India set to ride the KPO wave: Report

However, the top KPMG executive warned KPO is not a volume or cost arbitrage game but about knowledge and clients pay top dollar for quality. And, India, which already has a strong base in IT services and BPO sectors, should now build a knowledge base and move up the value chain.

"These are premium dollars. People will pay only if you have the knowledge and wisdom that they do not have in their companies. It is not a costs game, it is a knowledge game," he said.

The study notes that the possibilities that KPO, which surprisingly focuses on the high-end activities that were traditionally considered part of a company's competitive advantage or core activities, presents in India are endless.

However, there are major challenges to overcome too.

Firstly, India's industry competitiveness is on the decline following the appreciation of the Indian rupee against the US dollar.

Secondly, there are apparent shortcomings in the KPO providers' legal and compliance departments that could place valuable intellectual property at risk.

Thirdly, KPMG foresees an escalating battle for talent in the KPO market due to the highly specialist skills which it offers. And, to overcome high attrition rates, KPO providers need to quickly adopt recruitment and retention strategies to attract and keep staff with the required qualification and skill sets.

"Without those talented people, KPO simply cannot exist. Such people - in appropriate locations - will become extremely sought after," Zarrella said, adding that KPO providers should look for alternative locations for additional delivery centers, both from a customer and service provider perspective.

"Success in offshoring business operations has encouraged many multinationals to start outsourcing key business processes and high-end knowledge work," said Pradeep Udhas, global partner-in-charge, sourcing advisory, KPMG.

"Cost savings, operational efficiencies, access to talented workforce and improved quality are driving offshoring of high-end knowledge-based processes," Udhas said.