By Tarun GeorgeWhat value can Latin America offer the Knowledge Process Outsourcing industry?
That’s what we asked Alok Aggarwal, CEO of research firm Evalueserve, which provides KPO services from its delivery center in Valparaiso, Chile. He tells us here about what KPO clients are looking for in Latin America, how global services are changing with the US economy, and the pros and cons of Chilean sourcing.
What is KPO now compared to five years ago? Has it evolved, and does it include the same services?
Aggarwal: In terms of the aspects of the overall sector that defines KPO – research, analytics, clinical trials – those have not changed. They’re pretty much the same. What has evolved is the way the services are delivered. In particular, companies have been rethinking their onshore/offshore components in KPO.
The ITO industry for example had its roots in bringing people to the US from India or other countries. But when the dot com bubble burst, that practice starting withering away, since no one could afford the cost of paying people to come here. So now the average onshore component for IT is 30%, while the offshore is 70%. The difference with KPO is that it actually started with being all offshore. But now it’s going in the other direction where it’s clear that at least 10-20% should be onshore and onsite, to make the continuing process easier. The reason is that KPO as it’s done today, requires at least part of the provider’s team working closely with the client onsite, questioning them on their models and their assumptions, and understanding clearly what they want to achieve.
Does the Nearshore offer special value or advantages in KPO services? What specific capabilities are clients looking for in Latin America?
Aggarwal: Absolutely. For several of our banking clients we provide services from Chile, rather than India. If we look five years down the road, cost arbitrage will continue but it will become a smaller and smaller issue. The number of people doing analytics and math in the US has been decreasing at the graduate level, and now it’s an issue of not being able to find the skill level you want to hire.
So it’s no longer the case that clients are looking for a wage cost of $50,000 per FTE per year – they’re increasingly willing to pay $130,000 and more if you can provide those services offshore. Latin America has the education level in science and engineering that US firms are looking for. That and the time zone are the biggest advantages in KPO.
The banks are also coming under a lot of pressure these days, and are seeing their profit margins drop. So risk analytics for financial services is a very very big thing that they and insurance companies are after these days. But the main KPO growth area we’re seeing is the data analytics category.
What has the economy in the US done to the global services industry? How has the recession changed the outsourcing industry?
Aggarwal: 2008 and 2009 were large setbacks for the industry, since revenues were pretty much flat. So all the models predicting the future growth of outsourcing went for a toss, or at least got delayed by two or three years. Most of the offshore locations have not even fully recovered from the recession yet, so it’s not that things are back to normal as they were in 2005.
The growth of the offshore market has definitely slowed down. In 2007 my expectation for the IT outsourcing industry was around 23% growth until 2020 or at least 2015. But now at Evalueserve we’re estimating that growth to be around 15%. Similarly in the KPO industry we earlier thought the growth would continue at 30% per year, but now it’s probably closer to 20%.
I would say the BPO industry is getting affected the most. By and large those are fairly low value added businesses, and the barrier to entry is low as well. Companies like Convergys and others have definitely seen lower profit margins. There’s the same issue in the lower end of KPO which is market research – companies in that sector are definitely getting affected as well.
Since it’s still a very tough market for clients, they’re also facing pricing pressure and are looking for an edge to sell their own products. So what they want from their KPO providers is not just labor arbitrage, but a real value add in terms of services. In other words, they’re asking how they can make their product better.
How do your clients feel about Chile as a KPO delivery location?
Aggarwal: The fact that Chile is so good when it comes to immigration policy, issuing work visas and welcoming foreign workers, really creates a very strong and diverse labor pool for employers here to choose from. In our own office we have 27 nationalities represented. That diversity in the workforce means that the skills and talent that firms are looking for is also available.
The downside (and there’s not much that Chile can do about this) is that the salaries are about two times more expensive than in India. That’s not just for KPO, but also for the ITO industry. And the appreciation of the Chilean peso has made things worse. An average annual wage for a KPO professional in India would be $60,000, but in Chile it would be at least 40% more – so clients do get a shock.