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We recently presented at the Outsourcing ventures 2008 in Pune on the overall supply side challenges in the KPO industry with specific focus on recruitment challenges. The key takeaways from the analysis were:

The market for KPO is huge. Based on conservative estimates, we think the market is worth $10 billion by 2014, growing at a CAGR of 20% from 2003.

There are demand side challenges currently such as the financial crisis which has resulted in a freeze of business decision making in the financial services firms this quarter. In addition, KPO sale still requires a leap of faith for the client (and convincing from the KPO sales) that an outsourced arrangement can work, it carries value and results in overall reduction in costs.

But we think the supply side challenges are more severe. As a statistic, only half of the business school graduates are fit for KPO jobs. The key skills required for KPO work such as the ability to take a complex business problem and break it up into workable components, scheduling those components, applying smart ways of completing the tasks, effective client communication and strong business writing skills are not necessarily taught in business schools directly. The KPO industry also needs to get involved in the training of the students to transfer this practical business knowledge to the students.

The other major issue from the supply side is that the project management level resources in this industry are hard to find and take a long time to groom internally. These type of resources are the the foundation on which a scalable organization can be built.

To read more, see the attached presentation:sga_recruitmentchallenges_presentation

In the short term, there is bound to be pain for the KPO’s as the retrenchment in the western markets for financial services companies leads to cuts in the offshore centers (either captives or contracted outsourcing). But there are some structural shifts that we think will drive long term growth of the KPO sector. These are:

1. Investment banks have usually been ‘fat-cats’ and though the top tier firms have had substantial offshore presence through captives, the layer below (mid-tier and small tier) have not had much much of a global workforce. Now, with the financial crisis hitting hard on consumers and businesses, there is going to be additional scrutiny by investors on the costs and profit margins of the banks (including these investment banks that have become commercial banks now). After the excesses of compensation and greed that has been evident to the market (and the reason for failure), investors are going to demand more austerity. They will not want to pay so much for research. They will also demand more research (productivity), higher quality research (depth and connection with reality) while forcing the banks to keep costs down. This is going to force the banks of all sizes to think deeply on the composition of their workforce for the future with greater global component to it. The parting comment here is that we might see the equivalent of the Microsoft business model where there is grassroots adoption of outsourcing across all tiers of banks, not just bulge or large bracket. This will drive the volume and breadth of work.

2. Traditionally we have seen ‘back-office’ outsourcing for KPO. Examples are external financial reporting, fund reconciliation, internal reporting and analytics to support decision making and many other such activities where the primary driver was cost arbitrage (just like Y2K was for IT outsourcing). We think the BIG shift to notice here, is that global sourcing will come into play for front end support now. As an example, our firm SG Analytics is involved in client projects that range from M&A diligence support, analytics support for restructuring business divisions, strategy projects for acquisitions (sector analysis, identifying targets, building business case studies etc). We think this is still the tip of the iceberg. The opportunity (and now the willingness of banks to actually outsource this type of work) will only increase. We would like to hear what other analytics KPO’s are seeing in their markets such as pharma, legal, business analytics and others.

3. Lastly, the pendulum of investments is (and will continue) to shift towards emerging markets like China, Brazil, Russia, South Africa and India. As more money flows in from institutional investors of all type (HNWI, PE’s, Corporate funds, Sovereign funds etc), you will see the need of quality investment research work being done by local KPO’s in these countries for local investment. The one’s that will be successful are the one’s that will leverage their experience gained serving the global markets to their local markets now.