IT,ITES AND ANALYTICS

KEY POINTERS TO UNDERSTAND THE IT INDUSTRY

Global
Size
Key

IT industry Size and Segmentation

of Indian IT industry and share of different segments

performance parameters

Recent

trends in the industry practices

Factors

could affect the growth and the profitability of an IT

Services Company and how Indian IT companies are affected by it

How

to overcome the risks and sustain growth?

Impact

of cloud on Indian IT Services industry

Industry

Trends on Analytics

IT industry is classified into 4 segments and globally the

industry grew at a CAGR of 5.7% between 2009-14.
GLOBAL SIZE AND SEGMENTATION

Exports contribute to about 70% of Indian IT industrys revenu

Indian IT industry Overview

Operating parameters

KEY OPERATING PARAMETERS

Exports Growth

Billing Rates

Utilization Rates

Employee costs

Exports growth has slowed significantly from more than

30% to less than 15% in the last couple of years..
EXPORTS GROWTH

Billing rates for the Indian IT players have remained

almost flat over the last few years.
Offshore Billing Rate

Indian

IT services exporters

have not been able to raise

billing rates over the past
few years, ever since the
financial crisis in 2008-09.
In

fact, rates declined by 1-

2 per cent y-o-y in last 2-3

quarters as a result of pricing
pressure from BFSI clients
and stiff competition from
players who were able to
pass on the benefits of rupee
depreciation to clients.

Utilization rates started to improve in early 2013 after

declining over the previous couple of years.
Utilization Rate

Employee costs remain high over the years indicating

linear growth of the industry.
EMPLOYEE COSTS AS A PROPORTION OF REVENUES

KEY INDUSTRY TRENDS

11

Foreign IT service providers closing arbitrage gap

Large

MNCs like IBM, Accenture, Cognizant, and Capgemini setting up sizeable development centres in India, the cost
arbitrage enjoyed by Indian IT services companies so far, has
shrunk significantly.
Global IT companies have expanded in India both organically
and inorganically.
MNCs increasing focus on lower-value contracts
Multinational

IT services companies, which historically focused

on large deals, are now looking at smaller deals with shorter
turnaround periods to support growth.
This will land them in direct competition with Indian IT services
companies across the value chain.
12

Increasing SLA driven business models

Indian IT services companies have been slowly but surely

moving away a from a time and material based business model
to a fixed price and service-level agreement (SLA) based model.
The global slowdown also gave this trend a push, as clients
looked to
save costs.

Adoption of cloud-based services on the rise

According

to TPI, an organisation who tracks IT deals in global

market, the number of cloud-based service contracts awarded to
Indian IT vendors increased by 100 per cent y-o-y in 2011 to 220
contracts and it is estimated to further rise to 300 contracts in
2012.

13

Sharp rise in contract expiries leading to increased vendor ch

The

global outsourcing industry is going through a

transformational phase where more contracts are expiring.
In such a scenario, clients try to renegotiate contracts to suit
their business needs.
Hence, while renewing their contracts clients are looking to
optimize
costs by reducing billing rates or getting more value for the same
money.

14

Analysis of Risk

15

Type of Risks

CURRENCY RISKS

POLITICAL RISKS

COMPETITION FROM LOW COST COUNTRIES

GEOGRAPHICAL RISKS

VERTICAL RISKS
Verticals

are the industries which the clients belong to. Verticals

include BFSI, Telecom, Retial, Pharma, Manufacturing, Logistics etc.

If

a software company is too much dependent on one or two

verticals, it is considered to carry a high vertical risk. (Ex: Aricent

Technologies)

16

Type of Risks
SERVICE LINE RISKS
Service lines are the type of work that a software company is
doing for their clients.
It could vary between low-end and high-end.
Low-end Service lines
Low-end service lines are Programming (CAD), Maintenance,
Support, Testing, Infrastructure Management Services etc.
These services are highly commoditized and there is strong
competition from low-cost countries.
Companies typically get $25/hr to $30/hr for the low-end
services
High-end Service lines
IT consulting, Systems Integration are high end service lines.
IT consulting require significant business management skills
and overall business perspective rather than IT and
programming skills.
17
Companies command much higher billing rates for these high-

ILLUSTRATION OF VERTICAL AND SERVICE LINE RISKS

Service
Verticals
Lines
BFS Tele Manufa Ret Pharm Logistic Utilities Medi
I
com cturing ail
a
s
a
Program
ming
Maintena
nce
Testing
IMS
Systems
Integratio
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IT
Consultin
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18

Which of these risks affect the Indian IT companies?

CURRENCY RISKS

High
About 70% of industry revenues
are from exports

POLITICAL RISKS

COMPETITION
FROM LOW COST
COUNTRIES

19

GEOGRAPHICAL RISKS

High

High
Competition from countries like
Vietnam, philipines, China etc
High
80% of exports to US and UK
(62% to US and 18% to UK)

Indian companies are affected by all these risks in a big way

VERTICAL RISKS

20

SERVICE LINE RISK

High
About60% of industry revenues
are from 2 verticals: BFSI and
Telecom

High
More than 90% of the revenues
come from low-end service lines

ILLUSTRATION OF VERTICAL AND SERVICE LINE RISKS

Service
Verticals
Lines
BFS Tele Manufa Ret Pharm Logistic Utilities Medi
I
com cturing ail
a
s
a
Program
ming
Maintena
nce
Testing
IMS
Systems
Integratio
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IT
Consultin
g
21

OVERCOMING RISKS

22

Difficulty of overcoming a risk involves:

How much of existing competencies can be transferred?

How much of new learning or effort or investment is involved?

OVERCOMING RISKS
Geographical Risks
BFSI
Application Development
US

BFSI
Application Development
Germany

This involves understanding the practices (cultural, business

and regulatory) of the new geography
Existing competencies in Vertical and Service Line will be
helpful to over come this risks

23

OVERCOMING RISKS
Vertical Risks
BFSI
Application Development

Healthcare
Application Development

This involves understanding the new vertical

Services Line Competencies can be used to over come this
risks

24

Service Risks
Application
Development, IMS,
Support etc

IT Consulting

This risk is very difficult to overcome because:

Very little of existing competencies can be
transferred
Tough competition from big players
(Accenture, EDS (HP) etc)

Brand positioning of Indian IT players

But it is important to overcome the service line risk as:
This involves moving up the value chain (removing other risks
is more a horizontal movement)
Billing rates can be improved only by moving up the service
25

Cloud Computing

TRADITIONAL IT SPENDING

CLOUD CHARACTERISTICS
The cloud platform
comprises of three kinds
of services:
Software

as a Service

(SaaS)

Infrastructure as a

Service (IaaS)

Platform as a Service

(PaaS)

NEW ROLES UNDER CLOUD

COMPANIES IN CLOUD

Cloud Segments

Major companies

SaaS

Salesforce.com, Taleo, Netsuite,

Citrix online

PaaS

Salesforce.com, Netsuite, Microsoft

(Azure), CA Technologies (CloudPro)

IaaS

IBM, Rackspace, EMC, Amazon, HP

Cloud

Global cloud market is expected to grow at a CAGR of

about 30-35% to reach about $700 bn in 2020.
GLOBAL CLOUD MARKET SIZE

Domestic cloud market is also expected to grow at a

CAGR of about 35-40% to reach about $ 20 bn in 2020.
DOMESTIC CLOUD MARKET SIZE

BENEFITS OF CLOUD TO USER

Cloud

services offer trememendous flexibility of usage and

scalability, which, if applied effectively, can reduce IT costs for a

company considerably.
The

flexibility of cloud services is highly suited to web sites and

web services, which have peaks and troughs of data usage.

For

example: During the Indian Premier League cricket

tournament for example, sports websites will witness a flurry of

activity and will require further processing and data storage
support during that period.
Small

and medium enterprises (SMEs) will be more pliable to

move to cloud services due to the easy access to enterprise

applications which is provided by a service provider over the cloud.

BENEFITS OF CLOUD TO USER

Other advantages of cloud services include protection from

technology obsolescence as the cloud provider takes care of the

upgrades in the software and incurs regular maintenance.
The

application can be used on a pay-per-use basis as the cost

of the software is amortised over a large number of user

companies by the service provider.

BENEFITS OF CLOUD TO VENDOR

For

the vendors and service providers, the opportunity comes

from access to a whole new market the SMEs, who are averse
to making significant upfront investment in IT.
This

would result in overall market expansion for the vendors,

who had so far achieved limited success in targeting this

segment.

BENEFITS OF CLOUD

and Reduction in costs

CONCERNS OF CLOUD
For User Organizations

Security a concern in shared

resources

Bugs in platform service or

software application hurts more

than one user
Connectivity

issues will hamper

productivity
Loss

of control on data in case of

server abnormalities
Sunk

costs incurred on IT spends

For Vendors

IMPACT OF CLOUD ON LARGE ORGANIZATIONS

In the short-term Large companies that require a substantial amount

of customisation will not adopt cloud services easily.

IT

service companies, who provide enterprise application services

(like SAP or Oracle) to large companies, may not see much change in
their business models in the short-term.
Over

time, once the useable life of their IT infrastructure comes to an

end, they would be more willing to migrate to cloud services for their
non-critical applications like payroll, admin etc

Though close to 70% of Fortune 500 companies are

adopting cloud in some form, the proportion of the IT
spend on cloud is about 3-4%
CLOUD ADOPTION RATE
% OF FORTUNE 500
COMPANIES

% of TOTAL SPEND
ALLOCATED FOR CLOUD

Big companies are

adopting Cloud only for
non-core areas

IMPACT OF CLOUD ON SMEs

Rapidly

growing cloud market among SMEs is already compelling

traditional IT service providers to rethink their business models to

include pay-per-use models.

Services like those for CRM, payroll etc have been adopted by SMEs.

ERP

software developers like SAP have now ventured into making

versions and parts of their software which can be used over the cloud.
Hardware

players like IBM are also venturing into providing

infrastructure services over the cloud.

PROPORTION OF SMALL AND MEDIUM ENTERPRISES USING

CLOUD

IMPACT OF CLOUD ON INDIAN IT SERVICE COMPANIES

SHORT-TERM CONCERNS
As a majority of the Indian IT service exports revenues come
from IT spends made by large enterprises, there will not be a
significant disruption in the service line share of Indian IT
exports over the next 5 years.
LONG-TERM CONCERNS
The largest share of revenues currently comes from customisation
of enterprise software, building business specific applications and
managing enterprise IT infrastructure.
However, services provided over the cloud are standardised and
have minimal scope for customisation. Over the long term, thus,
spends on CAD are expected to reduce.
Integration and maintenance services for enterprises are also
expected to reduce. However, these services would then be
provided to the cloud service providers instead of the user

IMPACT OF CLOUD ON INDIAN IT SERVICE COMPANIES

NEW OPPORTUNITIES
Tier-I companies like TCS, Infosys, Wipro and HCL along with
some mid-size companies like Persistent have already begun to
create frameworks and offer cloud computing services.
The cloud computing market is expected to open up new business
for Indian IT service providers in the long-term owing to the
following:
IT service companies are building expertise in cloud service
delivery platforms and are expected to garner business from
providing consulting and migration services to existing clients to
migrate their non-critical applications to the cloud.
Small and medium enterprises adopt cloud services readily, Indian
IT service players looking to develop SaaS applications.
The estimated cloud services market for Indian service providers
was $2 bn billion in 2012-13, comprising largely of SaaS.

Analytics : Overview

ANALYTICS : INTRODUCTION
Analytics

is the discovery of meaningful pattern in data

Analytics is a decision-making science which has been in use for a

long time.

Companies have always been using analytics to find out various

meaningful patterns, trends or some meaningful conclusion from

various forms of data.
It

helps to take various business decisions based on real data

instead of intuition or apparent pattern.

With the evolution of enterprise IT, today companies are able to

capture various transactional or behavioral data (of customers) in

digital form at minimal cost.
Performing

analytics on that data has become pertinent as

TYPE OF ANALYTICS
BASIC OR DESCRIPTIVE ANALYTICS
Descriptive

analytics is used to understand the trend or pattern in

past data.

Very few basic questions like, "What has happened?", "Why did it

happen?", are answered through descriptive analytics.

Standard

reports on regular basis ( e.g. monthly MIS), adhoc

reports, query drill down to understand various underlying

parameters and alerts which have some predefined constraints are
few examples of descriptive analytics.
It

can be performed using standard tools like Microsoft excel, SAS

(Statistical Analysis Software), SPSS (Statistical Product and Service

TYPE OF ANALYTICS
PREDICTIVE ANALYTICS
Predictive

analytics is used to forecast future trends or patterns

in various scenarios.
Questions

like - "What is going to happen tomorrow to a

particular parameter (e.g. sales, profit, etc)?", "What will happen if

there is a constraint?" - are answered through predictive analytics.
Statistical

modeling, forecasting or predictive modeling fall in this

category.
Although,

predictive analytics can be performed using standard

tools similar to descriptive analytics, it requires significant

statistical and domain knowledge to predict the future.

TYPE OF ANALYTICS
PRESCRIPTIVE ANALYTICS
Prescriptive

analytics is used to prescribe optimum action for

the company to achieve some target within a set of constraints.

Questions

like - "What is the right thing to do to increase

sales?", "How to spend my advertising money?", "What is the

right price at which this product should be launched?" - are
answered through prescriptive analytics.
Optimisation

using scenario analysis, predicting future

constraints are few actions which are known as prescriptive

analytics.
Doing

this not only requires high level of business knowledge,

but also super computers to process various forms of complex

Analytics : Industry Trends

Earlier, analytics was exclusively used for marketing functions.

However, currently, all the companies have started using
analytics for other functions like operations, finance, human
resources, etc..
ANALYTICS REEVENUES BY FUNCTION

MARKETING AND SALES

Marketing

and Sales was one of the first function to adopt

analytics to understand customer profiling.

Nowadays,

enterprises are also spending money to find out

the right pricing strategy for their various products and

services.
In

a tough macroeconomic environment, companies

emphasise more on marketing and sales analytics to grow

their business.
Although

this is used by most of the companies across

verticals, BFSI and retail are major users of marketing

Human resource (HR):

Although

it contributes to the least proportion of the

industry's revenues, HR is one of the fastest-growing areas of

analytics.
Analytics

tools are being used across organisations to

understand sentiments among employees, assess root causes

of various cultural differences, engagement pattern, etc.

OPERATIONS:
Supply

chain analytics, which is used for scheduling,

optimisation of processes in the operation function is a major

source of revenue.

It also involves predictive modeling of downstream demand-

supply scenario, thus optimising the upstream work to

optimise cost or increase revenues for clients.

FINANCE:
Finance-related

analytics is mostly used for fraud and risk

management purposes.
Increasingly,

more raw data is being used in finance-related

analytics to detect fraudulent activities and assess various

market risks instead of using a single point score to quantify
risk.
This

is mostly used by the BFSI sector.

MAJOR INDUSTRIES ADOPTING ANALYTICS:

Following industries contribute to 70-80 per cent of analytics
players' revenues
Banking: the most suitable product for a particular customer to enable
higher sales.
Insurance: Determination of premium amount for exotic and traditional
products and tracking fraudulent activities while processing claims, etc.
It is also used to analyse risk at the portfolio level while reinsuring some
of the insurance companies.
Healthcare and life sciences: Analytics is used in managing the
supply chain, pricing strategy of new drugs and scenario analysis
during drug developments.
Telecommunications: The pricing strategy for different value-added
services and marketing those to right targets is the most common use of
analytics in telecom.
Retail: Effective usage of sales and marketing budget is a crucial
activity for retail players. Analytics is also used to determine store
efficiency, supply chain optimisation, customer churn pattern, retention

EMERGING INDUSTRIES FOR ANALYTICS:

Following industries contribute to 20-30 per cent of analytics

players' revenues
Energy/utilities : Demand forecast using pattern in downstream enduser industries is the major usage of analytics. It also used by various
players to determine prices of their services or products.
Media/entertainment: This industry uses analytics to optimise
marketing cost, to understand the socio-behavioural pattern of
customers and to determine effectiveness of any ad spending.
Transportation: Optimisation and scheduling of different activities is
core to any transportation company and analytics can help them in this
area

MAJOR ANALYTICS PLAYERS:

VARITEY OF PLAYERS WITH DIFFERENT POSITIONING:

As the industry is expected to grow very fast, many players are

entering the industry.
The number of players is likely to increase at a rapid pace over
the next few years.
While the niche players offer domain expertise and rich
experience, players from IT services and ITeS leverage on the
long-term relationships that they have with clients across
industries.
Clients are also very comfortable with sharing confidential data
with IT services vendors as they have a proven system of
information security.
All kinds of players will exist in the industry with different
positioning and each of them will have different kinds of offerings
in the long run.

EMPLOYEE CRUNCH : THE BIGGEST CHALLENGE

Talent

crunch is the major challenge for the industry and it is expected to

intensify over the next few years.

In

the past few years as well, there has been a huge demand for

readymade talent in the industry.

The

primary reason for this is multiple skills are required to be able to

work effectively in this field.

The

major skills required include in-depth statistics/mathematics skills,

computer programming knowledge to work with big volume data and

strong business knowledge to understand the meaning of different
patterns in data.
The

number of people in the industry to grow to 35,000 in 2016-17 from

MARKET SZE AND

OPERATING PARAMETERS

Indian analytics market to grow by 6X over next 5 years

MARKET SIZE AND GROWTH

KEY OPERATING PARAMETERS

Billing Rates

Utilization rates

Off-shorability

Analytics services earn significant premium in terms of

billing rates as compared to the traditional outsourcing
services like IT services or ITeS.
BILLING RATES

Operating margins are in the range of 40-50 per cent for most of
the analytics players. In terms of cost structure, employee cost
is the biggest cost, followed by sales and marketing cost.
MARGINS

Higher utilization reflects better demand growth

UTILIZATION
The

utilisation levels of various analytics companies are in

the range of 85-90 per cent.

This

is significantly higher than the utilisation of IT services

players who typically enjoy a utilisation rate of 75-80 per cent.

The

bench duration of employees is also never more than 1-2

weeks given that there is strong growth in demand for

analytics.
Moreover,

the skill sets required are also common in nature

and can be used across various projects

HIGH OFFSHORABILITY
Analytics
Thus,

has far higher offshore potential.

it allows a greater proportion of work to be delivered from

the offshore location.

It

not only saves cost for clients, but also improves service

providers' margins.
Industry

sources suggest that more than 90 per cent of

analytics work for a typical project is being carried out from

offshore locations.

ITES

About 80% of Indian ITES revenues come from customer

care and transaction services.
ITES: REVENUE BY SERVICE LINES

About 80% of Indian ITES revenues come from customer

care and transaction services.
ITES: BILLING RATES FOR DIFFERENT SERVICE LINES

About 80% of Indian ITES exports revenues come from US

and UK.
ITES: EXORTS REVENUE BY GEOGRAPHY