Future of Knowledge Process Offshoring: The India Story

End of the India story? This is one question that featured in almost all national and internal newspapers, magazines, journals, TV channels and every other form of media in the last few months. The question was a generic response following the US subprime crisis which was later followed by oil price inflation, crashing stock market and a host of other developments.

Knowledge Process Offshoring has become the next big thing in India. After IT Services and BPO, it’s probably the next most widely discussed topic on the offshoring front. However, unlike IT and BPO, knowledge process is a very broad and a poorly defined term. Intellectual Property, Legal Research, Business/Market Research, Investment/Equity Research, Clinical Data Management, Animation, Documentation – the list is endless. So, how do we differentiate a “Knowledge Process” from a “Business Process”? The most significant differential feature probably is the kind of manpower that it employs – MBAs, CAs, CFAs, Lawyers, Doctors, and Engineers. Also, there is this additional attribute that is typically associated with a knowledge process – i.e. the business value of the offshored work.
Traditionally, a “Business Process” is offshored to:

• Invest time and resources to focus more on the core business;
• Reduce cost; and
• Leverage the time gap among geographies thus making the business, work round the clock, 24x7.

On the contrary, the outsourced processes that fall under “Knowledge Process Offshoring” are never non-core and are always critical to the organizations that offshore those. In essence, BPO is all about processing whereas KPO is all about execution.

However, it’s not so simple. There is considerable ambiguity with the processes and operational characteristics that define a business unit as a KPO operation. When a global investment bank opens up a business unit in India to do “equity research”, it’s called a captive KPO operation. However, how many times have you heard someone referring to the Indian units of Frost & Sullivan and Datamonitor as captive KPO units? – Hardly anyone.

The logic is simple. Companies like Goldman Sachs, Morgan Stanley, JP Morgan, UBS, Credit Suisse and Deutsche Bank generate revenue by doing equity research. Similarly, McKinsey, Boston Consulting Group, Bain & Co., Thomson, IDC, Gartner, TNS, IMS Health, Frost & Sullivan and Datamonitor generate revenue by doing business and market research. If you investigate further, you will find that, none of these companies experiment with a long-term third-party relationship and almost all of them boast of dedicated in house knowledge processing operations in India. Thus, it will be wrong to tag their operations in India with a captive KPO tag. The Indian operations can rather be called as subsidiaries of the parent entity. Had they been offshoring their equity/business/market research work to an India based third-party to do it for them, the case would have been different. On the contrary, Novartis doesn’t generate revenue by doing market research. Thus, when they open a center in India to do market research and forecasting, it becomes a captive KPO unit.

Essentially, while all third party knowledge processors can be tagged with the KPO tag, all captives can not be.

Also, there is ambiguity with the term, “KPO” itself. While the KPO providers claim that the services that they deliver involve interpretation, analysis, judgement and insight, they continue to label these services with a “knowledge process” tag. I will reiterate what I said earlier – processes follow a standardized flow to get processed and don’t involve interpretation, analysis, judgement and insight. How many times have you heard an IT company labeling its services with a “Process” tag? – Hardly any. The same logic applies to knowledge intensive works for which the word “Process” doesn’t look apt. The Noida based RocSearch made sense when it re-named the entire domain as “Knowledge Services Outsourcing”, in short KSO. Also, its time companies start differentiating themselves by being more specific to what their services are. In other words, while a RocSearch or a Grail Research or a MarketRx becomes an ISO (Information Services Outsourcing) Provider, a Pangea3 or an Intellevate or a Lexadigm becomes a LSO (Legal Services Outsourcing) Provider.

While Indian knowledge processors claim that, it’s the access to highly skilled manpower that has also been motivating global organizations to offshore knowledge processes – ask the outsourcers and they will have a different story to tell. Don’t trust me if you don’t want to but the fact is more than anything else, its cost arbitrage and geographic time difference. In fact, the geographic time difference between India and the US has led to the evolution of what is called “spot research”. “Spot Research” can vary from researching press releases on a certain issue to a quick opportunity assessment of a market.

Gurgaon, India, 8:00 AM IST: The Life Sciences practice manager of an outsourced information services provider logs on into his mail inbox to look for any new research request. Bob, a senior executive in a medium-sized New York based Pharmaceuticals Company wants to know the media’s reactions to a recent announcement by the US FDA. He has a presentation to deliver to an in-house audience the next day for which he wants some press releases. The request demands a “spot research”. The manager assigns the research assignment to a two member team which spends the entire day digging the internet to source anything relevant.

Gurgaon, India, 5­­:00 PM IST: The team spends half an hour to one hour for context relevance of the collected press releases and rejects the ones that don’t make much sense. The press releases are next sent to the manager for a final round of quality check. The HTML documents are than PDFed and appended to make one consolidated file to be sent to the client.

New York, USA, 10:30 AM EST (8:00 PM IST): The file is sent to the US based accountability team for review and delivery. The ever busy business development executive delivers it directly to Bob and requests for a feedback on the quality. Bob spends the next couple of hours to review the entire document, selects some of the already highlighted press statements and prepares a slide to be included in the presentation scheduled at 3:00 PM EST.

New York, USA, 3:30 PM EST: Bob is extremely happy with the outcome of the presentation – comes to his desk – writes a quick feedback for the quality of service and responsiveness. Bob is elated as he didn’t even spend $100 for something that could have consumed his entire day.

And you know what – they have got a fancy name for what they did for Bob. They call it an “Insight Map”.

The geographic time gap has been advantageous in another way. In today’s competitive business, you don’t have all the time of the world to introduce products and services. We have several case studies on global organizations which have become immensely successful by leveraging their first mover advantage. The geographic time gap has resulted in businesses working round the clock, 24×7. While operational efficiency has increased tremendously, organizations have been fast in planning and implementing strategies.

After analyzing the work activities of Pfizer employees, Jordan Cohen, Senior Director of Organizational Effectiveness at Pfizer learnt that employees spent 20% - 40% of their time in doing scut work – creating documents, manipulating and analyzing spreadsheets, scheduling meetings and researching. While these Ivy League educated MBAs were supposed to devise strategy, they were breaking their heads in googling and making PowerPoints. All these combined with the company’s annual budget cut of $4 billions in 2005 called for smarter and cost-effective ways to do work – resulting in the birth of OOF, short for Office of the Future. OOF is an outsourcing partnership between Pfizer, the Chennai based OfficeTiger and the Bangalore based Genpact. While it was born of a financial crisis, it brought a paradigm shift in the way Pfizer employees did their job. According to Nancy Steele, Executive Director of New Business Development at Pfizer, “Rather than spending six months analyzing a segment to understand whether it’s a market opportunity, we spend closer to three months”

What could have taken Nancy whole six months to reach to a conclusion on whether or not to focus on the said market, took only three months. Not only, it was cost-beneficial, it also saved quality man-hours.

As the cases indicate, Indian knowledge processors have been smart enough to leverage every possible advantage of being in India. Cost arbitrage, geographic time gap, skilled talent pool and a host of other factors have all acted together to result in this revolution – a knowledge revolution.

A section of experts anticipate an end of the Indian knowledge revolution by arguing that the country is slowly loosing its cost advantage to other emerging knowledge economies. However, I personally believe that the Indian knowledge story is far from over and the revolution is embracing an entirely new dimension – one that will see more and more KOs (Knowledge Outsourcers) starting their captive knowledge processing centers in this country and more and more KPs (Knowledge Processors) exploring other geographies across the globe. The Indian KPO structure is heading towards a hybrid model – a dedicated mix of in-sourcing and outsourcing. In other words, while companies will keep on exploring and executing the captive model, they will still continue to partner with third party knowledge processors to make sure that they get an independent execution and judgment of every business issue they face.

The brightest case example could be that of Novartis AG. The Switzerland based Novartis is the fourth largest global pharmaceuticals company with business interests in Pharmaceuticals, Biotech and Medical Devices. The company recorded sales revenue of $29.5 billions in 2007, a growth of 9.5% over 2006. Novartis as an outsourcer has been pretty active in India’s KPO space. The company has the experience of working with more than one India based knowledge processors – the prominent being the Bangalore based PharmARC Analytic Solutions and Manthan Services and the Gurgaon based Evalueserve. At a time when factors like ever-increasing R&D costs, patent expiries, shrinking product pipeline, tightening FDA regulations and other regulatory hurdles are all acting together to block the top-line growth of the leading pharma majors, offshoring is rapidly emerging as the preferred choice to reduce cost.

Novartis in 2006 redefined the Indian KPO landscape when it started its first full fledged knowledge process execution center in Hyderabad. A fully operational KPO cactive, Novartis Global Services India (GSi), as it is known, has got big expansion plans. While the opening of the captive marked a loss of business to PharmARC Analytic Solutions, the company is continuing to maintain its relationships with Manthan Services and Evalueserve, although might be on a small scale. While experts may argue that such an event is primarily driven by the motivation to further reduce cost, the Novartis case pin-points to an additional angle to the whole story.

The movement from third-party to captive clearly depends upon the type of work being outsourced. In Novartis’ case, while both PharmARC and Manthan were executing business sensitive processes such as Sales forecasting and pipeline intelligence, Evalueserve was also into more or less, the same kind of processes. When processes are business sensitive, issues such as data security and confidentiality take precedence over anything else. While Indian knowledge processors including PharmARC, Manthan and Evalueserve boast of robust data security protocols, mechanisms and technologies, from an outsourcer’s perspective, there is nothing like executing things in-house.

Another equally important issue is the challenge to retain trained intellectual capital. Importantly, the Indian knowledge processors earn in dollars and wages are paid in Indian rupees. While the Indian rupee continues to appreciate against the US dollar, the KPO space has seen a tremendous hike in wage growth in the recent past. With the market being increasingly competitive, prospective employees are being offered unexpectedly fatter pay packets. Over the years, employee turnover has emerged as the biggest threat to the growth of the industry. While Indian knowledge processors have been the worst hit, the client organizations are also getting the heat of the burn, more so the ones who are into a dedicated FTE model. Such a trend is in turn forcing client organizations to think and explore the captive model. In a third-party model, the employee gets paid a small percentage of what the client actually pays for him/her. In other words, if the client organization pays $15 per hour, the KPO provider (knowledge processor) retains a major percentage of it and pays the rest to the employee. In a captive mode however, the employee gets paid directly and that makes the pay packet looks fatter. In essence, organizations operating through the captive route are better positioned to attract and retain quality human assets.

As the Novartis case indicates, the Indian KPO space is up for an entirely new business model. Let’s not forget – it required only one Evalueserve to re-write the rules of the offshoring game. On the captive model front, the one Novartis is up and running.

While one may argue that the creation of more and more captives will make the third-party knowledge processors loose business, that’s unlikely to happen in the near future. Here is why?

• In the “Information Research & Analysis (IRA)” space, the pace at which the knowledge processors are moving up the value chain has been pretty fast. Majority of knowledge processors operate in the entire IRA value chain and have been building up niche expertise that will be difficult to replicate;
• Most global organizations, even if its spot research, don’t rely on one single provider. In the real world of business third party analysis and independent judgment is as critical as an in-house analysis. Who else can be these third parties than the Indian knowledge processors with a pedigree in providing independent analysis;
• The acquisitions, stake ownerships and financing deals that have been inked in the past clearly reflect the confidence that global organizations, VCs and private equity firms have over these knowledge processors. The US based Fortune 500 RR Donnelley acquired OfficeTiger in 2006. Genpact is 22% owned by GE. Warburg Pincus, the global private equity powerhouse has a majority stake in WNS.
• I strongly believe that there is still a lot work that can be outsourced which has not yet been detected by the Indian outsourcing radar. For instance, in a manufacturing organization, everything else except R&D, manufacturing and selling is non-core. The one question that the Indian outsourcing providers are increasingly asking themselves and their clients is – what else?
• Today the Evalueserves of India are fighting neck-to-neck with the McKinseys of the world. Be it the their illustrious list of clientele, be it the quality of business processes they execute, the employee motivating attributes that they boast of or the career path and professional aspirations that they fulfill, Indian knowledge processors are giving their global counterparts a run for money. The future will see global organizations struggling to choose between a McKinsey and Evalueserve and not between a captive and a third party.
• Most importantly, a captive model is not everyone’s cup of tea. There are thousands of small and medium enterprises (SMEs), all based in the US and Europe for whom offshoring is an equal strategic necessity.

Also, a third-party model brings along with a whole lot of operational advantages such as cost savings against infrastructure and operations. Also, organizations don’t get exposed to the risks of running a business in a country they are not accustomed with.

The future also belongs to “nested outsourcing”. “Nested Outsourcing” entails the offshoring of processes to an India based knowledge processor which offshores the same to another of its execution center located elsewhere. Essentially, the Indian knowledge processors are expected to more aggressively embrace geographic diversification:

• To address the continuing shortfall of skilled workforce in India;
• To execute processes that require local language capabilities; and
• To counter the impact on bottom-line due to rupee’s appreciation against US dollars.

Most importantly, a global delivery model hedges against uncertain risks (Political, Economic, Regulatory) typically associated with having an execution center in one location.

In essence, Indian knowledge processors are already in a position to pull up their socks following events of uncertainty. The only segment that will be at the receiving end following increased adoption of “nested outsourcing” is the prospective Indian workforce. Geographic diversification clearly means the movement of jobs from India to elsewhere.

In fact, the Gurgaon based Evalueserve is already up and running in Valparaiso, Chile and Shanghai, China. The Chennai based OfficeTiger is in Manila, Philippines for quite a sometime now. The Chennai and Bangalore based HP DSAS (HP Decision Support and Analytics Services) has got a delivery center in Shanghai, China.

The future will also see knowledge processors being forced to explore Tier II and Tier III locations. While for IT and BPO service providers, the move is driven only by the motivation to further reduce operational cost, for knowledge processors, the move will be much more strategic. Here is a real world case that will tell you – why.

In 2005, Pfizer, Inc., the largest global pharmaceuticals company announced an annual budget cut of $4 billions to counterbalance revenue loss due to multiple patent expiries. While the company handed off pink slips to 10% of its workforce, it also started exploring other cost saving opportunities – including offshoring. The company, sometime in between the last quarter of 2005 and the first quarter of 2006 engaged the Chennai based OfficeTiger to initiate a test run that included processing and execution of a range of works such as document creation, meeting support, research, spreadsheet support etc. Unfortunately, the initial test run didn’t work as expected. One of the reasons was the prevalent decentralization and fragmentation within OfficeTiger. For instance, research requests that came to OfficeTiger needed to be researched, synthesized, formatted, copy-edited and quality-checked for language and presentation. Essentially, each engagement involved multiple expertises and there were too many handoffs. The management took the initiative of centralizing the flow that resulted in a Pfizer-dedicated team of research experts, graphic designers, document creators, proofreaders and copy-editors.

OfficeTiger could do that because the company essentially was a BPO service provider which moved up to the KPO value chain and boasted off a pedigree in providing document creation and graphic designing services.

However, the same scenario could not have been as simple and straight forward for a pure-play knowledge processor. Knowledge support people such as graphic designers, document creators and other allied experts are not paid the same way as research analysts and financial analysts. Most of these people come from modest academic background and find it difficult to cope with the financial demand of a Tier I location. Also since most of these people do not work as billable FTEs, knowledge processors find it difficult to negotiate a premium wage for these employees. While the trend will continue to move towards a situation wherein dedicated long-term contract will be the most profitable prospect for any knowledge processor, it will bring it with the challenge of recruiting and retaining allied information service experts. A Tier II or Tier III location could thus be an option that makes huge strategic sense.

While all these are raw predictions, the Indian KPO industry, for sure, is not going operate the way its operating today.