The business of knowledge in
India By Swati Lodh Kundu
BANGALORE - After success in business
process outsourcing (BPO), India has begun to
taste the fruits of knowledge process outsourcing
(KPO). At present, the US alone accounts for 60%
of the KPO work outsourced to low-cost locations
like India, while UK and Canada account for 20%,
the rest coming from Europe.
India has
favorable government regulations that support
R&D (research and development). The country is
also adopting the intellectual property regime
formulated by the World Trade Organization (WTO).
The government offers financial incentives for
R&D as well. Customs duties on clinical trial
have been waived. Also, good clinical practice
(GCP) guidelines have been made mandatory.
R&D investment in the country has seen
45% growth during 2002-04, at about US$6.8
billion, positioning India as the third most
favorable destination for R&D investment,
according to a recent study. In addition to 85% of
the R&D carried out by the government through
its research labs and PSUs (public sector units),
several multinationals have set up R&D centers
in India. The Council of Scientific &
Industrial Research (CSIR), with 38 labs and 80
polytechnology transfer centers, has the largest
R&D network in India. Apart from it, there are
about 2,000 recognized R&D institutes. Every
year 6,000 PhDs come out from the 380 universities
in India. The country also has 2.5 million
graduates. All these factors make it a favorable
cost-effective location for research and
development.
According to a report by
Evalueserve, the Indian KPO market will grow about
49% by 2010. On the other hand, the BPO sector is
slated to grow 30.6%. For clients, outsourcing
knowledge-based work leads to significant cost
savings. While an American MBA graduate earns
$85,000 a year as a starting salary, his Indian
counterpart earns only $12,000 - a cost savings of
85%. A PhD in the US earns $80,000 annually, while
his Indian equivalent earns around $16,000.
Due to a 12-hour time difference between
the US and India, a KPO vendor can provide a
24-hour work-cycle to the US client. According to
the survey, 30% of the revenue of a typical KPO
vendor is retained in the form of profits, while
35% goes to employee costs. The remaining 35% goes
to overhead costs like transportation, food,
telecom, security, etc.
KPO vs
BPO KPO involves high-end processes like
valuation research, investment research, patent
filing, legal and insurance claims processing,
online teaching and media content supply. In BPOs,
there is a pre-defined way to solve a problem and
employees are trained to learn that method. BPOs
will normally include transaction processing,
setting up a bank account, selling an insurance
policy, technical support, voice and email-based
support. In case of KPO, however, there is no
pre-defined process. One can look at it as
transformation of unsorted data into useful
information.
India, with its firepower of
chartered accountants, doctors, MBAs, lawyers and
research analysts is well positioned to grab a big
slice of the global KPO business. Those battling
with India in this arena will be Russia, China,
the Czech Republic, Ireland and Israel. China is
likely to get a bigger share of the Japanese and
Korean markets due to cultural similarities.
Russia, with its third-largest army of engineers
and doctors in the world, will make a bid to
capture the European KPO market. Close proximity
and cultural compatibility will boost its position
as an attractive nearshoring country for European
businesses. But Cold War inertia and isolation
from the US in the past will hamper its overall
growth as a viable KPO base. It will also face
competition from Ireland and the Czech Republic in
the European market.
India, with its
knowledge base and lower costs, will be leading
the pack in the race for KPO businesses. According
to the Evalueserve report, India will capture more
than 70% (approximately $12 billion) of the KPO
territory by 2010. The most sought after will be
professionals well versed in data search and
management. Biotech and pharma graduates will be
in demand. While data search will constitute 29%,
pharma and R&D will form 18% of the
$17-billion global KPO pie. Other hot areas will
be animation, publishing, remote education, VLSI
(Very Large Scale Integrated) chip and engineering
design.
With more and more KPO business
coming into India, BPOs will try to upgrade
themselves into KPO units as revenue per unit is
more in the latter than former. And the first to
benefit will be those already working in a BPO,
with some degree of specialization. According to
Evalueserve estimates, "Drafting and filing of a
patent application costs anywhere between $10,000
and $15,000 [in the West]. Offshoring even a small
portion of the process to an agent in India can
save up to 50% for the end-client." India is
already a hub for those willing to outsource their
R&D operations, be it chip design or pharma
and biotech research. In fact, quite a few
companies are locating their R&D divisions in
India. Some US law firms have set up their captive
centers in India. Others are collaborating with
Indian firms for the same.
Also, being
high up in the value chain, KPOs offer
considerably higher incentives to rope in talent.
The Evalueserve report reveals that whereas an
Indian BPO executive earns about $6,000 a year,
his KPO cousin is sure to make anywhere above
$8,800 - a huge 46% difference. The salary gap is
not limited to BPO versus KPO. Whereas a fresh
medical graduate or lawyer earns Rs150,000
(US$3,400) annually, a job with KPO offers at
least 500% more. Fresh doctors and lawyers take
home a cool Rs600,000-800,000 salary package at
KPOs. Compare this with the pay packets of MBAs
from non-IIM (Indian Institute of Management)
institutes, who take home Rs300,000-500,000 per
annum, or the yearly package for fresh IIM grads,
at Rs400,000-600,000. Economists and statisticians
are also in great demand for data modeling and
analysis.
In contrast to BPOs, KPOs
require understanding of how a client works. But
the contracts in the KPO industry will be of much
shorter duration. They may range anywhere from
three weeks to six months. So delivering
high-quality work will be a major challenge.
Several Indian BPOs have recognized this
opportunity and are in the process of developing
KPO capability.
Over the last couple of
years, small Indian KPOs have emerged and are
doing well. However, it's MNCs like GE and
Evalueserve, with their huge resources, which have
been doing better. GE has been hugely successful
with its 2,000-strong workforce at its research
center in Bangalore. Efunds has more than 80% of
its workforce in India. The figure for Evalueserve
is even more astonishing - Out of 650 employees
globally, 600 are based in India.
Clearly,
in the future, it's KPO rather than BPO that will
put India in the cutting edge of outsourcing
business. Moreover, with countries like Ukraine,
Hungary, Belgium, the Czech Republic and the
Philippines offering BPO services at a lower rate,
India will have to tilt toward KPO more heavily at
some point. India, it is estimated, will have more
than 250,000 KPO professionals by 2010. At
present, the figure stands at a mere 25,000.
However, KPO will not crowd out the BPO
business altogether. Revenues in absolute terms
will always be higher from BPOs. While KPO exports
from India are projected at $12 billion by 2010,
BPO exports will be much higher at $20 billion for
the same year. But India may start to lose its
low-cost advantage in the future, as low-end
services may move to cheaper destinations like
Ukraine, Belarus and Malaysia. Developing its KPO
industry is thus an absolute necessity for India
to stay ahead in the global outsourcing game.
Swati Lodh Kundu has a Masters
in Economics from the University of Calcutta.
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