Trading Labor on Wall Street: Examining India’s KPO Space


New York, NY – In the past few years, most global investment banks and brokerage firms have seen the financial advantages of outsourcing some of their analytical resources to lower cost centers like India.  In fact, some Wall Street firms have found the benefits to be compelling enough that they have created their own “captive” units rather than outsourcing to third-parties.

More recently a number of mutual funds and hedge funds in the U.S. and Europe have also started to leverage the growing pool of off-shore analytical capabilities.  Consequently, numerous KPO (Knowledge Process Outsourcing) firms have become key investment research vendors to the buy-side.

The following is an article written by a regular ResearchWatch reader, Frank Yazdi.  Frank is an employee of KPO provider — SmartAnalyst.  Mr. Yadzi is a member of SmartAnalyst’s Financial Services Group and has done extensive research on the KPO space as part of his coursework at New York University’s Center for Global Affairs. He holds an MBA in Finance and a BS in Finance and International Business.


One of the major economic stories of our day is the spread of offshore Business Process Outsourcing (BPO), a cost-saving measure by which companies hand off peripheral operations such as payroll and call centers, thus freeing them to concentrate on their core competencies.

By now, nearly every American is familiar with basic BPO services. Gartner estimates the global BPO market will be around $173bn in 2007, of which $24.23bn would be outsourced to offshore contractors. Of this, India is estimated to generate $13.8bn in revenue[1].

The success of BPO firms and India’s vast pool of highly-skilled labor has given birth to a new sector called Knowledge Process Outsourcing (KPO). KPO involves higher-end analytics and analysis, providing organizations with strategic and tactical decision-making tools.

Most KPO’s employ top-tier university graduates holding MBAs, PhDs, CFAs, MSs, MDs or Chartered Accountant designations.

According to the National Association of Software and Services Companies, the KPO industry is expected to grow at 45% a year and to top $17 billion by 2010. India’s share will be roughly $12 billion, or 70% of the total space.  In comparison, the BPO industry is expected to grow at 26% a year over the next few years. Additionally, it is estimated that the total KPO workforce in India will go from its current 25,000 to over 250,000 by 2010[2].

The most prominent developments will appear in the following areas:

§                                 Data Search and Analysis

§                                 Market Research

§                                 Financial Research & Analysis

§                                 Healthcare & Life Science Research

§                                 Engineering and Design

KPO has already had an impact on many industries, and it will have a profound effect on Wall Street’s operations in the years to come. Today, we will examine KPO’s demand drivers, trends, challenges, and conclude by listing some of the key players.

Demand Drivers

More Eyes on Costs: A tighter regulatory environment and additional investor scrutiny has finally put pressure on the unprofitable equity research departments of Wall Street. In addition, the unbundling of research and execution has forced fund management companies to examine fund fees and expenses.

Herd Mentality: The further acceptance and discussion of offshore research outsourcing provides a need for many Wall Street firms to evaluate their offshore strategy. Although hesitations still exist, the mentality of “this could never be outsourced” is being reduced as many of Wall Street’s largest players legitimize offshore strategies in the media.

The New York Times recently quoted a Thomas Weisel Partners career post stating that their analysts in India cover equities on their own. “They do not report to another analyst in the U.S. They will do their own research, come up with their own opinions on the stock and offer them directly to U.S. institutional investors. Simply put, we are not a back office in India.”[3]

Acceptance: There is an increased acceptance that current technological and communications systems can integrate a high-skilled low-cost workforce with an organization’s research process, no matter where in the world that workforce is located.

Scalability: The ability to “get an edge” by scaling one’s internal research process is very valuable. A publishing research analyst having the ability to cover 20 companies versus 12 in his or her sector can significantly increase margins for the firm when taking into account the incremental cost of outsourcing. For a fund manager, having eight eyes for the price of two analyzing news flow and financials of its portfolio companies will provide an investing edge over his or her peers.


New Entrants: We can expect many new entrants into the KPO space as the barriers to entry are very low. Low infrastructure and set-up costs will encourage small companies with a domain expertise to set up their own KPO providers. In addition, the industry has attracted entrepreneurial analysts, accountants, lawyers, scientists, engineers and doctors to become offshore providers with or without specific domain expertise.

New Destinations: While India has been the focal point of the KPO space, countries such as China, Russia, Mexico, Ireland, Chile, Brazil and the Philippines are emerging as KPO destinations. India, however, remains the favored destination, far ahead of other competitors in most areas, especially in financial, legal and healthcare research. The dimensions that usually influence a buyer’s decision regarding location include: availability of qualified labor; political stability; infrastructure; communication and technology support; and alleviation of intellectual property and data concerns. Underlying all of this, of course, is the availability of high-quality personnel at a reasonable cost.

More Investments, Mergers & Acquisitions: It is apparent that many Western investment firms are seeking to play in the lucrative KPO space and are aggressively investing in providers.

KPOs will be major acquisition targets in the coming years as BPOs will look for established KPOs to add to their portfolio to provide high-valued analytics to their current client base and established KPOs will want to acquire or merge with KPOs that have certain domain expertise, clients or geographic foothold.

As many as 100 mergers and acquisitions (M&A) and IPO transactions are estimated to be conducted in the Indian BPO and KPO industry beginning 2006 to 2010, according to a paper jointly issued by ASSOCHAM and Evalueserve. Large captives, according to the paper, may be spun off when their parent companies want to divest their stakes or mid-size captives may be acquired by third-party BPO companies.[4]

The largest deal reported thus far was the $250 million dollar acquisition of OfficeTiger by RR Donnelley in March of 2006.

Captives Outnumber Vendors: Many organizations have opted to establish their captive facilities as they are keen on reaping the benefits from outsourcing yet are not willing to expose themselves to the risks. This enables them to protect themselves against possible IP threats and feared loss of patented material.

As a case in point, Goldman Sachs and JPMorgan have announced expansions for their captives in India. Goldman Sachs is expected to grow its India headcount to reach employee strength of approximately 2,000 by the end of 2007. JPMorgan Chase plans to double its headcount in India from the current 3,000 by 2007.[5]

Expertise over Size: Going forward, domain expertise and qualified personnel rather than size will be the main factors of success. As new players enter the market weekly and drive pricing down on commoditized research products, successful KPOs will have domain expertise that they can leverage against competitors.


Workforce: Unfortunately, attrition rates are high across the industry as more players enter the market. Current players are aggressively recruiting and wages are quickly increasing. Providers need to be creative and rigorous with their recruiting and retention strategies. While India’s universities produce around 2 million English-speaking graduates each year, the expected KPO growth could potentially create a labor shortage within the next few years, particularly in specialized areas.

The main ingredient to run a successful KPO operation is access to a large pool of skilled and trained labor. Attrition rates remain high, competition for talent is stringent, and domain expertise is lacking. Key industry players (captives and third-party providers) are attracting the top employees. Also, a negative connotation regarding outsourcing still exists.

Quality Expectations & Client Management: Because there is no predefined process in KPO, the end product is very much dependent on the analytical framework used by the company and the analysts. The importance of scoping the project correctly, understanding the project goal and setting the client’s expectations are vital for a productive partnership. In addition, the need for quality measures and client feedback are imperative to a successful partnership.

Data Security & Client Confidentiality: The issue of data security and client confidentiality is a prevalent concern as clients frequently worry about their extremely sensitive and proprietary data traveling outside their organization, let alone to an offshore provider. Clients across all industries worry about their non-public information landing in the wrong hands. KPO providers are challenged to show their security and confidentiality protocols to demonstrate that extreme caution is always taken and that the protocols are tracked, monitored and enforced.

Main players in the financial services KPO arena include SmartAnalyst, Amba Research, Adventity, Irevna, Aranca, Copal Partners and Evalueserve.

About the Author: Based in New York, Frank Yazdi is a member of SmartAnalyst’s Financial Services Group and has done extensive research on the KPO space as part of his coursework at New York University’s Center for Global Affairs. He holds an MBA in Finance and a BS in Finance and International Business. He can be contacted at or 212-331-0010.






Comment by research:
very informative, well thought and researched

Comment by Tarak:
This a very cool news it helps me to take correct direction towards……


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