Mumbai, Dec 14: After achieving great success in BPO, India is now looking for a big leap in KPO. Due to abundance supply of intellectual and creative workforce at very competitive cost in the country, international companies are heading towards India to set up their business establishments.
The myth that Indian companies can only provide 'software coolies' is soon changing to the reality of Indian companies being capable of almost anything, even rocket science!
India has a large pool of knowledge workers in various sectors ranging from Pharmacy, Medicine, Law, Biotechnology, Education&Training, Engineering, Analytics, Design&Animation, Research&Development, Paralegal Content and even Intelligence services.
India's knowledge process back-office (KPOs) firms are venturing overseas for acquisitions as they scale-up, struggle for talent, try to beat a rising rupee and face competition from big software firms. "Cross-border M&A (mergers and acquisitions) market has opened up for KPOs," said Sumir Chadha, managing director, Sequoia Capital India.
The knowledge process sector faces the problems of a small market and niche opportunities. "..as the KPO industry booms the supply side will struggle to meet demand," M.S. Krishnan, professor at the University of Michigan wrote in a recent issue of Global Services magazine Private equity firms are also pumping in money to fund these acquisitions as returns from investments in KPOs are fairly high. "This sector generates a lot of profit with gross margin in the 60s," Chadha said. In the first nine months of 2007, private equity and venture funds invested $101 million in eight Indian KPOs compared to $135 million in seven companies in 2006, said Arun Natarajan of Venture Intelligence.
In times of currency fluctuations it makes sense for KPOs to diversify revenues through overseas buys.
"If the cost is in rupees and earnings are in dollars it makes sense to reduce rupee costs," said Natarajan. Overseas acquisitions also give these companies access to specialised talent which may not be available in India. Krishnan, in his forecast for 2010, said, "Providers will acquire small firms globally to gain domain knowledge and new customers." Recently, niche structural engineering KPO firm Mold-Tek Technologies Ltd bought a company in the U.S. for around $1.5 million and is now eyeing another.
Its Chairman and Managing Director, J. Lakshmana Rao, said the acquisitions were necessary as Indians did not possess the right skill-sets for the specialised work in building high-rises. "Buying a company in the U.S. or Europe gives stability and scale. Also, overseas companies tend to trade at lower valuations," Chadha said. A huge opportunity is opening up in outsourcing of manufactured products and engineering services from India, said Darius Pandole, partner in New Silk Route Advisors.
Most KPO firms in the engineering space were looking at the dual-shore manufacturing model, with a small base in any country to cater to clients on just-in-time delivery basis but with the main manufacturing hub in India, he added. Another impetus for growth is that established software services companies are also launching their own KPO arms as they endeavour to go up the value chain.
Knowledge processes in analytics, equity research, legal and financial services sectors are gaining ground in India. However, Shankar Narayanan, Managing Director of Carlyle India, cautioned that lack of clarity on the objective of an acquisition, absence of a short-term plan and over-valuation of assets were some challenges KPOs faced.
This talent is soon being discovered and tapped by leading businesses across the globe resulting in the outsourcing of high-end processes to low-wage destinations. Hence Knowledge Process Outsourcing involves offshoring of knowledge intensive business processes that require specialized domain expertise.