India : Flagship IT Outsourcing

India : Flagship IT Outsourcing

Presentation ByR. K. Verma Executive Director,

ER & DCI, NOIDA

Regional Business Round Table2-4 December, 2002 Lithuania

Agenda

IT Industry Software and Service Industry India Advantage Government Initiative Business model – example India & Europe: evolution of I.T. collaboration


IT Industry in India

In the last 5 years the industry has recorded a CAGR of more than 40%

Earned revenues worth US$ 12.2 B in 2001-02

2001-02 recorded the highest growth ever at a stunning 50%

Expected to reach US$ 80 b by 2008

2.042.88

3.85.03

6.05

8.67

10.1

12.2

0

2

4

6

8

10

12

14

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02


Software and Services Industry

India currently has a marketshare of 2% of the global market

Grossed an annual revenue of US$ 12.2b in 2001-02 Software Exports – US$ 9.5 b Domestic Market – US$ 3.7 b

Registered an overall growth of 55% during 2001-02 CAGR for the industry for the last 5 years has been

56.5%


Indian Software and Service Sector

Traditional Strengths Legacy Systems Software Development Large Projects Outsourcing On-site services Integration

New Strengths E-Commerce / E-Business Digital Content

Development R&D services Enterprise Consulting Network Management

Services Telecom Software IT Enabled Services


IT Software and Services Exports

A CAGR of 62.3% over the past 5 years Drivers for the market include:

Increased outsourcing Liberalisation of govt. policies and procedures Availability of good technical manpower

Expected to reach US$ 50 billion by 2008

1,0851,750

2,650

4,000

6,200

8,500*

12,200

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03

US

$ M

illio

n


Software Exports Activity

Rest of the World10.0%

Europe24.0%

Japan4.0%

America62.0%

USA

UK

INDIA

JAPAN

NORWAY

Singapore

Offshore Software Development

Destination of Software Exports


IT Enabled Services

Estimated to grow from US$ 900 million in year 2000 to an estimated US$ 17 billion by 2008

Drivers for the market Time zone difference with USA

and Europe enabling 24x7x365 Huge pool of English speaking

and computer literate manpower

Key focus areas: Call Centres, Engineering

and Design, Back Office Operations, Revenue Accounting, other ancillary operations

257

560

900

1,340

0

200

400

600

800

1,000

1,200

1,400

1998-99 1999-00 2000-01 2001-02


Projections

Software sector to grow steadily To attract FDI of over US$ 4 billion by 2008 Revenues expected to reach US$ 90 billion by 2008 To employ more than 2.2 million people

Domestic Software market expected to touch US$ 25 billion by 2008

Indian export revenues to touch US$ 50 by 2008 IT Enabled Services sector to witness a strong growth of

US$ 17 billion by 2008 US $9 billion business opportunity from global e-solutions

services market by 2005

India Advantage


Ireland :

• Packaged Applications

• Localization

• Product Development

China :

• Embedded Software

• Hardware Services

• Localization

• Application Development

Canada :


• BPO

• Contact Centers

Israel :

• High-End Software

• Learning Systems

Country Specialization by Niche

Russia :

• High-End Software Engineering

Philippines :

• BPO

• Contact Centers

• Animation


India :• Application Outsourcing• ITO• BPO• Product Development• Contact Centers


Stable Economy and Infrastructure

Stable legislative and economic framework

The GDP of India grew at 5.2% over the previous year and stands at US$ 423 B

India has 6th largest telecom network in the world and the second largest among the emerging economies (after China)

Currently there are 25m fixed phone lines and to reach 125m by 2008

Cellular penetration in India is currently 4.5 million and is growing steadily


Large reservoir of skilled workforce

With over 410,000 employees, India is the 2nd largest employer in IT software and services industry

Huge pool of English speaking and computer literate manpower

Annual output of 178,000 engineering graduates

160 universities and 500 institutes provide computer education at degree level

70,000 private training institutes for computer education – 1 million trained every year

73,000 to 85,000 professionals are ready to join the industry every year


India’s value proposition goes beyond costs

Dramatic cost reductionDramatic cost reduction

Faster time to marketFaster time to market

Well established quality processes

Well established quality processes

Large, high quality talent poolLarge, high quality talent pool

Tested and robust business models

Tested and robust business models

The India Value

Proposition

The India Value

Proposition

Annual cost of a FTE* in India could be as low as 30% of the cost in a Financial hub like New York or London

24X7 production runs by synchronizing work between onshore and offshore teams

Over 50% of the SEI CMM Level 5 companies are based in India

Almost all relevant players are ISO 9000 certified

Pool of over 410,000 technical professionals growing at 20% p.a

Second largest English speaking scientific manpower pool with 62% having more than 4 years experience

Stable economy with strong government support for IT growth

Entrepreneurial know-how and business mgmt skills

Source: McKinsey

* Full Time Equivalent


India is a very competitive location for outsourcing

Size of circle corresponds to number of qualified workers

Capabilities of workers• Qualifications/capabilities• Foreign languages (primarily English)• Quality of work/work ethic• Cost differential

High

Low

Low High

Singapore

Hong Kong

Holland

Ireland

U.K.

Australia

China

Philippines

Mexico

India

Location attractiveness• Infrastructure

- Communication- Basic infrastructure

• Country risks/FDI incentives- Attractive incentives- Political environment

• Time zone attractiveness

Source: McKinsey

Government Initiatives


Government Initiatives

IT on National Agenda (IT and Communications Ministry) Strong Telecom and IT Policy

National Telecom Policy The Information Technology Bill The Convergence Bill

100% customs duty exemption Zero duty on import of Software Zero Tax on Venture Capital Gains Income Tax Exemption to IT Software & Services Opening of the long distance and International telephony sectors

for private participation Internet Telephony by April 2002


Government Initiatives..contd

Special Schemes - Software Technology Parks (STP) and Special Economic Zones (SEZ) 21 STPs all over in India Income Tax holiday till 2010 STP building or Virtual Units Free Imports Minimum value addition required High speed Datacom Connectivity

E-Governance 19 State Governments have IT Policies 1-3% of Government spending towards IT

Enforcement of Anti-Piracy laws Signed ITA at WTO


An attractive IT destination

India exports software to 102 countries around the globe

Software exports account for a substantial 10.5% of India’s total exports

185 of the Fortune 500 companies outsource from India

23 CEOs of Fortune 500 companies are of Indian Origin

More than 1000 domestic IT service providers exist


An attractive IT destination

Indian vendors adhere to strict quality standards such as CMM, PCMM and ISO certification

Global software majors such as Microsoft, Compaq, i2 Technologies, Oracle, Novell, Adobe, SAP etc. have their operations in India

Leading MNCs setting up back-office operations in India Prominent among them include GE Capital, American

Express, Citigroup, HSBC, Standard Chartered, Ford and Deutsche Bank


Top 5 Positives

Great Quality at Good Price

High overall customer satisfaction

Passion and Commitment

Availability of Technical Skills

Enterprise move up “Quality” Chain

Customer Feedback - Positives & Challenges

Challenges

Cross cultural issues

Change Management

“Subservient” approach

Industry / Process Skills

Account Mgmt. vs. Project Mgmt.

Business Models


A variety of business models can be considered

Single entity formed by combination1 set of shareholdersPooling or purchase of assets/stock

Characteristics

Creation of “Newco” equity companyContributions and ownership by 2 or more partners

Parent-to-parent equity investment, plusOngoing activity involving joint contributions; shared risk and

reward

Contractual parent-to-parent alliance with substantial shared risk/reward or exclusivity

Parent-to-parent Relationship without shared control, ownership, or risk

Arms lengthArms lengthcontractcontract

NonequityNonequityalliancealliance

Minority equityMinority equitystakestake

Joint venturesJoint ventures

M&AM&A

Source: McKinsey


Off-Shore Models: Services Delivery


Companies like GE are leading the way in leveraging the Indian opportunity (example)

Aims to become biggest

provider of remote

services with 10% share of global remote

services

Call centers Transaction processing e.g. mortgage, insurance claims, credit cards

Accounting payment Insurance Engineering & research

Moving up the value chain into task analysis, planning, forecasting, underwriting and other value services

Internal (mainly supporting GE US)

Internal (supporting GE worldwide)

Supporting 270 GE processes of thirty different business

Internal and external

<1,500 at one location 1,500-9,500 at 3 locations At least 12,000 in 4 locations

1994-19981998-2001

2003

~ $ 300 million per annum Tested concept for one year Demonstrated cost and quality

benefits to end users within GE Invested in infrastructure and

built scale

> $ 450 million per annum

“India’s potential to become a global R&D platform is acknowledged worldwide. Our focus is to board base this talent from information technology to multidisciplinary research engineering and technology enterprise”

Main activity

Resources

Estimatedbottom lineimpact

Client

Source: Interviews, Press clippings, McKinsey analysisCEO, GE India

India & Europe: I.T. Collaboration


Several factors explain limited European activities historically

Moderate economic pressureModerate economic pressure Slower uptake in Europe for most technology trends Less competitive pressures

Minimal exposure to India/ Indian playersMinimal exposure to India/ Indian players

US focus of Indian companies – group mentality Smaller NRI population Perception of low cost but poor quality

Language barriersLanguage barriers Challenge of working through an on-site model

Socio Cultural barriersSocio Cultural barriers

Limited exposure to Indians Acclimatization challenges Value experience over youth and quality over price

Access to lower cost East European MarketsAccess to lower cost East European Markets

Poland, Hungary, Ireland and now Russia were viable options

Visa restrictionsVisa restrictions More control than US

Source: McKinsey


However, a large number of these factors now stand addressed in favour of fostering an Indian partnership

Companies engaging in in-house training Number of trained language savvy Indians is increasing steadily Setting up a local front end to cross language and cultural barriers

Language barriersLanguage barriers

Still real but Indian companies are becoming more sensitive As India deals more with Europe the cultural comfort level will rise Aggressive off shoring resolves much of the socio cultural conflict

Socio Cultural barriersSocio Cultural barriers

Changing as European companies aspire to be globally competitive

Indian IT companies are exploring Europe seriously Setting-up key local offices and near-shore development centers Increasing student population in Europe (in particular U.K)

Minimal exposure to India/ Indian playersMinimal exposure to India/ Indian players

Inability of East European markets to meet the demand Indian companies often have better quality processes and a

highly skilled staff

Access to lower cost East European MarketsAccess to lower cost East European Markets

This matter is being addressed as the need is growing The off shoring model puts less pressure on Visa effortsVisa restrictionsVisa restrictions

Moderate economic pressureModerate economic pressure

Source: McKinsey


To counter this and target the European markets, India its and its companies will have to significantly overhaul their front end processes

Increase new business development momentum

Increase penetration into existing key accounts

Step up marketing and brand building efforts

Recruit seasoned local professionals Target at decision making level Tailored value propositions Robust sales toolkit

Define clear positioning Focused reputation building/ networking

efforts Clear 1 year event/networking plan Identify events/forums to participate

Cross-functional account team Robust Key Account plans Clear incentives Meaningful top management involvement Quality reviews

Source: McKinsey


Summary

Partnering with India for offshore IT Services is a working model and a proven success

Cost as well as strategic benefits are obtainable

Alternative engagements models should be evaluated

NASSCOM & the MCIT is suited to enable dialogue between Transition Economies and India’s IT Sector

India : Flagship IT Outsourcing

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