India : Flagship IT Outsourcing

1. India : Flagship IT Outsourcing Presentation By R. K. Verma Executive Director, ER & DCI, NOIDA

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

3. 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

4. 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%

5. 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 Indian Software and Service Sector

6. 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 US $ Million

7. NORWAY UK JAPAN USA Singapore INDIA Software Exports Activity Offshore Software Development Destination of Software Exports

8. 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 literatemanpower • Key focus areas: • Call Centres, Engineering and Design, Back Office Operations, Revenue Accounting, other ancillary operations

9. 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

10. India Advantage

11. Russia : • High-End Software Engineering Country Specialization by Niche • China : • Embedded Software • Hardware Services • Localization • Application Development • Ireland : • Packaged Applications • Localization • Product Development • Canada : • Application Development • BPO • Contact Centers • Philippines : • BPO • Contact Centers • Animation • Application Development • India : • Application Outsourcing • ITO • BPO • Product Development • Contact Centers • Israel : • High-End Software • Learning Systems

12. 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

13. 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

14. India’s value proposition goes beyond costs • 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 Dramatic cost reduction * Full Time Equivalent Faster time to market • 24X7 production runs by synchronizing work between onshore and offshore teams The India Value Proposition Well established quality processes • 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 Large, high quality talent pool Tested and robust business models • Stable economy with strong government support for IT growth • Entrepreneurial know-how and business mgmt skills Source:McKinsey

15. India is a very competitive location for outsourcing High Size of circle corresponds to number of qualified workers • Singapore • Ireland • Australia • Holland • Hong Kong • U.K. • Location attractiveness • Infrastructure • - Communication • - Basic infrastructure • Country risks/FDI incentives- Attractive incentives • - Political environment • Time zone attractiveness • India • Philippines • Mexico • China Low Low High • Capabilities of workers • Qualifications/capabilities • Foreign languages (primarily English) • Quality of work/work ethic • Cost differential Source:McKinsey

16. Government Initiatives

17. 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

18. 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

19. 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

20. 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

21. Customer Feedback - Positives & Challenges Challenges Top 5 Positives Great Quality at Good Price Cross cultural issues Change Management High overall customer satisfaction “Subservient” approach Passion and Commitment Industry / Process Skills Availability of Technical Skills Account Mgmt. vs. Project Mgmt. Enterprise move up “Quality” Chain

22. Business Models

23. A variety of business models can be considered Characteristics • Single entity formed by combination • 1 set of shareholders • Pooling or purchase of assets/stock M&A Joint ventures • Creation of “Newco” equity company • Contributions and ownership by 2 or more partners Minority equity stake • Parent-to-parent equity investment, plus • Ongoing activity involving joint contributions; shared risk and reward Nonequity alliance • Contractual parent-to-parent alliance with substantial shared risk/reward or exclusivity Arms length contract • Parent-to-parent Relationship without shared control, ownership, or risk Source:McKinsey

24. Off-Shore Models: Services Delivery

25. Companies like GE are leading the way in leveraging the Indian opportunity (example) 2003 Aims to become biggest provider of remote services with 10% share of global remote services 1998-2001 1994-1998 Main activity • Call centers • Moving up the value chain into task analysis, planning, forecasting, underwriting and other value services • Transaction processing e.g. mortgage, insurance claims, credit cards • Accounting payment • Insurance • Engineering & research • Internal (mainly supporting GE US) • Internal and external Client • Internal (supporting GE worldwide) • Supporting 270 GE processes of thirty different business Resources • <1,500 at one location • At least 12,000 in4locations • 1,500-9,500 at 3 locations Estimatedbottom lineimpact • ~ $ 300 million per annum • > $ 450 million per annum • Tested concept for one year • Demonstrated cost and quality benefits to end users within GE • Invested in infrastructure and built scale “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” CEO, GE India Source: Interviews, Press clippings, McKinsey analysis

26. India & Europe: I.T. Collaboration

27. Several factors explain limited European activities historically Moderate economic pressure • Slower uptake in Europe for most technology trends • Less competitive pressures Minimal exposure to India/ Indian players • US focus of Indian companies – group mentality • Smaller NRI population • Perception of low cost but poor quality Language barriers • Challenge of working through an on-site model • Limited exposure to Indians • Acclimatization challenges • Value experience over youth and quality over price Socio Cultural barriers Access to lower cost East European Markets • Poland, Hungary, Ireland and now Russia were viable options Visa restrictions • More control than US Source:McKinsey

28. However, a large number of these factors now stand addressed in favour of fostering an Indian partnership Moderate economic pressure • 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 players • 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 barriers Socio Cultural 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 Access to lower cost East European Markets • Inability of East European markets to meet the demand • Indian companies often have better quality processes and a highly skilled staff Visa restrictions • This matter is being addressed as the need is growing • The off shoring model puts less pressure on Visa efforts Source:McKinsey

29. 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 • Recruit seasoned local professionals • Target at decision making level • Tailored value propositions • Robust sales toolkit Step up marketing and brand building efforts Increase penetration into existing key accounts • 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

30. 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