of KPO Vendors Since 2006 8

Table 3: Assessment of emerging KPO locations 15

Table 4: Analysis of key KPO vendors by service line 25

© Datamonitor. This brief is a licensed product and is not to be photocopied Page 5

Defining Knowledge Process Outsourcing

Definitions of KPO include a broad range of services

© Datamonitor. This brief is a licensed product and is not to be photocopied Page 6

Contract signings and M&A activity illustrate growing maturity of KPO

Table 1: India’s Top 10 BPO Providers, 2007-2008

Rank Company Name Position in Previous Year

Source: Nasscom, July 2008 DATAMONITOR

KPO acquisition activity

© Datamonitor. This brief is a licensed product and is not to be photocopied Page 7

Table 2: Acquisitions of KPO Vendors Since 2006

Buyer Target Main Activity of Target Employees Price Date

Source: Datamonitor DATAMONITOR

Many KPO vendors focus on specific vertical markets

The financial services industry is an ideal market for KPO

© Datamonitor. This brief is a licensed product and is not to be photocopied Page 8

© Datamonitor. This brief is a licensed product and is not to be photocopied Page 9

KPO vendors aim to go beyond cost arbitrage

Source: Datamonitor DATAMONITOR

© Datamonitor. This brief is a licensed product and is not to be photocopied Page 10

© Datamonitor. This brief is a licensed product and is not to be photocopied Page 11

The Origins of the KPO Market

The KPO hype begins to grow

Growing maturity opens up significant opportunities

© Datamonitor. This brief is a licensed product and is not to be photocopied Page 12

Offshore delivery has remained a constant feature of KPO