kpodemand_071107
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Ministry of Communication(ITES Secretariat)
With the financial support of
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6-9 November 2007
Accra, Ghana
KNOWLEDGE
PROCESS
OUTSOURCING
Global Demand StudyGlobal Demand Study
2
Contents
I . Introduction....3
II. The KPO Industry.....................................8
III. Setting up Captive V/S selecting a vendor...25
IV. Success Story: India..29
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Third party vendors surpassing Captive KPOs Companies that have not yet set up captives and SMEs with engagements sizes being much smaller are
highly likely to choose the Third Party vendor model. Third party vendors have an upper hand against the Captive KPO due to the following reasons:
Faster initial set-up Faster and easier initial staffing Better long term employee retention More flexibility Better Cost Control
Initial set-Up phase analysis shows that a Third party KPO takes just above 3 months to beginoperations whereas a Captive KPO takes over 14 months to begin operations .
FTE : Full TimeEmployees
Initial set-up time comparison between Captive and Third party vendors
7
Services rendered by the KPO industry
The KPO industry is rapidly growing and newer services are being targeted to be outsourced.
Along with the services depicted in the adjacentfigure, some of the newer emerging areas in theKPO industry are:
Audiovisual services Training services Education services
KPO Industry services
PharmaR&D
Animation &Design
Writing &ContentDevelopment
DataAnal ytics
Investment Analysis& EquityResearch
Legal Services&IP Research
LearningSolutions
Engineering &Design
Business &TechnicalServices
Business &Market
Research
By 2011 the KPO industry is expected to reach$ 17 billion industry.
The services rendered by the industry then,along with their distribution is illustrated in thepie chart.
Newer segments are being added to theindustry with a cost-benefit analysis, adding to
the ever growing KPO industry.
8
The KPO Industry
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An overview of the Industry
As per NASSCOM India estimates, the KPO industry isexpected to grow at 45% by 2010 to a $16 billionindustry
Some countries have started developing expertise inspecific services in the KPO industry.
Countries like India and China are major suppliers of the KPO industry and have established themselves inmost of the sectors
Although nations like India, China are well established
and are considered as the leaders in the industry theyface significant competition from countries like Irelandand Philippines, which are the new emerging nations. Russia, Ireland, India.Pharmaceuticals
New Zealand, India.Legal
China, Russia, India.IT/R&D
Russia, India.Healthcare
China, Ireland, India.Financial services
Philippines, India.Content
Philippines, China, IndiaAnimation
CountryService Segment
Northern Ireland, Bangladesh, Ghana, Korea, Mauritius, Nepal, Senegal, SriLanka, Taiwan, and Thailand
Next in Line
Brazil, the Caribbean region, Eastern Europe, Malaysia, Israel, Singapore, andVietnam
Challengers
India, China, Canada, Mexico, South Africa, Ireland, Russia, and PhilippinesOffshore Leaders
Nations that vendor to the KPO industry
Major Players in the KPO industry
10
The Future of KPO Industry
46%17.01.29Total (USD bn)39%2.00.2R&D
40%3.00.25Biotech and Pharma
N/A2.00Remote education and publishing
N/A0.30Medical content and services
N/A0.30Paralegal content and services
46%1.40.1Animation and simulation services
29%2.00.4Engineering and design
70%0.40.01Market research and competitive intelligence
N/A0.20Research and information services in HR
50%5.00.3Data Search, integration and management (Analytics)
N/A0.40Equity, finance and insurance research
CAGRFY 10FY 03KPO Sectors
Analytics is expected to be the largest segment in KPO industry
Segmental growth in KPO industry
Largest sectorData Search,integration & management
The fastest growingsector
Market research & competitiveintelligence
11
Demand Side of the KPO industry
U S , 6 0 %U K , 2 0 %
E u r o p e ,2 0%
U S U K E uro p e
KPO services help to improve the time-to-market,access to special skills, absorb peak load andenhance organizational effectiveness.
Foreign small and medium enterprises are alsolooking at KPO services to cater to their high-value project-specific activities.
Developed economies, such as the US, UK, and countries in Western Europe are increasingly facing ashortage of highly trained and specialized professionals in various knowledge-intensive high-skill sectors.Figure above shows the country-wise contribution to the demand side of KPO.
US, UK, Germany and France are the countries that drive the demand for the KPO industry. However, USearns the maximum from outsourcing and a comparison of t hese nations is shown below.
0.57
0.440.34
Cost Savings forCustomers &Investors
Direct Benefits
Value of LabourRe-Employed
0.50-
0.53
0.07
For every $1 spent For every 1 spentUS earns$1.14-$1.17
France earns back 0.86
Germany earnsback 0.74
0.36 0.36
0.05 0.03
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Benefits of KPO Along with the cost effectiveness, countries can expect more than one of the following benefits:
Legal ProtectionStructural Issues
Labour LawsUnsuitable Business Processes
Governmental PoliciesManagement Attitude and Strategies
Regulatory relatedCompany Specific
Some impedimentsto outsourcing
Organisation does not have to build their own headcount and have to spend less oninfrastructure
Peak load absorption
Complexity Reduction
Access to Global Reach
Enhancement of ServiceQuality
Accelerating Processcycle
Availability of skilledworkforce
Significantly reduce the complexities involved in managing and continuous knowledgebuilding of human resources and concentrate on core activities
Reduction in cost of investment in facilities, infrastructure and human resources to alarge extent by outsourcing to a KPO vendor having global presence
Offshore centres have been able to make dramatic improvements inp rocess qualityand productivity as compared to that in the parent location
Outsourcing non-core activities to specialized firms that are better, faster and moreefficient at managing these processes, can accelerate the process cycles and reduceturn-around time.
Supply of skilled labour in most of the countries supplying KPO has been increasingat a steady pace.
13
The Supply Side of KPO
KPO is centered on professionals possessing the right skills. Hence, KPO operations arelikely to evolve in countries with the highest educational standards, providing a largenumber of highly qualified professionals (Engineers, MBAs, CFAs, lawyers etc.).
The supply side of the KPO industry can be classified into following major regions: South East Asia-Pacific
Countries providing KPO services in this r egion include India, China, Philippines and Malaysia The Asia-Pacific region is the leader in the supply side of the KPO industry due to contribution by countries
like India and China. The labour costs are pretty low and skilled labour is available in abundance. Countries falling in this region can provide a 24X7 support to western countries.
Europe Countries providing KPO services in this region include Czech Republic, Ireland, Poland, Hungary and
Russia. Outsourcing to Europe provides two primary advantages viz. Low risk profile and Cultural and geographical
proximity to Western regions. Latin America
Countries providing KPO services in this re gion include Brazil, Chile and Mexico. Similar benefits as that of Europe.
Middle East Includes Israel, and is yet to develop itself as an outsourcing region.
14
South East Asia-Pacific
Advantages
Supportive Government policies.
24X7 support due to time zoneadvantages.
Falling telecom rates.
Availability of skilled labour.
Huge labour pool.
Disadvantages
Unreliable power supply outside thetop ten metropolitan regions.
Skilled labour mainly available in thetop ten metropolitan locations
Employee turnover ratio is high
INDIA
Advantages
A large numbers of bilingual engineerswho speak in Japanese & Chinese.Thus, it is uniquely positioned to tapthe Japanese and Korean markets.
China is building networks, particularly telecommunications.
There are excellent opportunities for 24x7 support.
Business transparency is increasing.
Low infrastructure costs.
Disadvantages
Trade policies and over regulation of Chinese government has hamperedgrowth
Intellectual property concerns linger.
Weak command over English languageacts as a strong disadvantage. There iscultural incompatibility as well.
Employee wages are on the rise.
CHINA
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South East Asia-Pacific (contd)
Advantages
Business friendly government policieswith respect to tax and set-up policies.
Large skilled labour pool at low costs
24X7 support can be provided to thewestern countries
Employee turnover is 5%
Cultural closeness to the westernregions.
Disadvantages
High corruption levels
Poor risk profile in terms of legacy of natural disasters and data theft.
Though the policies are in place, procedures are time consuming.
Strict labour laws.
Political instability.
Infrastructure is weak.
PHILIPPINES
Advantages
Attrition rates are very low.
Supportive government policies.
Strong language skills.
Perfect geographic location whichconnects the eastern and the westerncountries.
Skilled labour available.
Disadvantages
Small labour pool
Low service maturity
MALAYSIA
16
Country-wise comparison of the South East Asia-Pacific Region Although Chinas population is 16 times the size of Philippines, its pool of suitable young professional
engineers is half of the suitable candidates from Philippines. In India the overall quality of the educational system, apart from the top universities, needs to improve
significantly. A comparison showing the number of suitable candidates out of a possible 100 graduates with
relevant degree that could be employed if there was a demand for all of them is shown below.
Asia
Country Name
Engineer Finance/Accounting
Generalist
China
Philippines
Ind ia
M alaysia
20
10
15
30
15
25
25
35
25
20
10 3
Asia
Country Name
Engineer Finance/Accounting
Generalist
China
Philippines
Ind ia
M alaysia
20
10
15
30
15
25
25
35
25
20
10 3
17
Europe Eastern Europe has 40 to 50 provincial cities with universities large enough to supply a highly skilled
labour force at lower labour cost. Outsourcing here would help to spread potential risks across a portfolio of locations with different risk
profiles by taking into account the reliability of infrastructure, political stability, and the possibility thattalent might emigrate be enticed by competitors, or prove less capable than anticipated.
Countries like Russia could play a major role in the KPO industry if it were to introduce changes in itslabour policies
If proper measures are taken by the European countries for development of outsourcing, Europeanregion can catch up with Asian nations.
Advantages
Availability of skilled labour Huge labour pool
Disadvantages
Telecom infrastructure costs are high. Cultural problems. Governmental policies act as a
hindrance. At the middle and lower levels English
proficiency is relatively poor.
RUSSIA
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Europe (contd)
Advantages
Good government policies.
The telecom infrastructure is good.
Good western culture affinity.
Proficient skills in Europeanlanguages.
Political stability.
Disadvantages
Intellectual property security problem
Salaries and other costs are on the rise.
CZECH REPUBLIC
Advantages
Literacy rate is 99.9%
Low or no political risk in the country
Solid infrastructure.
Unique blend of language andcommunication skills available.
Favourable government policies
Disadvantages
The labour pool is pretty small.
Labour costs in Ireland are high.
IRELAND
19
Europe (contd)
POLAND Advantages
Business friendly governmental policies with respect to FDI.
Good public infrastructure.
Skilled labour available.
Poland has a strong cultural affinitywith Germany and the rest of Europe
Good proficiency in languages likeEnglish, German, French and Spanish.
Disadvantages
Cannot provide 24X7 support to thewestern countries.
Wages are on the rise
Advantages
Liberalized telecom structure.
Good real estate availability.
Skilled labour available.
Strong western cultural affinity.
Proficient skills in English, Germanand French languages.
Closely located to European countries.
Disadvantages
Labour pool is limited.
Cannot provide 24X7 services to thewestern regions
HUNGARY
20
Country-wise comparison of the European Region Job candidates from Russia are well-educated but often lack grounding in practical skills
from their university education. Poland has nearly five times suitable qualified engineers as compared to the much more
populous Russia. Figure below shows the number of graduates out of a possible 100 with correct degree
could be employed if there was a demand for all 100.
10
50
15
20
40
30
50
50
50
10
20EasternEurope
Country Name
Engineer Finance/
AccountingGeneralist
Russia
CzechRepublic
Poland
Hungary 30
10
50
15
20
40
30
50
50
50
10
20EasternEurope
Country Name
Engineer Finance/
AccountingGeneralist
Russia
CzechRepublic
Poland
Hungary 30
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Latin America Latin American regions have a strong cultural affinity with the western regions. However, due to cost factors and lack of significant talented labour pool, these regions are
lacking behind Also, these regions cannot provide a 24X7 support to the western regions since they fall in
the same time zone. Often labour policies act as a hindrance in outsourcing of services.
Advantages
Abundant real estate at cheap rates
Low operating costs for business
Excellent telecom and network services available
Labour costs are cheap
Disadvantages
Strict labour laws
Brazil had slow growth rate (GDP grew by only 2.3 % a year from 2000-2005
Weak English language proficiency
Lack of management skills
Less man power
Brazil
22
Latin America
Advantages
Low levels of corruption
Business friendly government policies
Low electricity costs
Transparent legal environment
Strong telecom infrastructure, railwaysand roads.
Disadvantages
Small labour pool because of small population
Spanish is a must for doing business inChile.
Complex banking system
Several visa and immigration problems.
CHILE
Advantages
Labour costs are low.
Cultural proximity to the westerncountries.
Disadvantages
Mexico has an underdevelopedrecruiting industry.
Poor language skills
Labour skills are poor
Countrys landscape for IT vendorsranks second worst among the lowwage countries.
MEXICO
23
Country-wise comparison of the Latin-American Region
Brazil is one of the most populated nations in the Latin-American region; however it has asmaller size of population which will cater to the KPO industry.
Figure below shows the number of graduates out of a possible 100 with correct degreethat could be employed if there was a demand for all 100.
LatinAmerica
Country Name Engineer
Finance/Accounting Generalist
Brazil
Mexico
Note: Data for Chile was not available
13
42 35 11
13 8
LatinAmerica
Country Name Engineer
Finance/Accounting Generalist
Brazil
Mexico
Note: Data for Chile was not available
13
42 35 11
13 8
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Middle East
Israel has performed extremely well in high technology areas. Software companies form a major part of Israels industr ial production and exports. However, it is a new entrant in the KPO segment and will have to develop itself in order to attract other
segments in the KPO industry. Currently there is no other nation from Middle east that vendors to the KPO industry. However, with
changes in governmental policies and tie-ups with US one can expect a major growth in these nations aswell.
ISRAEL Advantages
Skilled labour available.
Highest per capita engineers.
Active government funding.
Strong education system
Diverse population
Disadvantages
Small labour pool
Politically unstable
25
Setting up a Captive v/s Selecting a vendor
26
Selection of a KPO vendor
Country Specific Elements
Cost Savings Availability of Skilled Professionals Personal Connection Project management skills and quality
certification Language and culture Telecommunication infrastructure Intellectual property protection Political stability and support Time zone difference Country image Software and hardware resources
Company Specific Elements
Company size Vision, mission, strategy and
objectives. Credibility Work ethics and culture Data security Security practices and initiatives Competitive infrastructure Skill set
There are various factors which play a significant role in choosing a KPO vendor which aresegregated into two categories viz. Country specific and Company specific elements.
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Selection of a KPO vendor (contd.)
Over and above the factors mentioned earlier, the other important aspects thecompanies should look into are: Security Practices and Initiatives
Though security certification is a minimum requirement, internal security policies andsafeguards against vendors personnel are more i mportant.
Some of the security compliances that the co mpanies look for are: Network Security Compliance Personal Security Compliance
Physical Security Compliance Competitive Infrastructure
Real estate is being developed to incorporate state-of-the-art telecommunications technology(see example) in order to create smart buildings that have fibre optic cabling, alternativepower sources, and high-capacity, high-speed dig ital networks
Easy accessibility to persons and documents Skills Sets
The human resources at the vendor should possess certain basic skills sets as per therequirement of different business segments
28
Challenges in setting up a KPO Operational Challenges
Internal (lack of talented pool, rising wage rates etc.) Competition (newer entrants, better abilities etc.) Industry (infrastructure, amenities etc.)
High Level of Demand for Quality Keen understanding of how client works and what his exact needs are. The client will not look at dollar fi gures but will be mainly concerned with quality of services.
HR related Issues Recruiting and Training Retaining and Nurturing talent
Company Branding Sales Marketing
Innovation and differentiation Offer new types of services simply not available in high-wage countries for cost reasons
Cross cultural skill requirement
Understanding and appreciating of intercultural differences ultimately promotes clearer communication, builds trust and yields tangible results in terms of business results
29
Staying Competitive
At Operational Level
Skills Upgrade Staff Retention Better Security Better Control Mechanisms Improve SLAs to Improve Quality
At Strategic Level
Attract Better Quality Professionals Bring In More Capital Form an Effective Industry Association Collaborate with Service Accrediting
Organisations Sales and Marketing Governmental Intervention and Policies
To stay ahead in the global KPO market, vendor has to develop its indigenous KPOniche to maintain its leading edge. Few ways of overcoming the challenges are:
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India, The Success Story
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India, the Success Story India has been called the back-office of the world by several research and consulting organizations. There are certain advantages of outsourcing to India such as:
Successful BPO industry The BPO and the IT-ES sector success laid a very strong foundation for the KPO industry in India. The BPO and IT-ES sector gave a strong image to India as well.
Largest skilled labour pool Skilled labour is available in abundance in India w ith many prestigious technical universities and business schools. With nearly 60% of its population between the age of 15-59 and more than half below the age of 25, India has significantly large
number of people in working age group.
Competitive labour costs Although the labour costs are on the rise, they are still considered very cheap as against the western regions. Despite wage inflation averaging 10-15% annually, companies are able to leverage declines in telecom and other overhead costs,
productivity gains and economies of scale to sustain cost advantage.
Supportive Governmental policies There is a stable and supportive political environment in India. The labour policies are liberal as well. Proactive measures are taken by NASSCOM and Government of India to realise success in KPO sector like BPO and IT-ES sectors.
Competitive Infrastructure Reliable telecom and utility infrastructure support within Indias special IT parks. India has started taking measures in ensuring that it can match international standards of infrastructure. It has one of the most
competitive telecom rates world wide and several IT majors are now well established in India.
Conducive business environment The government has taken initiatives to focus on the issues of data privacy, information security, and Intellectual Property Rights with
acts such as Information Technology Act 2000 etc.
Companies are ensuring certification of standards like ISO and matching their framework to the CMM levels.
32
Future of KPO in India India has already employed over 25,000 professionals in the KPO sector and this figure is expected
to grow to over 250,000 professional by 2010. Figure below depicts services that will be outsourced to India along with their break-up, 5 years from
2006.2 % 9 %
3 3 %
1 %1 3 %
1 3 %
2 0 %6 %
2 %
F in a n c e A n im a t io nD a t a & M a r k e t R e s e a r c h H R & C o m pL e g a l D e s ig nE d u c a t io n P h a r m a a n d M e d ic a lR & D
According to Evalueserve, Indian KPO sector will increase its sh According to Evalueserve, Indian KPO sector will increase its sh are in the global KPOare in the global KPOsector to 71% by 2010. The KPO market in India is expected to insector to 71% by 2010. The KPO market in India is expected to in crease to USD 12crease to USD 12billion by 2010 reflecting a CAGR of 49.5%billion by 2010 reflecting a CAGR of 49.5%
Full study available upon request: [email protected]