- Analytical Commentary -

September 19, 2009 (FinancialWire) (ValueNotes Outsourcing Watch: Insights for Investors) — Reports of the Switzerland-based bank UBS (NYSE: UBS) looking to exit its captive business and knowledge process outsourcing units in India are rife. Genpact (NYSE: GE) and Cognizant (NASDAQ: CTSH) are among the contenders.

UBS has two centers in India and another one in Poland, and they are valued at about $100 million. Standard Chartered Bank will open another office for Scope International, its knowledge process outsourcing (KPO) network. The company already has its first office in Chennai. The company also plans to increase the number of its employees.

The KPO sector in India has continued on its growth path even during the current economic crisis. Slated to cross $12 billion by 2010, this segment has treaded the path chalked out by the business process outsourcing industry - following the success route as it carefully avoids the pitfalls. The growth has been slightly slow, but that is owing to the high skill sets required. KPO emerged as natural progression for companies that had established their competence in BPO segment. They were able to leverage their experience and knowledge of customer requirements to move up the value chain. Development of skill sets, rapport with clients and offering end-to-end services has worked in favor of establishing India as the preferred destination. The ability to scale up has also been established leading to greater confidence among the buyers. Added to that is the growing confidence in the ability of Indian companies, and gradual transformation into global companies.

Some of the other deals that are indicative of the trend are:

* Citigroup sold two of its captive units - Citigroup Global Services to TCS for $505 million and Citi Technology Services to Wipro for $100 million, in 2008

* Morgan Stanley is also looking to exit its back office operations in India. The knowledge services provided include equity research, complex financial modeling and portfolio analysis. Infosys and Wipro are said to be interested in acquiring these operations

* Aptara plans to establish a new Publishing Center of Excellence in Trivandrum, India to provide advanced editorial, composition and production management services to the company’s key customers

This growth has been noticed across verticals and indicates the overall scenario in the knowledge services. A number of IT companies such as Infosys, Wipro, HCL, and others that have already made a mark globally are now branching out into these knowledge intensive services, to be able to add more value to their offerings. Buyers also depend more and more on their vendors for many of these related service-extensions. A number of KPO providers also fall into the category of niche providers, where they develop expertise in a particular vertical. These niche providers are usually small in size and while scalability could be an issue, they are adept at providing services that require subject understanding.

The nature of such relationships has undergone a change and though buyers and vendors do enter long term contracts, the degree of difficulty of services decides the billing rates. It may not always be the same billing rate for all tasks, and are usually negotiated as per projects. Experience in the vertical also allows a company to charge higher.

Going forward, India is slated to capture almost 70% of the offshored KPO services. Some of the other destinations that compete with India within the KPO segment are the Philippines, Hungary, Ireland, China and Poland. Among the challenges that India needs to overcome are lack of vertical specific experts, IP issues, high wages, and reaching out to the small and medium enterprises in the buyer markets. There are a number of small players in the market that are doing very well. The VC/PE interest in the segment is growing, and as the segment achieves more maturity, larger players will continue to acquire the niche providers. However given the scope of the services, the segment will continue to be dotted by the smaller domain experts, and their ability to sustain and succeed will depend upon the quality of the deliverables.

ValueNotes Outsourcing Watch: Insights for Investors” is a unique news and analysis service from the ValueNotes Outsourcing Practice, focused entirely on outsourcing. The publication analyzes events in outsourcing, outsourcing companies, trends in the sector, impact of global competition from offshoring to established U.S. companies, and emerging investment opportunities.

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