IT Offshore Outsourcing

Offshore outsourcing is not generating the expected cost savings promised nor

is it pursued for cost savings.

McKinsey Global Survey

McKinsey Global Survey

McKinsey Global Survey

USA is still the leading region for product designs & new product intro.

Changing World• Collapse of the Berlin wall • Leadership change in China • The European Union

Technology Bubble

• Year 2000• Telecommunication

– Voice

– Data

CEO /CFO View of Supplier$1,000,000 Cost savings

468,000 Number of shares

$2.137 Cost savings stated in earnings per share (EPS)

$1,000,000 Cost savings

20% Operating Profit %

$5,000,000 Additional sales needed to generate the same operating income as the cost savings

$1,000,000 Cost savings

468,000 Number of shares

$2.137 Cost savings stated in earnings per share (EPS)

Source: SDS network software M.L. Emilliani

Impact of Cost reduction on Share price

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

2003 2004 2005 2006

Share price Share price

India: Attractive IT Outsource Location

High

High

LowWorkers Capability

Loc

atio

n at

trac

tio

n

English, Education, Qualification, Cost

InfrastructureGeopolitical RiskIncentives

Criteria: South East Asia Attraction

GeopoliticalRisk

English Proficiency

Average Programme

r Salary

Pro’s & Con’s

India Moderate Good $4-12K IT Outsourcing heaven

China Low Poor $4-12K Strong government support. Weak IP protection., Bureaucratic

Thailand Low Poor $4-12K Weak education

Malaysia Low Fair $4-12K Shortage of skilled IT

Singapore Low Good >$12K Excellent infrastructure, stable

Philippines Low Good $4-12K Mfg outsourcing heaven

Vietnam Moderate Poor $4-12K Small Mfg outsourcing

New Zealand Low Good >$12K Very stable political & Economic

Foreign direct investment in:

Commercial-servicesexports from:

United States: $82.0 BIndia: $ 4.7 BChina: $53.5 B

United States: $282.5 billionIndia: $ 24.9 billionChina: $ 44.5 billion

Sources: • Organization for International Investment, • The Economist, • U.S. Federal Reserve, • World Trade Organization

United States India ChinaTotal population 0.29 billion 1.07 billion 1.30 billion

Civilian labor force 147 million 470 million 744 million

Percent of population under age 25 35% 53% 41%

Number of college graduates / year 1.3 million 3.1 million 2.8 million

Number of computer-science graduates / year 53,000 75,000 50,000

As percentage of population 0.02% 0.007% 0.0004%

Cost of a cup of coffee (gourmet) $1.68 $0.50 $1

Percent of country with electricity 100% 60% 98%

Percent of population living below the "poverty line"*

12% 25% 10%

Illiteracy rate 5% 35% 15%*

Definition of "poverty line" varies substantially by country.Sources: U.S. Census Bureau, U.S. Bureau of Labor Statistics, U.S. DoE, The Economist, Economic Times of India, Software Outsourcing Research, CNBC, the National Center for Education Statistics, the International Energy Agency, and CFO research

Hourly WagesU.S. India

Telephone operator $13 Less than $1

Medical transcriptions $13 $2

Payroll clerk $15 $2

Legal assistant/paralegal $18 $7

Data-entry clerk $20 $2

Accountant $23 $11

Financial researcher/analyst $34 $11

Software developer $60 $6

Engineer $120 $18Note: Numbers are rounded. Where ranges were given, the average is given aboveSources: University of California, Berkeley; and McKinsey Global Institute

India moving up the value-chain in IT services

• India started by providing Cobol programmers in early 1990s

• Moved to porting from Fortran and Cobol onto C and Pascal

• Moved to converting legacy systems into simple client-server based systems

• Solution provider to Y2K glitch• Moved up the technology chain to Java and XML

programming • Attempting to break into R&D in software & services.

IT Services

– Steel– Chemicals– Ship building

– Utilities– Car manufacturers

– Banking & financial institutions

– Insurance

– Energy equipment– Electronics

– Airlines– Pharmaceuticals– Retailing– Packaged goods– Computer

manufacturers

– Telecom

– Aerospace

– Entertainment– Real estate brokerage– Hotels

– E-commerce– SW-producer

•High•Medium

•Low

•Medium

•High

•Low

•G

lob

al cost

base in

du

str

y

•Relative share of remote serviceable processes

Multinational IT companies with R&D center in India

• Motorola India Electronics Ltd. • Novell India Software Dev. Center • Oracle India Development Center • Philips Research Center • Samsung India Software R&D Center • SAP Labs India • Sasken Technologies • STMicroelectronics • Sun Microsystems, India Engineering Center • Texas Instruments • Zilog R&D Center • Many others in Biotech and Pharmaceutical

Industries

Prior to Outsourcing Evaluate

• Fit between product and where they are mfg.?

• How Supply Chain will work overseas?

• Do lower labor costs really offset shipping fees?

• Who do you want to manage your vendor relationships?

Compete not on PRICE,

but on SPEED & FLEXIBILITY

Offshore Outsourcing dilemma

Will be decided in 2015…

US aging population growth

+Shortfall in domestic labor supply