The $ 37 Billion LPO Opportunity

“While we stop to think, we often miss our opportunity” Publilius Syrus

Globalization and outsourcing between them have created a huge pool of opportunities for India. From the simple all-encompassing BPO model we have arrived in the era of specialization. We have the KPO, RPO, LPO, and we have online Tutors and what have you. In this period of economic recession another opportunity for the LPO industry valued at around $ 30 Billion would emerge spread over the next 5-7 years?

The LPO is a well known concept and has been much written about. I would like to point out a specialized area for the LPO business revolving around services related to the CDS or Credit Default Swap.

The total value of CDS outstanding, world wide issued by banks, companies, hedge funds, HNI etc is to the tune of $ 62.2 Trillion, as per the Bank for International Settlement. The composition of the United States outstanding CDS contracts is about $ 15.5 trillion as of Q2, 2008. The Maturity value is as follows:

http://www.occ.treas.gov/ftp/release/2008-115a.pdf

Maturity Value of CDS by Aug 2009 is $ Trillion 0.93
Maturity Value of CDS by Aug 20014 is $ Trillion 10.075
Maturuty Value of CDS after Aug 2114 is $Trillion 4.495

Estimated Market size for KPO

Assuming that if 5% of that entire amount ends up in litigation (because of the nature of these financial instruments) we are talking of potential litigation of more than $ 750 Billion dollars spread over the next 5-7 years. All those law firms would need back end services to fight out their claims. Assuming nominal fees of 5% towards back-end research work etc, the market for this specialized research in the next 7 years would be in excess of $ 37.5 Billion.

What is a Credit Default Swap?

A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument goes into default or on the occurrence of a specified credit event occurs. The salient features of a CDS are:

It is a new financial instrument developed in 1997,

You need not own the credit instrument like the mortgage or loan, so in a way it is like a gamble for getting benefit on some event happening like a third company going into default or bankruptcy,

There is no centralized exchange or clearing house for CDS transactions; they are all done over the counter (OTC) and a CDS can be bought by anyone, including an individual Investor.

Why there could be extensive litigation over the CDS is because off the unregulated sales, and numerous failures and bankruptcies which have occurred. In the words of General Douglas McArthur “There is no security on this earth, there is only opportunity”