Egidio (Edge) Zarrella, is the global head of IT advisory services for KPMG. He is based in Sydney, Australia, but given the global nature of his role I’m sure he has an extensive knowledge of the Qantas menu.
Edge is quite a distinctive character. He is very tall and his hair is very long. It’s styled a bit like Jerry Garcia or possibly Robert Plant around the Led Zeppelin IV era and his name reminds everyone of the guitarist in U2. One of the things that university students tend to blog about after they meet Edge on campus is how on earth a global company like KPMG can have a senior partner who looks like that. Of course, it’s probably a major factor for those same students wanting to sign up to join the company when they graduate.
Edge explained to me that KPMG takes NASSCOM really seriously: “We pick about two or three events year that KPMG really focuses on – events we really want to be associated with. We have about 40 partners here at this event and that’s a huge commitment. It’s getting more and more popular; perhaps they even need to build a convention centre in Mumbai now so it can get even bigger.”
He’s right of course. I knew KPMG was a sponsor, but just committing 40 partners to travel from all over the world to spend time at the event is a huge commitment in itself.
Edge wanted to first move on from the topic everyone has been talking about, the sub-prime credit crunch in the US and the subsequent economic uncertainty: “Last year was more of a snapshot, consolidating information on where the industry is at present. This year everyone seems to be asking me about the sub-prime credit crunch and I’m saying to them for goodness sake, that’s just one thing that might cause blip. I really think the sub-prime issue is just a natural correction for people doing something silly and then coming back and changing their processes. If everyone thought that none of this can happen then they just don’t understand business cycles, it’s just a blip. We are also looking at market concerns in India as well right now, but I prefer to look at it in terms of the global market and the domestic market. As the ITO industry is about 25 years old now, if you look at that, it’s become a commodity industry so what do you think the margins are going to be? Guess what, margins are going to become tighter as the industry gets more commoditised. This will also happen to BPO as it matures.”
KPMG has just released a new research report on the development of the KPO market and Edge has some strong views on the subject. To understand the context you have to appreciate that one of the clichés in this industry is how companies need to ‘move up the value chain’, meaning they should move away from standard, prescriptive, tightly-defined services to highly-skilled, less defined services – such as analytics or research. The assumption amongst many is that BPO firms can bolt on some new services and thus move up the value chain, which Edge strongly protests against.
Edge said: “KPO is a new segmentation of the whole sourcing business and is seriously all about quality. You need to talk about real value to the business and if you can offer value then you can charge a real premium for it. I think there is a danger in India that some players who think KPO is just a continuation of BPO will suffer. With KPO, quality absolutely comes first. It’s not a commodity. It’s not a quantity game. India’s success can sometimes be it’s worst enemy – I think about this when I hear BPO companies talking about rolling out 3,000 seat KPO offerings.” He gets even more vehement: “People talk about KPO services being worth $150 an hour, well I have a small client who is charging $200 and they confessed to me that they could easily charge more. The point is that this is just like hiring an expert accountant; people will pay any amount of money for a high quality service. That’s the KPO value and the danger in India is that we keep talking about this as business processes – good luck with it if you want to do KPO like that.”
So Edge thinks there is a huge opportunity for firms to work in the KPO space, but I think he rightly points out some of the dangers. It’s not unique to India, it’s just that India has the most mature offshore BPO industry and therefore wants to leverage that position by moving into new areas. It’s only natural for the BPO industry in India to be making forays into KPO. Edge warns of one big difference though: “If you make a mistake in BPO then that’s just a part of the process, you might get a slap on the wrist, but that’s accepted. In KPO if you make a mistake then I will never work with you ever again. You are history. If you are a BPO with 10,000 people then you can’t move up the value chain using the same business model. You can retrain those people of course, or spin off a new division of the company. A joint venture or new company has to be created so you don’t confuse the market. You can’t be a large commoditised BPO on the one hand and a high-end KPO firm on the other.”
When I want to talk about value to companies I sometimes ask people to look at London. It’s a very expensive place to do business, but the entire global financial services industry goes to do business in London because it is the best place to get that business done. It’s an example of something being done because it is driven by quality rather than cost and Edge cites the strong reputation of actuaries in Australia in a similar way – they can pretty much charge what they want, because their services a in strong demand.
Edge also warns that India has the scale, but in some areas may lack expertise or focus: “This is not a volume game. India will always be number one because of the volume, but don’t assume that India will always get what it wants. Look at these small countries trying to promote their expertise in particular specialist areas – like Wales and Malaysia here at NASSCOM. India might assume that they can take everything, but we are talking about intellectual arbitrage, not cost arbitrage. Guess what, you can’t price intellectual arbitrage unless you know exactly what you are doing.”
Edge gave a great example of a KPO that is exploding in importance, engineering: “India has the talent to remain in the lead in many areas though. Look at something like engineering design for example. India is producing more engineers each year than there are in the whole of Europe, so that means moving into the future every new bridge in the US is going to be designed in India.”
I think Edge has a really perspicacious vision on KPO. It’s one thing to talk about pricing by value rather than time or headcount, but it is another to actually move away from the established BPO model and to price in this new way. Hopefully there will be a lot of people in the industry who listen to him, because they will struggle to get KPO right if they don’t.
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