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Indian IT-ITES – Driving Growth by

Moving up the Value Chain

Workshop on Transport Modeling


Research & Software Development,
Vadodara
April 2005

This material was used by NASSCOM during an oral presentation; it is not a complete record of the
discussion. No part of it may be circulated, quoted, or reproduced for distribution outside the client
organization without prior written approval from NASSCOM. TM
About NASSCOM
NASSCOM is… Strategy
• Premier trade body and the •
Partner with the Central and State
chamber of commerce of the Indian Governments in formulating IT
IT-ITES industry policies and legislation
• Global trade body with over 900 • Partner with global stakeholders for
members, of which nearly ~200 are promoting the industry in global
global companies from the US, UK, markets
EU, Japan and China • Strive for a thought leadership
Objective position and deliver world-class
research and strategic inputs for the
industry and its stakeholders.
• Encourage members to uphold world
class quality standards
• Primary objective – to act as a • Strive to uphold Intellectual Property
catalyst for the growth of the Indian Rights of its members
IT-ITES industry.
• Strengthen the brand equity of India
• Facilitation of trade and business in as a premier global sourcing
software and services destination
• Encouragement and advancement • Expand the quantity and quality of
of research the talent pool in India
• Propagation of education and • Continuous engagement with all
employment member companies and stakeholders
• Providing compelling business to devise strategies to achieve
benefits to global economies by shared aspirations for the industry
sion: Toglobal
establish
sourcingIndia as the 21st century’s
and software
the country powerhouse
d position the country as the global sourcing hub for software and servic
Discussion Outline

The Emerging
Landscape of
Global Services

Evolution of
Indian IT-ITES

Q&A
Discussion Outline

The Emerging
Landscape of
Global Services

Evolution of
Indian IT-ITES

Q&A
Global sourcing of services is not just a
passing fad…
In 2003, 300 of the Fortune 500 employed offshore
resources…
2003
Have nots Have
40% 60%

33% increase in
offshore penetration
year over year
2004
Have nots Have
20% 80%

Source: Gartner
…but a business imperative

• Widespread acceptance of the benefits of offshore outsourcing –


based on significantly favourable total transaction cost economics
• Maturing industry structure, highlighted by vendor consolidation and
greater standardization of infrastructure elements
• Multi-tier suppliers, and multiple country options - enabling clients to
appropriately balance cost, control, quality & risk
• Transition from one-off offshore outsourcing contracts to an
integrated global delivery model
• Increase in addressable market, re-definition of ‘offshore-able’
activities to include more complex, higher value-added services and
increasing offshore penetration
• Distinction between domestic and offshore service providers
beginning to fade – as each begin to adopt a mix of onshore-offshore
delivery strategies
IT-ITES has emerged as the poster child
of the global
economy…
Classic example of a disruptive technology...
…with significant potential for value creation…

Source: McKinsey Global Institute

…across multiple business functions and industry sectors…


…without geographic boundaries
…with global service delivery becoming
a mainstream
phenomenon
$ Billion $ Billion

800 70
Total Offshore IT Services Revenue
700 60 Total Offshore BPO Services Revenue

600
50
500
40
400 India Offshore IT Services Revenue
30
300 India Offshore BPO Revenue

20
200

100 10

0 0
2004 2005 2006 2007 2008 2009

Global BPO Revenue Global IT Services Revenue


Source: neoIT
The list of services sourced globally is
expanding rapidly…

Information Technology (IT) Business Process Outsourcing (BPO)

Application Development Human Resources

Application Support &


Maintenance Finance and Accounting

Infrastructure Services Back Office Administration

Engineering/ Design Services


Payment Processing

System Integration & Consulting


CRM

Tech Support

Knowledge Process Outsourcing


...indicating strong forecasts for
offshore IT Services…
$B % (CAGR)
30 28.24 90%
Total Market Size ($ B)
2002 17.6
25 75%
2005 29.9
20 2008 51.8 60%

15 45%
12.2
27% 29%
10 25% 25% 30%

14%
13% 5.13
5 3.27 15%
1.85
0.32 0.79 11%
0 0%
Mexico Philippines China Eastern Others Canada India
Europe
2002 2005 2008 CAGR

Source: neoIT
…as well as offshore BPO

$B % (CAGR)
25 90%
Total Market Size ($ B)
77%
2002 8.1 19.8 75%
20
2005 19.8
2008 42.2 60%
15
44% 45%
40% 45%

10 8.7
38% 29% 30%
4.9
5
3.1 3.1 15%
1.8
0.8 13%

0 0%
Mexico China Philippines Central & Others Canada India
Eastern
Europe
2002 2005 2008 CAGR

Source: neoIT
Discussion Outline

The Emerging
Landscape of
Global Services

Evolution of
Indian IT-ITES

Q&A
Indian IT-ITES – the eye of the storm, is
witnessing
unabated growth…
1,800 5%
USD billion 4.1%
INR billion • Indian IT-ITES has grown
Share in India's GDP 3.5%
at a CAGR of 28% over
3.2%

2.7%
2.9%
1,275.8
FY 1998-2005
1,200 3%

978.3 • Share in India’s GDP has


1.9% 779.6
more than doubled from
1.5%
657.9 1.9% to 4.1% - expected
600 1.2% 565.9 2%
to reach 7% by FY 2008
• Industry aspires to reach
361.8
253.1 28.2
186.4 21.5

5.0 6.0 8.2 12.1 13.4


16.1
USD 50 billion in export
0 0% revenues by 2008
1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-
05E

Source: NASSCOM

…that is expected to continue


While the IT Services and Software
segment remains the
mainstay of the industry…
100%
ITES-BPO

IT Services &
Software

Hardware
0%
1999-00 2000-01 2001-02 2002-03 2003-04 2004-05E

Source: NASSCOM

• IT Services and Software revenues have accounted for half to two-thirds of


the industry aggregate
• ITES-BPO revenues have witnessed significant growth – currently account
for nearly 20% of the industry aggregate
• Services (IT + ITES-BPO) together account for over three-fourths of the
industry revenue – mirroring the composition of the worldwide industry

...ITES-BPO is growing rapidly…


…with the service portfolio moving up
the value-chain
1980 1985 1990 1995 2000 2005 & beyond

Transformational BPO
Design & Integration
Product Development & Testing Remote Infrastructure
Management
Customer Contact
Research and Analytics
Customer Contact / Hardware & Full Process Outsourcing
BPO Installation Support Problem Solving/Decision Making
Value

Rules-based Processing

Out-Tasking Maintenance
Application Technical Support
Support Transactional Data Entry

Data Entry

Strategic Impact

Cost
Cost Control
Control Focus
Focus on
on Core
Core Competence
Competence Business
Business Transformation
Transformation

IT
BPO Mutual Gains Re-invest Mutual Gains

Source: neoIT
Indian vendors are expanding their
addressable market…
Remote Remote management of services such as helpdesk services,
Infrastructure server management, data centre management, network
Management management, asset management, desk-side support, IT
security services, maintenance services and applications
operations.
IT Consulting IS strategy, IT architecture assessment and planning,
operational analysis, technical system and network
designing, product / solution specific consulting
Knowledge Process Financial services: Equity research analyst support,
Outsourcing valuations, financial modeling and analytics, buy/ sell-side
research, sector and specific stock tracking. Actuarial
analytics, credit risk analytics and modeling. Fund
management and administration.
Professional services: Accounting, tax and audit support,
legal and litigation support, business / corporate and market
research
Others: Contract research in pharmaceuticals and
biotechnology, animation and graphics for the entertainment
sector
Case Example: Remote Infrastructure
Management
…and unlocking the potential in high-
end, specialized areas

Texas Instruments Develops embedded software for broadband, DSP,


wireless terminal and OMAP applications and OS. The
company has filed 225 patents out of its India-based
facility over the last 17 years. Has over 900 employees at
its India center, plans to increase its employee strength to
2,500 by 2005.
Intel Has an end-to-end product development lab in Bangalore
that was set up in 1998. Announced plans to double the
number of engineers employed to 3000 by the end of
2004.
Adobe Adobe’s R&D center at Noida is its largest facility of this
kind outside the US.15 Ten percent of the company’s
global R&D workforce is based out of India.
Microsoft (IDC) Works as an extension of its R&D team in Redmond and
employs over 150 professionals. Has announced plans to
increase its investment in India to USD 400 million by
2005.
Others IBM, Veritas, Baan, SAP Labs, Cadence Design Systems,
Cisco, CSC, EDS, Huawei Technologies, Motorola, ST
Microelectronics, and more
…such as product development and
engineering services

Daimler Chrysler Has had an R&D facility in India since 1996 that undertakes
software development for its super luxury cars, encryption,
image/signal processing, telematics; engineering services-
finite element modeling, CAD/CAM and PDM

Ford Established in 2001, Ford Information Technology Services


India provides design capabilities and e-business solutions
to Ford’s Asia Pacific operations.
General Motors Established in 2003, GM India undertakes research in
math-based tools, vehicle
development and automotive electronics, vehicle design
tools, enterprise modeling & virtual manufacturing,
automotive materials and chemical systems
Honeywell Undertakes software product development and support,
technology development and hardware engineering for the
company’s aerospace, automation and control businesses.

Others TCS, Infosys, Wipro, Akzo Nobel, GE, KPIT Cummins ,


Nielsoft, and more
Today, several large global
corporations source IT-ITES
from India…
Research /
Analytics/
Engineering

Shared
Services
(IT / HR / FA)

Customer
Relationship
Management

Back Office
Processing

Data Entry /
Transcription BFSI ICT Auto Healthcare Others

…across industry verticals and business functions


Industry maturity has fostered the
evolution of multiple
engagement models…
From primarily captive… …to a hybrid model

Indian Indian
best-of- best-of-
breed Outsource breed
Outsource
vendor to Global vendor
to Global
brand
brand

Feasibility JV/ JV/


of Allian Alliance
ce
outsourcin
g the
process

Delay Captive Delay Captive

Cross-border operation sophistication


Source: McKinsey Analysis
…and a diverse vendor landscape…

MNC Vendors with Indian Ops Indian IT Firms • Custom


application
development
Services with
High support and
Penetration maintenance
• Customer
Fulfillment
• Accounts &
MNC Captive Units Indian BPO 3PSPs administration

Emerging • Engineering
Service Lines
services
• Remote
infrastructure
management
• IT consulting
• Research &
…addressing the specific needs of
different client groups
India Business Models

Strategic Alliance/Joint
Captive Models Outsource Model
Venture Models

Pure Captive Model Joint Venture (JV) Pure Outsource


• An internal cost center or • Joint Venture with equity • Use of a India-based
a 100% subsidiary participation from customer provider to offshore
company set-up to and vendor. Customer business processes or IT
execute offshore retains control due to services
business processes investments in entity. Managed Outsource
and/or IT services • British Telecom - Mahindra • Full-/part-time resources
• Amex, Dell, Standard on the ground in India to
Chartered, HSBC, Ford, BOT and Inverted BOT facilitate transition,
Sun • Where the Indian Provider relationship mgmt and
sets up facility and transfer of organization
provides implementation and domain knowledge to
support to start with third party providers
• Customer can buy out at
a predetermined stage
• Reverse scenario has
also been seen in the
market
• Aviva-WNS/EXL,24/7, AIG-
Polaris
While cost advantage was the initial
attraction…

• Significantly
favorable total
transaction cost
economics
• Gross savings on
factor cost up to 78%
• Net realized savings
Source: McKinsey Global Institute
ranging between 25-
60%
COST ELEMENT US INDIA SAVING PROCESS ACHIEVED SAVING

USD / FTE / Year Value Share Value Share On US Cost base Transaction Processing 25%-40%

Personnel Costs 42,927 73.3% 6,348 48.4% 85% Accounting / Contact Center Services 30%-40%

IT/ Telecom Costs 2,400 4.1% 3,770 28.7% -57% IT Services 25%-50%

Office Facility Costs 3,700 6.3% 1,991 15.2% 46% Finance / Insurance 40%-60%

Other G&A Expenses 9,571 16.3% 1012.5 7.7% 89% Digital Content 30%-50%

Total Cost 58,598 100% 13,121 100% 78% Software/ ERP / Analytics 40%-60%

Source: GECIS, FT Outsourcing to India Conference – November 2004


Source: NASSCOM, Evalueserve Analysis
Blended rate for voice and non-voice operations

The above figures are indicative and the actual costs – savings could vary by process; further the cost advantage may be partially offset by travel, transitioning and
non-process communication costs
…access to a large, highly qualified
pool of talent,
Indian Demographic Profile Undergraduate engineering degrees
Over 60 292,000 granted in 2003
7.0% 100% > 1 billion
years
195,354

20-59 years 47.9%


103,440
82,409
60,914
45,145

0-19 years 45.1%


India China Japan Russia US South
Korea

Source: NCAER, Registrar general of India Source: NASSCOM, US Census Bureau

1,200 '000s
1,045
• Favourable demographic 1,000
842
profile 800
670

• High annual graduate 600


430
522

turnout 400
284
160
• Attractive employment
200
56
0
prospects – beyond 1990-91 1996-97 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 E

monetary compensation
Source: NASSCOM

• Rapid scaling up of
…a high degree of quality orientation...

Quality practices in Indian IT-ITES have evolved through three


distinct stages…

STAGE I STAGE II STAGE III

• Creation of basic • Emphasis on • Development of


processes software processes, metrics
• Alignment of engineering and a framework
Quality • Alignment of for improvement in
Management QMS with the all areas (e.g.
Systems (QMS) CMM sales, billing and
with global framework collection, etc.)
standards (e.g.
ISO) • Acquisition of • Adoption of
CMM process
• Framework for certifications methodologies
measurable at progressive such as People
improvement levels of CMM and Six Sigma
• Consistent and maturity to deliver ‘end-to-
…and demonstrated process
expertise…

Country Level 5 • India has far more SEI CMM


# of Level 5 companies than
Companies**
any other country in the
Canada 1
world
China 2

India 76
• Productivity and efficiency
Russia 1
gains achieved through
USA 20
process expertise
• Significantly lower error
rates compared to similar
Source: NASSCOM

units in the exporting


country
…have enabled firms to achieve significant productivity gain
** Compiled after October 2002 – may not be current for all the countries
A comprehensive legal framework…

Data Privacy and Protection Laws in India • Though India does not have
an independent data
Copyright Yes protection act – the existing
legal framework matched
Patent Product Patents 2005 with their independent
contracts provide adequate
safeguards to companies
Data protection Comprehensive offshoring to India
Framework 2004
• Further, Indian authorities are
Vertical Specific Laws No committed to further
strengthening the existing
Digital Signatures Yes frameworks to keep them
current and relevant
Hacking Yes

Privacy Yes
…and elaborate security practices

• Significant (5-15%) IT budget allocation to


security
• Dedicated security teams
• Compliance with international standards and laws
• Documented security policies
• Regular security audits – internal as well as
external (independent and by client)
• Periodic security training for all employees
• Robust physical security, data back-up / recovery
and business continuity arrangements
World class telecommunication
infrastructure
• International connectivity via 3 under sea cables
as well as satellite
• Bandwidth prices fast approaching international
rates
– Cost of an E1 half circuit has declined by ~60% over the
last three years
– In 2005, TRAI has proposed to reduce the cost of an E1
by a further 35%
– Price declines for higher capacities up to 70%
• Increased FDI limit (74%) to attract more global
players
International standards in real estate
and office facilities
• Large efficient floor plates
• Independent control and high-end security systems
• Liberal parking standard to accommodate employee transport
fleets
• Flexible lease terms and rent free period (e.g. during fit-out)
• Better cost management through flexible service
agreements24/7 operations and complete backup for essential
services including power
• Tenant controls employee amenities and facilities
• Phased procurement/leasing of office space in a single campus
• Plug and play facilities for temporary accommodation
...and strong government support

• Setting up of export promotion zones / special


economic zones
• Financial incentives
– Income tax exemptions and tax holiday under Section
10A/10B
– Service tax exemptions
– Concessions on excise duties
– Concessions on foreign exchange regulations
• Proactive support by the state governments
– Employment linked exemptions and rebates
– Single window clearances
…are other factors that complete India’s value proposition
Complementing the industry’s success
in exports is a
steadily growing domestic market…
12 Domestic IT-ITES Revenues
10 USD billion

8
• Domestic revenues of Indian IT-
6 10.2 ITES valued at over USD 10bn
8.2
5.7
4
5.9 6.3
• CAGR of 19.2 percent over FY
2 4.3 2000-05
0
1999-00 2000-01 2001-02 2002-03 2003-04 2004-05E
• Electronics consumption in India
estimated at $9.7 billion in 2005

Source: NASSCOM
• Still very low compared to other
nations (China is at USD 150bn
Total Indian Electronics Market Consumption and the US is at USD 450bn)
EDP Consumer
• MNCs currently account for
26% 25% leading shares in most segments
Office Equip
– especially in hardware
1%

Medical &
Industrial
3% Telecom Components
22%
7% Control & Instr Radio Comm
7% 9%

Source: In-Stat / MDR

…with significant untapped potential


While on a strong footing – India also
has its share of
challenges…
• Demand for trained talent outpacing supply resulting in attrition
and increasing direct and indirect costs
• Overburdened infrastructure in existing hubs of IT-ITES activity –
inadequate infrastructure in some of the smaller towns
• Anti-offshore outsourcing debate still lurking
• In spite of its proven dominance, the Indian IT-ITES industry is
still largely a price taker – creating unwarranted pressure on
margins
• Maintaining its lead over competing locations
• Leveraging the untapped potential of the domestic market
• Bridging the digital divide in the country

dustry stakeholders are committed to overcoming th


Discussion Outline

The Emerging
Landscape of
Global Services

Evolution of
Indian IT-ITES

Q&A