How to build a successful financial KPO unit

Understand the client's perspective

I remember running a very large engagement to build 500 financial models and equity research reports for an investment banking client who did not deem it important to share that they were going to publish this research almost instantaneously on their research website. As we started to deliver these reports, the outputs did not integrate very well with the website's publishing platform. This led to a lot of rework and delays in sending out timely research to their institutional customers. KPO work is very integral to a client's business: knowing the 'big picture' always helps.

Build relationships with end-users

Unlike BPO (business process outsourcing) or ITO (information technology outsourcing) work where it is sufficient to align with strategic business leads and vendor management teams, success in KPO engagements is largely driven by strong integration and communication with individual business end-users. It is the end-users who determine which part of their core domain tasks should be moved to the vendor, including the pace and complexity of the work.

I have seen outsourcing program managers creating ambitious goals for the KPO program that get waylaid because the end-users have not bought into the program or are nervous about sharing critical tasks with a vendor.

This will only change when they build direct confidence in the vendor's capability by interacting with the specialists and skilled resources that the vendor provides.

Knowledge workers at the vendor's end also highly value their interpersonal relationships with end-users, and make the highest contribution when they feel they are a logical extension of the client's team. One of our analysts, Ajay Dogra (name changed), prides himself for the fact that he is directly working for a celebrated US Telecoms Analyst-Tim Stevenson (name changed)-and would not like to change his sector for as long as he gets to work with Tim.

Consciously plan for work evolution

When I was part of the BPO industry, we used to be heavily preoccupied with 'dumbing down' the work profile to make tasks more process-oriented and easily trainable. In the past six years of running KPO units, I have realized that the exact reverse should be done! Knowledge workers naturally want to move up the value chain and do more sophisticated tasks for their clients. So don't disrupt the natural evolution of work complexity, and instead encourage it. It makes for a happy client and a happy employee.

Choose the right team

The critical success factor in a KPO engagement is choosing each team with the right skill sets and not merely the right leader. Each individual member often directly interacts with the client and is responsible for the quality of the output he/she delivers. Any compromise on this front leads to frustration at both ends. If the chemistry between them is not working, make a quick swap of the team member as the relationship is unlikely to sustain in the long run anyway. Also, given that billing rates in this business are upwards of $60,000 per annum, there is low tolerance for mediocrity. It is also important to over-invest in the engagement in the first 90 days to closely iron out these issues expeditiously.

Sound culture to drive success

We cannot create a successful KPO doing equity research unless our knowledge workers (called analysts) behave like they belong in a capital markets firm. Our analysts should have morning meetings to discuss overnight developments in stock markets, discuss valuation impacts on critical stocks, or pursue CFA degrees in their spare time. A KPO firm providing insurance KPO support will not be worth its pedigree if their associates are not encouraged to take the LOMA or FSA (UK) exams. Therefore, it is this culture and ecosystem of specialization that distinguishes a successful KPO and allows it to obtain its disproportionate share in the market place.

In summary, the best KPO firms in the industry focus heavily on understanding the client's domain and his objectives, investing in strong domain specialists, and relentlessly living the culture of the domain in which they operate.

Key trends in the Indian KPO sector

Given the high growthforecasted for this sector, the following three key trends are expected to shape the future of the industry, particularly the financial services domain:

1. Exploring new geographies and localization of operations

In line with the model adopted by the IT and BPO companies, the KPO service providersincluding some of the major Indian research & analytics providershave also started setting up delivery centers abroad. Language considerations are the primary driver behind this change, as international delivery centers enable the firms to serve the non-English speaking clients. Other potential benefits include hedging or risk diversification capabilities as the dependence on a single country is reduced and also the fact that it allows the service providers to be more responsive to the client needs by matching the client time zones. As the industry continues to grow and expand, global expansion is expected to continue.

2. Land grabbing phase to continue

The years 2008 and 2009 in the financial services KPO industry saw the takeovers of the captive units of global investment banks byIT giants. Some of the deals were the acquisition of the global captive unit of Citibank by Tata Consultancy Services for $505 Mn in 2008 and the acquisition of Swiss bank UBSs Indian outsourcing arm by Cognizantfor $75 Mn in 2009. These deals could be viewed primarily as initiatives to embark on horizontal integration routes, as they not only enhanced the acquirers knowledge of the financial services domain, but also augmented their capabilities to provide integrated services across consulting and technology.

Recent deals include the acquisition of Pipal Research by Crisil in 2010, the acquisition of Copal and Amba Research by Moodys in 2011 and 2013, respectively, andthe acquisition of Fractal Analytics by TA Associates in 2013. These deals were primarily undertaken to acquirethe niche capabilities of the targets. For example, Moodys acquisition of Amba gives the group access to Ambas global clientele, which includes seven of the top 15 global banks as well as several asset management and corporate banks engaged in both investment banking and commercial banking.

3. KPO industry to follow the IT industry, moving from commoditized work streams to high-end work

Following the growth path of the IT industry, the KPO industry today has an influence over the front office functions of almost every major division of global financial services institutions. The KPO providers are being increasingly viewed as strategic partners rather than mere support providers. Whether it be devising fund raising strategies for a corporate finance advisory client or live deal support for a private equity fund or real time quarterly updates for an equity research boutique or charting out the key legal M&A deal terms, the KPO industry does it all. Thus, thelines between outsourceable and non-outsourceable work have become thin.

On a concluding note, we can say that India, with its vast knowledge pool, will remain a preferred location for the KPO sector. Going by the trends, the industry will continue to evolve, carrying out tasks requiring high complexities. Industry consolidation will continue, with the bigger players setting up international centers globally. The sector will also need to cater to the talent crunch and mitigate the competition from countries such as China and the Philippines.