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Sri Lanka’s IT/ BPO and Knowledge Services Industry

Dr. Arul SivagananathanMD – Hayleys PLC’s

IT/BPO & Shared Services Sector25th October 2013

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Overview

� About the Industry

� Where is Sri Lanka today in the World outsourcing map?

� State of the Sri Lankan IT/ BPO industry

� Future focus

� Positioning Sri Lanka

� Building the brand

� SLASSCOM Initiatives

� Rural BPO and IT

� Way Forward

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Customer Market segmentation in BPO

Source: NASSCOM Strategic Review

Americas:

America accounts for more

than 63% of the global spend

on IT/BPO

Europe, Middle-East & Africa (EMEA):

EMEA accounts for approx 19%

of the global spend on IT/BPO

Asia Pacific:

• APAC region accounts for

more than 17.6% of the

global spend on IT/BPO

• It is estimated APAC to be fastest growing market

with 15-20% growth in the coming years

Overall Global IT/BPO market was USD 500 Billion in 2011

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Why do Global Companies Off-Shore?

• Cost-savings between 40% to 50%

• Fixed to variable cost

• Increased ability to focus on core competencies

• Shared Services – Create CoE (24 x 7)

• Unlock constrains to changes

• Improved efficiency and higher service levels

• Quality improvements with Six sigma & FMEA

• Re-engineer processes and streamline methodology

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Where is Sri Lanka today in the World’s Outsourcing

landscape ?

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Sri Lanka - Strengths

• Educated work force

• Talent pool for specific skills: eg largest pool of UK qualified accountants outside of UK, pool of IT graduates

• High literacy rate (>93%)

• Investor friendly policies with booming economy – Tax concessions, BOI

• Time Advantage – Centrally Located to West & East

• Beautiful Island with booming tourist industry

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• Political Risk – Regular Policy Changes

• Infrastructure – lack of intelligent buildings / roads / transport

• High Telco, Utility cost

• Lack of skills outside of Greater Colombo (IT savvy, English)

• Government policies on labour law (Poya days, Female night shifts, Number holidays in Sri Lanka)

• Mindset change to embrace it as a career

Change of mind-set required for Global Services

Sri Lanka - Weaknesses

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Where were we 5 years ago?

Sri Lanka

Philippines

Sri Lanka

China

& today?

Vietnam

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What need’s more work…

• Building the ‘Sri Lanka brand’ within the target segments –move from pre conflict level marketing investment to something suitable

• Focused investment promotion (moving beyond tax incentives)

• Enabling environment (telecom, infrastructure)

• Right Talent - Accelerating capacity development while ensuring quality

• Catalyst policies to help the growth of the industry

• Government championship

SLASSCOM(Sri Lanka Association of Software and Service Companies)

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Member Companies

Board of Directors

General Council

Corporate Office

Advisory Board

SLASSCOM Structure

12 member Board of Directors

including Chairman, two Vice

Presidents from BPO and IT

sectors

Advisory panel

consisting of eminent

professionals from the

industry

21 member

General Council

elected every year

Team of five with full time

Executive Director

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$1b

Marketing

Policy

Quality

Capacity -BPO

Capacity-IT

Entrepreneurship

grow demand

Driving Strategy - Forums

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Sri Lanka is clearly emerging as a Global IT/ BPO Sourcing Destination

Sri Lanka is another Asian country that has

succeeded in positioning itself as an

alternative to India. - IBM Global Location Trends Report 2010

Ranked among the Top 25 in the AT Kearney Global Services Location

Index (GSLI) in 2011Ranked number 5 in financial attractiveness, ahead of India, China and all of CEE

Gartner's 30 Leading Locations for Offshore Services (2010-2011).

Included among the Top 10 in Asia pacific.

12th in the top ranking destinations in IBM Global Location Trends Report

Ranked among the top 10 emerging global destinations by Global

Services Magazine.

Sri Lankan’s geographical location, infrastructural facilities,

direct access to the Indian market, high quality standards of the

workforce, open economy and various free trade agreements

make it an attractive outsourcing destination. – Global Services Destinations Compendium 2010

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State of the Industry

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VISION of SLASSCOM

“by 2016, IT/BPO Industry to become 1 Billion USD in

Export Revenue and create 100,000 Jobs ”

2009 2010 2011 2012 2013 2014 2015

210

310

387

525

605

750

946

IT/BPO Export Revenue in mill USD

Actual Estimated

Source: ICT Export Value Survey (Aug 2011- PWC publication)

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Industry made great strides over the last 5 years in revenue, employment and growth in industry

Growth in new ventures starting100% 182%Growth in

workforceGrowth in revenue

Global growth in brand reputation

Government endorsement and support

• Top 25 in the AT Kearney Global Services Location Index

•Gartner's 30 Leading Locations for Offshore Services

• 12th in the top ranking destinations in IBM Global Location Trends Report

• Traction in Australia, UK, FAO, Product Engineering

• Attractive corporate Tax holiday• Lower PAYE tax – only industry• President's backing - Knowledge Hub/Year of English & IT, Set up of Ministry of IT

• 300m allocation in 2013 budget• Significant impact from ICTA ICBP• EDB and BOI alignment

Rapidly growing startup eco system

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Where should we set our sights for the next wave of growth?

2022 Moonshots (Vision 2022)

• $5b Revenue

• 200,000 Jobs

• 1000 Startups

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Building the Brand

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Country Reports

• AT Kearney Sri Lanka Country Benchmarking Report commissioned by ICTA

• ICT Export Value Survey 2010 -Published by EDB. Comprehensive view on the IT and ITES Export market (Aug 2011)

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Select clients of Sri Lankan firms

Select MNCs operating in Sri Lanka

Unknown to most global observers, a significant knowledge services industry has been developing in Sri Lanka

Key Insights

• Over 300 IT, BPO and KPO companies employ more than 60,000 Sri Lankans and generate more than $400 million in exports in 2011

• Companies in Sri Lankaprovide sophisticated accounting services and financial analytics to their customers, as well as offshore legal services, medical diagnostics, and architectural drawings

• Sri Lankan companies export services to a wide variety of clients across regions

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In terms of costs, Sri Lanka’s average wages are in line with South Asia, making it one of the world’s lowest-cost destinations

Annual Average Wages, US$

Source: Economist Intelligence Unit 2011, A.T. Kearney analysis

1,012

1,272

1,440

1,524

1,584

1,620

2,772

4,716

4,860

6,708

7,641

UK 32,769

Mauritius

Malaysia

UAE

China

Egypt

India

Sri Lanka

Philippines

Bangladesh

Pakistan

Vietnam

Average wages

• Average wages indicate overall wage pressure in an economy, regardless of industry conditions

• Sri Lanka compares closely to the other South Asian and South East Asian countries, making it one of the lowest-cost options for remote service delivery

• The only countries that report significantly lower average wages are Vietnam, where incomes are rising fast, and Pakistan, where security concerns limit attractiveness

Financial Attractiveness

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For typical positions in the knowledge services sector, Sri Lanka offers amongst the lowest wages in the benchmark countries

Annual IT Programmer compensation cost, US$

Note: All wages are annual and fully loaded. Fully loaded compensation includes benefits, taxes, and bonus.

Source: Mercer HR Consulting 2011, Watson Towers 2011, A.T. Kearney analysis

11,291Vietnam

11,371Philippines

India 10,170

Sri Lanka 8,996

Pakistan 8,683

Bangladesh 7,800

UK 44,297

UAE 40,504

Mauritius 33,704

China 23,576

Malaysia 16,868

Egypt 13,894

Annual BPO Analyst compensation cost, US$

3,574

4,104

4,200

4,653

5,374

5,451

5,913

9,121

UK 28,679

UAE 17,895

Mauritius 14,145

Malaysia 10,398

China

Egypt

India

Pakistan

Philippines

Bangladesh

Sri Lanka

Vietnam

Professional Compensation

• Sri Lanka offers remarkably low costs, considering the value offered

• According to international salary surveys, compensation costs for sample IT positions are 10% lower than India and 20% lower for BPO functions

• In addition to low costs, companies consistently report low attrition

• Attrition rates in Sri Lanka tend to be just under 20%, whereas rates in India and the Philippines typically range from 20-25% in IT to 30-35% in BPO

Financial Attractiveness

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Office space is available and relatively affordable, and new developments are underway

Office rent, class A office space in major business hub, US$/m2

Source: CB Richard Ellis 2011, A.T. Kearney analysis

192

227

252

262

316

343

368

440

459

472

918

978

India

China

Pakistan

Vietnam

Egypt

UK

Malaysia

Philippines

Bangladesh

Sri Lanka

Mauritius

UAE

Real Estate

• Companies in Colombo do not report office space to be a problem

• Several BPO companies are housed in class A facilities downtown as opposed to in suburban campuses

• In addition, class B real estate in Colombo is easier to come by and of better quality than in many emerging market capitals

• Private actors have created dedicated IT/BPO industry parks - not yet at capacity

Financial Attractiveness

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Literacy and secondary enrollment rates are on a par with developed countries

Note: Gross enrolment ratios measure total enrolment as a percentage of the total population corresponding to the relevant age group

Source: UNESCO 2011, A.T. Kearney analysis.

Secondary Enrollment Rate, % Adult Literacy Rate, %

UAE 98%

70%

Vietnam 70%

Malaysia

33%

Bangladesh 44%

India 59%

Pakistan

China 76%

Egypt 81%

Philippines 82%

Mauritius 89%

Sri Lanka 90%

UK 96% Philippines 95%

UK 99%

93%

Pakistan 55%

Bangladesh 56%

India 62%

Egypt 66%

Mauritius 88%

UAE 90%

Sri Lanka 91%

Malaysia 92%

Vietnam 93%

China

Enrollment rates

• With free primary and secondary education and an extensive university system, Sri Lanka has had a very strong education system for decades

• Sri Lanka’s literacy rate is the highest in South Asia, positioning it to train a large number of high-quality personnel

People Skills & Availability

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Executives rank Sri Lanka’s tertiary education among the best in Asia

Quality of Management Schools

6.0

5.0

4.9

4.7

4.7

4.4

4.3

4.1

4.0

3.9

3.3

3.0Egypt

Vietnam

Bangladesh

Pakistan

Mauritius

China

Philippines

UAE

Sri Lanka

India

Malaysia

UK 5.0

4.9

4.7

4.7

4.5

4.2

4.2

4.1

3.6

3.3

3.1

2.4Egypt

Philippines

Bangladesh

Pakistan

Mauritius

Sri Lanka

UK

India

China

Malaysia

UAE

Vietnam

Quality of Math & Science Schools

Source: World Economic Forum Global Competitiveness Report 2011-2012, A.T. Kearney analysis

Education quality

• Sri Lanka’s management schools are ranked among the best in Asia; their math and science programs also rank highly

• Sri Lanka currently has 23 accredited universities, more than 25 private institutes offer diplomas in IT

• Foreign universities are partnering with local institutions to offer degree programs, and some are setting up their own campuses in Sri Lanka

People Skills & Availability

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Sri Lanka has cultivated distinctive capabilities in particular technical and professional services

Source: Chartered Institute of Management Accountants 2011, A.T. Kearney analysis

12,466

5,729

3,080

3,036

2,520

2,446

2,310

1,959

1,252Poland

Ireland

Zambia

Pakistan

China

India

Malaysia

South Africa

Sri Lanka

UK 45,280

Top Ten CIMA Student PopulationsProfessionals

• To compete with large countries, Sri Lanka needs to focus on growing competitive talent in specific areas

• Already Sri Lanka boasts more people with UK-recognized accounting qualifications than any country outside the UK

• Given a similar emphasis on other professional qualifications (in medicine, law, engineering, architecture, etc.), the country has the potential to develop distinctive remote services offerings in these areas also

• The IT industry has also developed distinctive capabilities in a number of niches such as open source, cloud apps and mobile technologies

People Skills & Availability

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Sri Lanka’s business environment is considered superior to other low-cost emerging markets

Ease of Doing Business, Rank

Source: World Bank Doing Business 2012, A.T. Kearney analysis

7

18

23

33

89

91

98

105

110

122

132

136

UK

Malaysia

Philippines

India

Bangladesh

Egypt

Pakistan

Vietnam

China

Sri Lanka

UAE

Mauritius

Regulations

• The World Bank Doing Business Report measures the costs to firms of business regulations in 183 countries

• Sri Lanka improved 11 points in the Doing Business rankings between 2011 and 2012 and ranks higher than all other lower cost countries in the region

• A three-decade legacy of pro-business and pro-investment policy has resulted in the lowest regulatory burden on the subcontinent

2.6

China

3.7Sri Lanka

Vietnam 2.7

Egypt 3.0

India 3.0

Bangladesh 3.0

UK 3.1

Pakistan 3.2

Mauritius 3.6

Philippines

UAE 4.4

Malaysia

3.9

4.4

Regulatory Burden

Business Environment

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Sri Lanka also offers superior infrastructure to most other low-cost countries

Overall Infrastructure Quality Score

Source: World Economic Forum Global Competitiveness Report 2011-2012, A.T. Kearney analysis

6.3

5.7

5.6

4.7

4.6

4.2

3.9

3.8

3.5

3.4

3.1

2.8Bangladesh

Vietnam

Philippines

Pakistan

India

Egypt

China

Mauritius

Sri Lanka

UK

Malaysia

UAE

Infrastructure

• Overall infrastructure quality, including transportation and utilities, surpasses that of South Asian and almost all Southeast Asian competitors

• This is a welcome difference to other locations, often plagued by inefficient infrastructure

• Colombo’s Bandaranaike International Airport has more flights to India than any other country

• In terms of ICT infrastructure, Sri Lanka alsoscores better than most regional competitors

Business Environment

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The Digital Divide – Low ICT Adoption/ Literacy

Percentage of computer owned households by Sector

and Province – 2004, 2006/7 and 2009

Source: Computer Literacy Survey – 2009 by Department of Census and Statistics

Household computer ownership

(percentage) – 2009

Internet and e-mail using household population

(percentage) 5-69 years aged by sector and province - 2009

Where can we go in the next 10 years?

The road ahead..

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Colombo

Uduvil

Vavuniya

Jaffna

Vakarai & Oddusudan

Batticaloa & Kalmunai

Akkaraipatu

ONTIME BPO

Mavalachiya

Foundation of

Goodness

Seenigama

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■ Sri Lanka is in many ways a hidden gem for outsourcing. It is uniquely positioned to offer companies skilled talent and a strong business environment at competitive costs

■ With a population of 20 million, Sri Lanka does not offer the size advantages of countries such as China, India, and the Philippines. However, recognizing its small scale, companies in Sri Lanka focus on higher-value niche products across industries

■ With continued efforts to expand the talent base, reduce red tape, improve infrastructure, and establish new knowledge cities around the country, Sri Lanka is expected to become a major player in the IT, BPO, and knowledge services industry in the next few years

■ Sri Lanka already offers global companies unique advantages as a location for delivery of sophisticated knowledge services. It is likely that the industry will exceed its own ambitious target to generate more than $1 billion in revenues by 2016 and put Sri Lanka firmly on the global services map

■ Sri Lanka IT/BPO industry to become $5 billion industry by 2022 and the vision to become the number one industry with 1000 startups.

In Summary

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Thank you