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Indian IT-ITES – FY05 Results and FY06 Forecast

S. Ramadorai, Chairman NASSCOM, CEO & MD TCS


Kiran Karnik, President NASSCOM
Press Conference, Bangalore
June 2, 2005

This material was used by NASSCOM during an oral presentation; it is not a complete record of the discussion.
No part of this document may be circulated, quoted, or reproduced for distribution without prior written approval
TM
from NASSCOM.
FY05 results have exceeded last year’s forecasts
Domestic Market USD Billion
ITES-BPO Exports
IT Software and Services Exports
• Overall software and services
32% (exports + domestic) grew by 32%
against a forecast of 25%
25%* 22.0 • Exports grew by 34%
20.5 23.0%
4.8 – Strong growth validates the
16.7 16.7%* 4.2 economics of offshore outsourcing
44.4%
3.9
5.1
5.2 – Highest growth since the slowdown
41.7% in 2001
3.6
30.4% • Domestic revenues* grew by 23%
11.2 12.0
9.2 21.7%
*FY04 estimate restated (up from USD3.6bn); includes
value of domestic ITES-BPO; forecast growth of 16.7% was
on a base of USD 3.6bn
FY04 FY05P FY05
Source: NASSCOM

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Driven by strong fundamentals and broad based growth

Exports Indian IT Software & Services • Software and services* grew by 27%
Domestic USD Billion

12.0
– Indian vendors establishing their
presence in high-margin segments
9.2
– MNCs ramping-up offshore delivery
4.2
3.6 capabilities in India
– SME growth about 20-22%
– Increasing interest in R&D /
FY04 FY05 engineering services / embedded
Source: NASSCOM systems
Exports Indian ITES-BPO – FY05 revenue from product
Domestic USD Billion development & R&D services ~USD
3.0bn (up from USD 2.3bn in FY04)
• ITES-BPO* grew by nearly 49%
5.2
– Steady growth in traditional services
3.6
0.3 0.6 – Increasing traction in high-end
process outsourcing
FY04 FY05 – Growing domestic segment
Source: NASSCOM
* Includes domestic and export revenues
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Market indicators remained strong in FY05

Growth in addressable • Expansion of services: infrastructure management, network management, consulting


market • New geographies and vertical markets all leading to a sustained demand backdrop

Geographical mix • While US and UK remain the dominant markets


• Indian companies gaining traction in newer geographies; Japan, Germany, Singapore
Client wins / increased • Rapid volume growth; clients continued to ramp up engagement sizes with leading vendors
penetration – Over 660, USD 1mn+ clients with the top-4 players alone – up from 441 in FY04
• Steady increase in net client additions across all four quarters
Pricing trends and • Stable pricing environment (marginal upward bias)
industry profitability – IT Services: Onsite rates USD 55-65 per hour; offshore rates USD 18-26 per hour
– BPO: Wider range; some segments more susceptible to downward pressure
• Cost-margin profile supported by declining technology costs, tighter discretionary controls,
increased rollout of variable compensation schemes, a shift to lower-cost campus recruits,
sales and marketing leverage through more effective account mgmt, and scale economies

Vendor maturity • Focus on improving revenue mix and increasing realizations, utilization
• Mid-sized companies instead emphasizing domain knowledge and process management
skills and demonstrating the value of a focused solutions provider; walking away from
price-driven deals
• BPO firms balancing voice and non-voice business portfolios to diversify revenue and raise
seat utilization
• Indian players instrumental in cross border M&A activity in IT services and BPO
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And the sector scaled record levels of employment
Employee numbers ‘000s 697
IT Software and Services CAGR 29.8% 588
ITES-BPO 18.5%
490
416
360 37.0% 348

242 254
180
106
70
42

FY00 FY01 FY02 FY03 FY04 FY05

Source: NASSCOM

• Industry employee base crossed the 1million mark in FY05


– IT Software and services employee base has grown at a CAGR of 23.6% (FY00-05)
– ITES-BPO employee base has grown at a CAGR of 52.6% (FY00-05)
• Indirect employment attributed to IT-ITES – 2.5 million in FY05

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Outlook for FY06 is positive; export growth 30-32%
ITES-BPO Exports USD Billion
• Current penetration of IT budgets of
IT Software and Services Exports
Global 1000 clients is low relative to
the opportunity size
30-32% 22.5 • Emerging service opportunities in
BPO, infrastructure management,
34% 17.2 40-42%
7.3 testing services, consulting, etc.

5.2
• India’s offshore value proposition
12.8 44.4% remains the strongest
3.6 25-27% 15.2 – Superior offshore process
management and service delivery
30.4% 12.0 capabilities
9.2
– Talent pool: size does matter –esp.
when you need to scale-up
FY04 FY05 FY06P
Source: NASSCOM

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Forecast growth for domestic market in FY06 – 25%
Domestic Market USD Billion
• Growth forecast for the domestic market
is relatively lower – highlighting the
25% 6.0
different stages of maturity in the
markets
23% 4.8
• With progressive deregulation and rising
3.9 competition, companies are increasing
their focus on the domestic market;
especially on emerging sectors such as
retail, logistics, telecommunications and
SMEs
• Significant untapped potential, rapid
adoption and small base likely to result
in high growth (rate) in domestic BPO
FY04 FY05 FY06P
Source: NASSCOM

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Indian IT-ITES on track to reach USD 50bn exports by
FY09
USD Billion
CAGR PERIOD DOMESTIC MARKET* EXPORTS* INDUSTRY TOTAL
10 YR TARGET FY99-09 23.5% 34.7% 31.2% 50-52

ACHIEVED FY99-05 18.9% 37.0% 31.3%

REQUIRED FY05-09 30.7% 31.2% 31.1%


* Includes IT Software and Services as well as ITES-BPO

Industry performance tracked continuously and


targets revisited every three years
17.2
NASSCOM-McKinsey Study 1999, 2002 & 2005
13-15
12.8

9.6
7.7
6.2
4.8
4.0
2.6 3.9
2.6 3.0
1.9 2.5
1.7

FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY09^


Source: NASSCOM ^NASSCOM McKinsey Study 2002

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Key trends likely to shape industry growth in FY06

• Offshore penetration of the Fortune 500 increased by 33% in 2004 (from 300 to
400)
– Recent momentum complemented by low penetration levels (value ~2%) will continue to
drive rapid offshore adoption
• While a direct face-off between offshore-centric players and global service
providers is unlikely (given their differing revenue mix); the degree of competition is
set to increase:
– Global IT majors will gain noticeable scale in their offshore service delivery capability –
to be leveraged while bidding for new contracts
– Indian / offshore-centric vendors will steadily gain market share in segments of
traditional IT outsourcing – highlighting the adaptability of the offshore model
• Greater global delivery model (GDM) adoption; increased interest in newer offshore
destinations – though India is expected to remain the leader
• Pricing trends in BPO likely to be susceptible to downward pressure, increasing the
emphasis on operational excellence to sustain margins
• Integration of IT-BPO contracts to become more common

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While other destinations are also emerging...

Total 39.6 Total 94.0

India 17.2 India 48.0 • Total value of outsourcing


to India – USD 17.2bn in
Canada 12.6 Canada 20.9 2004 – estimated at 44% of
the worldwide total
China 1.9 China 5.0 Worldwide spend is

Eastern Eastern forecast to reach USD
1.8 6.4
Europe Europe 94bn by 2008
Philippines 0.9 Philippines 2.6 • Value of work outsourced
to India is forecast to reach
Mexico 0.5 Mexico 1.1 USD 48bn by 2008

Others 4.7 Others 10.0 2008


2004

Source: neoIT

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…India still ranks as the preferred destination
1 Czech
Factors India China Malaysia Republic Singapore Philippines

Financial Structure (Scale: 1-4)


Compensation 3.19 3 2.5 2.24 0.91 3.14
Infrastructure cost 0.23 0.23 0.33 0.27 0.22 0.22
Tax and regulatory 0.3 0.09 0.26 0.13 0.34 0.23
Sub Total 3.72 3.32 3.09 2.64 1.47 3.59

People Skills and Availability (Scale: 1-3)


BPO experience 1.03 0.48 0.19 0.23 0.61 0.42

Size & availability of labour 0.47 0.6 0.02 0.01 - 0.08


Education 0.25 0.21 0.27 0.33 0.33 0.19
Language 0.21 0.07 0.14 0.17 0.25 0.14
Employee retention 0.13 - 0.11 0.18 0.17 0.11
Sub Total 2.09 1.36 0.73 0.92 1.36 0.94

Business Environment (Scale: 1-3)


Country risk 0.83 0.68 1.03 1.06 1.41 0.57
Country infrastructure 0.2 0.15 0.24 0.28 0.4 0.13
Culture adaptability 0.1 - 0.28 0.38 0.43 0.05

Security of Intellectual Property 0.18 0.1 0.22 0.3 0.39 0.17


Sub Total 1.31 0.93 1.77 2.02 2.63 0.92

Total 7.12 5.61 5.59 5.58 5.46 5.45


Comparative rating for offshore destinations
Source: AT Kearney TM
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Sustained competitiveness in spite of rising people costs

Source: GECIS

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Five S’s For IT Take-off
SKILLS SECURITY
Expand Skill sets to create value Secure Destination for added value
Bigger pool to stem attrition/wage inflation Strengthen IT Act further
Create academic Alliances through UGC 4E framework for trusted Sourcing
Skills certification for BPO-entry level Improve Data Protection & Privacy Laws
Certification for front line supervisors India as a Centre of Process Excellence
SYNERGY SCALABILITY
Synergize to capture value Scale New Ground
Sharing knowledge & learning's Bring growth to Tier I & II towns
Co-operate and compete to grow GATS to ensure people movement
Hardware – Software synergies Emphasize off-shoring benefits

SCORE
Score Globally With R&D
Collaborate with Academia
Forge Alliances

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Innovating to Stay Ahead

Incubation labs Speed


Idea generation Productivity
Solution mindset Scalable Architecture
Collaborate
with Academia Real Time
Systems
IPR

NASSCOM as Create
People business
Facilitating Body Propositions

Create Standards
Collaborate with
Educational Institutes Brand Creation
to attract people
Drive and Productization
Invest in R&D Shape Encourage entrepreneurship
Industry
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