India’s KPO Industry – Current Market Size and Expected Growth

In 2006-07, the KPO industry in India accounted for more than two-thirds of the global revenue and Evalueserve’s earlier estimates in 2004 and 2007 assumed India would continue to account for two-thirds even when the industry’s global revenue reached $16.7 billion. That assumption was based on India’s advantage over other emerging markets with respect to the availability of talent, English language skills, and lower wages (e.g., 15-20% lower than China and 40-50% lower than Eastern European and South American countries). However, several factors have since pushed global firms to reconsider their offshore outsourcing strategies.

The annual attrition rates in Indian KPO firms soared to 30-35% during 2006-08. Unfortunately, there was an irrational exuberance and large MNCs were offering exaggerated salaries to support their burgeoning offshore captive centers in a war for talent. The unintended consequence was even more costly attrition for all firms during this time. This ‘Lemming Effect’ and the fact that venture capitalists were readily funding any firm that was in the KPO sector, provided the impetus for annual local wage inflation rates to hit a remarkable 19% during 2006-09.

At a macro level, the euphoria surrounding the growth of the Indian economy and the significant influx of Foreign Institutional Investments led to a 25% appreciation of the Indian Rupee to the U.S. Dollar within a span of 14 months during 2007-08. These factors not only affected the KPO industry in India, but also the overall Indian export industry.

Now that the extreme pain of the Great Recession has eased, at least for the moment, attrition and currency valuations are again beginning to become a cause for concern. Although the Indian Rupee depreciated substantially (52 INR to 1 $) during the throes of the recession, it has appreciated again by more than 15% during the last eight months. Any appreciation beyond 46 INR to 1 US Dollar will further restrict not only the growth rate of the Indian KPO industry, but the overall Indian export industry. Although attrition had eased during 2008 and 2009, it has again risen above 20% during the first two quarters of 2010.

Another reason for lower growth rates in India is that KPO implementations are starting to develop in a hub-and-spoke model, where the hub may be an onshore or nearshore location, while India and other countries serve as important spokes in the wheel. In fact, several countries in Latin America (e.g., Chile, Costa Rica) are quickly becoming potential hubs for U.S. nearshoring, while many Eastern European countries (e.g., Romania, Poland) are becoming nearshoring hubs supporting Germany, Switzerland, and other mature European markets.

For these reasons, Evalueserve forecasts the KPO industry in India to grow by approximately 20%, which is lower than the 24% forecasted growth rate for the global KPO industry in Section 2. Correspondingly, Evalueserve had to throttle back its forecast given the changes in previous assumptions and now expects the Indian KPO industry to account for only 59% of the global KPO industry in 2013-14, rather than the 70% and above it had estimated four years ago.

The Indian KPO industry is expected to reach nearly $5.95 billion in revenues in 2010-11 and $10 billion in 2013-14.

Rapidly Growing KPO Sub-Segments

Several sub-sectors have grown fairly well in spite of the recession – and some perhaps because of it. Three are being highlighted below including banking, finance, securities, and insurance (BFSI) research and analytics services; legal, paralegal and Intellectual Property (LPO) services; and publishing.

Conversely, data management, search and analytics services; architectural services; and translation and localization services have proven to be laggards with respect to growth.

BFSI Research and Analytics Services

By March 2007, there were approximately 4,900 professionals in low-cost countries providing BFSI research and analytics-related services. Of this, 3,500 professionals were providing services from India and earning $175 million in annual revenue. These services included library information services for investment banks, data  modeling, equities research, fixed-income research, insurance analytics, risk analytics and structured products related work. Our estimates show that by March 2010, 11,500 professionals were providing an expanded set of such services from low-cost countries and earning annual revenues of approximately $690 million (of which approximately 9,200 were from India earning $510 million in annual revenue). The reasons for this growth can be attributed to:

1.  BFSI traditionally leading the way in cutting costs and adopting new technologies and services (e.g., aggressively sending IT work to low-cost countries in the 1990s) 
2. the Great Recession hitting this industry the hardest because even now, most BFSI firms are cautiously replenishing staff by only using consultants, part-time workers, local and offshore outsourcing.

Legal Research and Legal Process Services

By March 2007, there were approximately 2,700 professionals in low-cost countries providing services related to legal research, intellectual property research, and other legal-related services. Of this, 2,500 professionals were providing services from India and earning $95 million in annual revenue. Services included electronic document management services (e.g., word processing, legal transcription, and legal coding, tagging and summarization), electronic document discovery services (i.e., reviewing electronic records for potential discovery in litigation), intellectual property services (e.g., prior art search, landscaping with respect to patents and trademarks, overlap and evidence of use analysis), and legal research services (e.g., preliminary drafting of pleadings, employee contracts, and non-disclosure agreements).

Evalueserve estimates that in March 2010, 5,500 professionals were providing an expanded set of such services from low-cost countries (earning an annual revenue of approximately $265 million, of which approximately 5,100 were providing these services from India earning $250 million in annual revenue).

The reason for this growth can be largely attributed to the Great Recession where the legal departments of large, mid-sized, and small corporations were forced to reduce their costs, which they partly achieved by offshoring and partly by reducing the fees of their external law-firms. In fact, this cost pressure is likely to continue for the next 3-4 years and hence both the legal departments within organizations and corporations as well as law firms themselves are likely to more aggressively offshore low-end work in the legal and intellectual property sectors.

Offshore Outsourcing of Publishing Services

In 2006-07, there were approximately 12,000 professionals in low-cost countries providing services related to publishing; of this, 9,000 professionals were providing services from India, earning approximately $300 million in annual revenue. Approximately 55% of this revenue was earned through the creation of content (primarily in science, technology, medical and other academic domains) and by creating and organizing content for textbooks, magazines and business-to-business marketing materials. Evalueserve’s estimates show that by March 2010, 29,000 professionals were providing an expanded set of such services from low-cost countries earning annual revenues of approximately $930 million (of which approximately 24,500 were from India earning $790 million in annual revenue). The reason for this growth can be largely attributed to the Great Recession and the fact that the traditional publishing industry is gradually losing market share to electronic publishing and is under significant pressure to reduce costs. Indeed, the pressure on traditional publishers will only increase as more people move to reading content online.

Dr. Alok Aggarwal is Co-founder and Chairman, Evalueserve