TM
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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
About NASSCOM
• 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
• 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
• 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
NASSCOM is… Strategy
Objective
Vision: To establish India as the 21st century’s software powerhouse and position the country as the global sourcing hub for software and services
Discussion Outline
The EmergingLandscape of
Global Services
Evolution of Indian IT-ITES
Q&A
Discussion Outline
The EmergingLandscape 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…
…in 2004, this figure is expected to have risen to 400
2003
2004
33% increase in offshore penetration
year over year
33% increase in offshore penetration
year over year
Have nots40%
Have60%
Have nots20%
Have80%
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…
…across multiple business functions and industry sectors…
…without geographic boundaries
Source: McKinsey Global Institute
…with global service delivery becoming a mainstream phenomenon
Global BPO Revenue Global IT Services Revenue
India Offshore IT Services Revenue
Total Offshore IT Services Revenue
India Offshore BPO Revenue
$ Billion $ Billion
Total Offshore BPO Services Revenue
0
100
200
300
400
500
600
700
800
2004 2005 2006 2007 2008 2009
0
10
20
30
40
50
60
70
Source: neoIT
The list of services sourced globally is expanding rapidly…
Information Technology (IT) Business Process Outsourcing (BPO)
Human ResourcesHuman ResourcesApplication DevelopmentApplication Development
Finance and AccountingFinance and Accounting
Back Office AdministrationBack Office Administration
Payment ProcessingPayment Processing
CRMCRM
Tech SupportTech Support
Application Support & Maintenance
Application Support & Maintenance
Infrastructure ServicesInfrastructure Services
Engineering/ Design ServicesEngineering/ Design Services
Knowledge Process OutsourcingKnowledge Process Outsourcing
System Integration & Consulting
System Integration & Consulting
...indicating strong forecasts for offshore IT Services…
0.32 0.791.85
3.27
28.24
12.2
5.13
29%27%25%
13%14%
11%
25%
0
5
10
15
20
25
30
Mexico Philippines China EasternEurope
Others Canada India
$ B
0%
15%
30%
45%
60%
75%
90%
% (CAGR)
2002 2005 2008 CAGR
Source: neoIT
Total Market Size ($ B)
2002 17.6
2005 29.9
2008 51.8
…as well as offshore BPO
0.81.8
3.1 3.1
4.9
8.7
19.877%
38%
44%40%
29%
13%
45%
0
5
10
15
20
25
Mexico China Philippines Central &EasternEurope
Others Canada India
$ B
0%
15%
30%
45%
60%
75%
90%
% (CAGR)
2002 2005 2008 CAGRSource: neoIT
Total Market Size ($ B)
2002 8.1
2005 19.8
2008 42.2
Discussion Outline
The EmergingLandscape of
Global Services
Evolution of Indian IT-ITES
Q&A
Indian IT-ITES – the eye of the storm, is witnessing unabated growth…
28.221.5
16.113.412.18.26.05.0
1,275.8
978.3
779.6
657.9
565.9
361.8253.1
186.4
1.2%1.5%
1.9%
3.2%
3.5%
4.1%
2.7%2.9%
0
600
1,200
1,800
1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05E
0%
2%
3%
5%USD billion
INR billion
Share in India's GDP
• Indian IT-ITES has grown at a CAGR of 28% over FY 1998-2005
• Share in India’s GDP has more than doubled from 1.9% to 4.1% - expected to reach 7% by FY 2008
• Industry aspires to reach USD 50 billion in export revenues by 2008
…that is expected to continue
Source: NASSCOM
While the IT Services and Software segment remains the mainstay of the industry…
0%
100%
1999-00 2000-01 2001-02 2002-03 2003-04 2004-05E
ITES-BPO
IT Services &Software
Hardware
• 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…
Source: NASSCOM
1980 1985 1990 1995 2000 2005 & beyond
Mutual Gains Re-invest Mutual Gains
Strategic ImpactStrategic Impact
Va
lue
Va
lue
Full Process Outsourcing
Rules-based ProcessingProblem Solving/Decision Making
Customer Contact
Transactional Data Entry
Data Entry
Cost ControlCost Control Focus on Core CompetenceFocus on Core Competence Business TransformationBusiness Transformation
Out-Tasking
BPO
Transformational BPO
Application Support
Technical Support
Customer Contact / Hardware & Installation Support
Maintenance
Product Development & Testing
Design & Integration
ITBPO
…with the service portfolio moving up the value-chain
Source: neoIT
Research and Analytics
Remote Infrastructure Management
Indian vendors are expanding their addressable market…
Remote Infrastructure Management
Remote management of services such as helpdesk services, server 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 Outsourcing
Financial services: Equity research analyst support, 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, vehicledevelopment 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…
OthersICTBFSI Auto Healthcare
…across industry verticals and business functions
Research / Analytics/ Engineering
Shared Services (IT / HR / FA)
Customer Relationship Management
Back Office Processing
Data Entry / Transcription
Industry maturity has fostered the evolution of multiple engagement models…
JV/ Alliance
Indian best-of-breed
vendor
Delay
Outsource to Global brand
Captive
JV/ Alliance
Indian best-of-breed
vendor
Delay Captive
From primarily captive… …to a hybrid model
Feasibility of outsourcing the process
Cross-border operation sophistication
Outsource to Global brand
Source: McKinsey Analysis
…and a diverse vendor landscape…
Indian IT FirmsMNC Vendors with Indian Ops
Indian BPO 3PSPsMNC Captive Units
Services with High
Penetration
Emerging Service Lines
• Custom application development support and maintenance
• Customer Fulfillment• Accounts &
administration
• Engineering services• Remote infrastructure
management • IT consulting• Research & Analytics /
KPO• Animation
…addressing the specific needs of different client groups
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
Captive Models
Joint Venture (JV)• Joint Venture with equity participation
from customer and vendor. Customer retains control due to investments in entity.
• British Telecom - Mahindra
Strategic Alliance/Joint Venture Models
BOT and Inverted BOT • Where the Indian Provider sets up
facility and provides implementation 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
Pure Outsource• Use of a India-based provider to
offshore business processes or IT services
Outsource Model
Managed Outsource• Full-/part-time resources on the
ground in India to facilitate transition, relationship mgmt and transfer of organization and domain knowledge to third party providers
India Business Models
While cost advantage was the initial attraction…
PROCESS ACHIEVED SAVING
Transaction Processing 25%-40%
Accounting / Contact Center Services 30%-40%
IT Services 25%-50%
Finance / Insurance 40%-60%
Digital Content 30%-50%
Software/ ERP / Analytics 40%-60%
Source: GECIS, FT Outsourcing to India Conference – November 2004
COST ELEMENT US INDIA SAVING
USD / FTE / Year Value Share Value Share On US Cost base
Personnel Costs 42,927 73.3% 6,348 48.4% 85%
IT/ Telecom Costs 2,400 4.1% 3,770 28.7% -57%
Office Facility Costs 3,700 6.3% 1,991 15.2% 46%
Other G&A Expenses 9,571 16.3% 1012.5 7.7% 89%
Total Cost 58,598 100% 13,121 100% 78%
Source: NASSCOM, Evalueserve AnalysisBlended rate for voice and non-voice operations
• Significantly favorable total transaction cost economics
• Gross savings on factor cost up to 78%
• Net realized savings ranging between 25-60%
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
Source: McKinsey Global Institute
…access to a large, highly qualified pool of talent,
100% > 1 billion
45.1%
47.9%
7.0%
0-19 years
20-59 years
Over 60years
Indian Demographic Profile
56
160
284
430522
670
842
1,045
0
200
400
600
800
1,000
1,200
1990-91 1996-97 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 E
'000s
• Favourable demographic profile • High annual graduate turnout• Attractive employment prospects –
beyond monetary compensation
• Rapid scaling up of employment in the sector
Source: NCAER, Registrar general of India
Source: NASSCOM
292,000
195,354
103,44082,409
60,914 45,145
India China Japan Russia US SouthKorea
Undergraduate engineering degrees granted in 2003
Source: NASSCOM, US Census Bureau
…a high degree of quality orientation...
STAGE I STAGE II STAGE III
Quality practices in Indian IT-ITES have evolved through three distinct stages…
• Creation of basic processes • Alignment of Quality
Management Systems (QMS) with global standards (e.g. ISO)
• Framework for measurable improvement
• Consistent and orderly execution of engagements
• Emphasis on software engineering
• Alignment of QMS with the CMM framework
• Acquisition of CMM certifications at progressive levels of maturity
• Development of processes, metrics and a framework for improvement in all areas (e.g. sales, billing and collection, etc.)
• Adoption of process methodologies such as People CMM and Six Sigma to deliver ‘end-to-end’ quality
…and demonstrated process expertise…
• India has far more SEI CMM Level 5 companies than any other country in the world
• Productivity and efficiency gains achieved through process expertise
• Significantly lower error rates compared to similar units in the exporting country
Country Level 5
# of Companies**
Canada 1
China 2
India 76
Russia 1
USA 20
Source: NASSCOM
** Compiled after October 2002 – may not be current for all the countries
…have enabled firms to achieve significant productivity gains
A comprehensive legal framework…
• Though India does not have an independent data protection act – the existing legal framework matched with their independent contracts provide adequate safeguards to companies offshoring to India
• Further, Indian authorities are committed to further strengthening the existing frameworks to keep them current and relevant
Data Privacy and Protection Laws in India
Copyright Yes
Patent Product Patents 2005
Data protection Comprehensive Framework 2004
Vertical Specific Laws No
Digital Signatures Yes
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…
• Domestic revenues of Indian IT-ITES valued at over USD 10bn
• CAGR of 19.2 percent over FY 2000-05
• Electronics consumption in India estimated at $9.7 billion in 2005
• Still very low compared to other nations (China is at USD 150bn and the US is at USD 450bn)
• MNCs currently account for leading shares in most segments – especially in hardware
…with significant untapped potential
Domestic IT-ITES Revenues
4.35.9 6.3
10.2
8.25.7
0
2
4
6
8
10
12
1999-00 2000-01 2001-02 2002-03 2003-04 2004-05E
USD billion
Total Indian Electronics Market Consumption
Components22%
Telecom7%
Office Equip1%
Medical & Industrial
3%Control & Instr
7%Radio Comm
9%
EDP26%
Consumer 25%
Source: In-Stat / MDR
Source: NASSCOM
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 EmergingLandscape of
Global Services
Evolution of Indian IT-ITES
Q&A
