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…
• Premier trade body and the chamber of
commerce of the Indian IT-ITES industry
• Global trade body with over 900 members, of
which nearly ~200 are global companies from
the US, UK, EU, Japan and China
Objective
• Primary objective – to act as a catalyst for the
growth of the Indian IT-ITES industry.
• Facilitation of trade and business in software
and services
• Encouragement and advancement of research
• Propagation of education and employment
• Providing compelling business benefits to
global economies by global sourcing
Vision: To establish India as the 21st century’s software powerhouse
and position the country as the global sourcing hub for software and services
Strategy
• Partner with the Central and State
Governments in formulating IT policies and
legislation
• Partner with global stakeholders for promoting
the industry in global markets
• Strive for a thought leadership position and
deliver world-class research and strategic
inputs for the industry and its stakeholders.
• Encourage members to uphold world class
quality standards
• Strive to uphold Intellectual Property Rights of
its members
• Strengthen the brand equity of India as a
premier global sourcing destination
• Expand the quantity and quality of the talent
pool in India
• Continuous engagement with all member
companies and stakeholders to devise
strategies to achieve shared aspirations for the
industry and the country
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%

…in 2004, this figure is expected to have risen to 400 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
Application Development
Development Human
Human Resources
Resources

Application
Application Support
Support &
&
Maintenance
Maintenance Finance
Finance and
and Accounting
Accounting

Infrastructure
Infrastructure Services
Services Back
Back Office
Office Administration
Administration
Engineering/
Engineering/ Design
Design
Services
Services Payment
Payment Processing
Processing
System
System Integration
Integration &
&
Consulting
Consulting CRM
CRM

Tech
Tech Support
Support

Knowledge
Knowledge Process
Process Outsourcing
Outsourcing
...indicating strong forecasts for offshore IT Services…

$B % (CAGR)
30 Total Market Size ($ B) 28.24 90%

2002 17.6
25 2005 29.9 75%

2008 51.8
20 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)
2002 8.1 77%
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 at
Share in India's GDP 3.5%
a CAGR of 28% over FY
3.2%
2.9%
1,275.8
1998-2005
1,200 2.7% 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 to
600 1.2% 565.9 2%
reach 7% by FY 2008
253.1
361.8
28.2 • Industry aspires to reach
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
Rules-based Processing
Value

Out-Tasking Maintenance
Application Technical Support
Support Transactional Data Entry

Data Entry

Strategic Impact

Cost Control Focus

Focus on
on Core
Core Competence
Competence Business Transformation

IT
BPO Mutual Gains Re-invest Mutual Gains

Source: neoIT
Indian vendors are expanding their addressable market…

Remote Infrastructure Remote management of services such as helpdesk services, server management,
Management data centre management, network 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, valuations, financial modeling
Outsourcing 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 best- Indian best-

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

Feasibility of JV/ Alliance JV/ Alliance

outsourcing
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 support
and maintenance
Services with
High • Customer Fulfillment
Penetration
• Accounts &
administration

MNC Captive Units Indian BPO 3PSPs

• Engineering services
• Remote infrastructure
management
Emerging
Service Lines • IT consulting
• Research & Analytics /
KPO
• Animation
…addressing the specific needs of different client groups
Captive Models
Pure Captive Model
• An internal cost center or a 100%
subsidiary company set-up to
execute offshore business
processes and/or IT services
• Amex, Dell, Standard Chartered,
HSBC, Ford, Sun
India Business Models
Strategic Alliance/Joint
Outsource Model
Venture Models
Joint Venture (JV) Pure Outsource
• Joint Venture with equity participation • Use of a India-based provider to
from customer and vendor. Customer offshore business processes or IT
retains control due to investments in services
entity.
• British Telecom - Mahindra Managed Outsource
• Full-/part-time resources on the
ground in India to facilitate transition,
BOT and Inverted BOT relationship mgmt and transfer of
• Where the Indian Provider sets up organization and domain knowledge
facility and provides implementation to third party providers
support to start with
• 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 ranging
between 25-60%

Source: McKinsey Global Institute

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

1,200 '000s
1,045
• Favourable demographic profile 1,000

• High annual graduate turnout 842

800
• Attractive employment prospects – 670
600 522
beyond monetary compensation 430
400
284

• Rapid scaling up of employment in the 200 160

56
sector 0
1990-91 1996-97 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 E
Source: NASSCOM
…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 processes • Emphasis on software • Development of processes,

• Alignment of Quality engineering metrics and a framework for
Management Systems (QMS) • Alignment of QMS with improvement in all areas (e.g.
with global standards (e.g. ISO) the CMM framework sales, billing and collection, etc.)

• Framework for measurable
improvement
• Consistent and orderly
execution of engagements
• Adoption of process
• Acquisition of CMM methodologies such as People
certifications at CMM and Six Sigma to deliver
progressive levels of ‘end-to-end’ quality
maturity
 …and demonstrated process expertise…

Country Level 5 • India has far more SEI CMM Level 5

# of Companies** companies than any other country in
Canada 1 the world
China 2 • Productivity and efficiency gains
India 76 achieved through process expertise
Russia 1 • Significantly lower error rates
USA 20 compared to similar units in the
exporting country
Source: NASSCOM

…have enabled firms to achieve significant productivity gains

** 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
Patent Product Patents 2005 legal framework matched
with their independent
Data protection Comprehensive Framework contracts provide adequate
2004
safeguards to companies
Vertical Specific Laws No
offshoring to India
Digital Signatures Yes • Further, Indian authorities are
Hacking Yes
committed to further
strengthening the existing
Privacy Yes frameworks to keep them
current and relevant
…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
4.3
2
2000-05
0
1999-00 2000-01 2001-02 2002-03 2003-04 2004-05E • Electronics consumption in India
Source: NASSCOM
estimated at $9.7 billion in 2005
Total Indian Electronics Market Consumption
• Still very low compared to other
EDP
26%
Consumer nations (China is at USD 150bn
25%
and the US is at USD 450bn)
Office Equip
1% • MNCs currently account for
Medical &
Industrial leading shares in most segments
Components
3% Telecom
22% – especially in hardware
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

…industry stakeholders are committed to overcoming them

Discussion Outline

The Emerging
Landscape of
Global Services

Evolution of
Indian IT-ITES

Q&A