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An overview of the IT-BPO sector in India By Rajeev Kumar Consul (Commercial) UNIBAN May 20, 2008

An overview of the IT-BPO sector in India By Rajeev Kumar Consul (Commercial) UNIBAN May 20, 2008 Agenda 1. The rise of the Indian economy 2. Dynamics of the Indian IT-BPO industry Current trends Future outlook 3. Sustaining India’s value proposition Talent availability

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An overview of the IT-BPO sector in India By Rajeev Kumar Consul (Commercial) UNIBAN May 20, 2008

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  1. An overview of the IT-BPO sector in India By Rajeev Kumar Consul (Commercial) UNIBAN May 20, 2008

  2. Agenda 1. The rise of the Indian economy 2. Dynamics of the Indian IT-BPO industry • Current trends • Future outlook 3. Sustaining India’s value proposition • Talent availability • Cost competitiveness • Risk management • Business environment • Value-add The Indian economy at a glance Drivers of rapid growth 2

  3. India fact sheet FY 07 unless indicated otherwise Sources: IBEF, EIU, RBI, CIA fact book 3

  4. The Indian economy Real GDP growth Percentage, 1991-2007 Composition of India’s GDP, 2007 ( ) - share in 1991 Manufacturing Agriculture India Developing World Average Developed World Average Services Source: Economic Survey Source: Usda.gov The Indian economy has experienced rapid growth buoyed by a shift from an agriculture to a services-led economy 4

  5. Key drivers of rapid growth (1/2) Inherent lower-cost economy Impact • Sustained growth in exports - reputation as low-cost, high quality sourcing destination for goods and services US/India GDP (PPP) ratio • Sustained PPP advantage India exports, US$ billion Price comparison US vs. India* Source: Morgan Stanley * Indicative based on ranges …in an inherently lower-cost economy… 5

  6. Key drivers of rapid growth (2/2) Global working age population 2020 UK -2 Mn Russia 0Mn Czech Republic Ireland -6Mn Turkey -1Mn Iraq US * -17Mn 2Mn China -3 Mn Pakistan -10 Mn -9 Mn Japan 2Mn -2 Mn Israel * -5.6 m in 2010 Iran 5Mn 0Mn France 19Mn Italy 3Mn 7Mn Philippines 5Mn 47Mn Bangladesh 4Mn Mexico Egypt India 4Mn Vietnam 1Mn Malaysia 5Mn 3Mn Indonesia Brazil Source : BCG With an increasing imbalance in the global workforce, India’s demographic advantage is likely to be a key driver of future growth 6

  7. Summary of key messages As a rapidly growing market based on sound fundamentals, India has become a leading center for global sourcing of goods and services India’s growth is driven by a unique combination of a progressive free-market policy, a low cost structure, and a sustained demographic advantage Global workforce imbalances are likely to increase India’s significance as a key source of talent for services 7

  8. Agenda 1. The rise of the Indian economy 2. Dynamics of the Indian IT-BPO industry • Current trends • Future outlook 3. Sustaining India’s value proposition • Talent availability • Cost competitiveness • Risk management • Business environment • Value-add The Indian economy at a glance Drivers of rapid growth 8

  9. The Indian IT-BPO industry at a glance Indian IT-BPO Sector Revenue Aggregate and Share of GDP Exports Domestic US$ billion, percentage Percentage of GDP 5.5% 5.2% 4.7% 4.1% 64.0 3.6% 48.1 • Sustained export growth – revalidates strong fundamentals • Revenue aggregate as a percentage of GDP continues to rise 29% 32% 33% 31% 37.4 28.5 21.6 FY04 FY05 FY06 FY07 FY08E Source: NASSCOM 9

  10. Employment 9-10mn 7-8mn ~2mn Total Employment Direct Indirect Direct Employment ‘000s FY2008 estimates • ~2 million professionals employed directly • Indirect employment ~4x, creating additional 7-8 million jobs FY2007 FY2008E Source: NASSCOM Source: NASSCOM Direct employment to reach nearly 2 million; indirect job creation estimated at 7-8 million 10

  11. Exports Indian Providers Sourcing model Global Captives 100% = US$ 64 billion Global Providers IT* 12% 18% 62-66% Exports 28% 28% ** 30% 29% 70% BPO 27.5% 28% 40% Domestic Market 34-38% 32% Source: NASSCOM Source: NASSCOM Export revenue remains the mainstay with steady growth across segments; Industry structure is well-balanced between Indian and Global providers *Includes product development and engineering ** Negligible 11

  12. Domestic market 100% = US$ 64 billion • Rapid economic growth • Increased consumption of goods and services • Growth in tech-related spends by enterprises • Internet connectivity 62-66% Exports 44% 38% 43% 44% Domestic Market 34-38% Source: NASSCOM Domestic market is gaining momentum, driven by overall economic growth, increased adoption of technology and outsourcing 12

  13. Geographic exposure – exports Percentage CAGR FY2004-07 FY2007 100% = US$ 31.4 billion* FY2004 ROW APAC2 Continental Europe1 43% >55% UK UK Continental Europe US 36% 30% APAC US Indian IT-BPO Exports grew at a CAGR of 35% over FY2004-07 FY2007 Source: NASSCOM While US and UK remain the dominant markets, the industry is steadily increasing its exposure to other geographies • Excludes hardware exports • 1 Top 3 countries include Germany (~2.5%), Netherlands (~2%), Switzerland (~1%) • 2 Top 3 countries include Australia (~1.5%), Japan (~1.5%), and Singapore (~1.3%) 13

  14. Vertical exposure FY2007 • Banking, Financial Services, Insurance and Hi-tech / Telecom account for nearly 60% of Indian IT-BPO exports • Manufacturing and retail are other large sectors • Airlines, media, healthcare and utilities are some emerging high-growth sectors Source: NASSCOM Vertical market exposure for industry exports is well balanced across several mature and emerging sectors 14 * Excludes hardware exports

  15. Service portfolio BPO EXAMPLE Revenue Split by Service Offered Coverage Percentage of full service FY2008E 100% = US$ 10.3 billion Customer Interaction & Support Vertical-specific BPO Services Other Horizontal Services Finance & Accounting Knowledge Services Human Resources Mgmt. Procurement Services Source: NASSCOM Source: NASSCOM Export growth is also being supported by increasing breadth and maturity of the service portfolio… 15

  16. Buyer needs Source: NASSCOM-Mckinsey Report 2005 …driven by mature buyer needs evolving towards beyond-cost benefits 16

  17. Footprint Global Delivery Footprint of Indian IT-BPO Firms Significant addition of onshore presence enabling firms to offer end-to-end service capabilities Over 77 cities* across more than 25 countries Progressive near-shore expansion to enhance “follow-the-sun” and “multi-lingual” capabilities Expanding Global Delivery capabilities complemented by a widening service portfolio is helping providers deepen client relationships 17 * Excludes Indian cities / India

  18. Distribution of exports by region in India Source: NASSCOM The industry is well spread across multiple Indian locations. Additionally, the next wave of locations is on the rise. 18

  19. Future outlook Addressable market of at least US$ 380 billion (2007-08) Global Sourcing of IT & Engineering Services Global Sourcing of BPO Services 5-6x 6-7x ~220 - 250 ~160 190 - ~44-47 15-18 Others ~26-29 Others 15-18 India** >29 India** ~11 Current Addressable Current Addressable size market size market US$ billion Source: NASSCOM analysis based on NASSCOM-Mckinsey Report 2005 With strong fundamentals and significant head-room, the Indian IT-BPO industry is well placed to further expand its share of worldwide IT-BPO spending 19

  20. Summary of key messages The Indian IT-BPO market continues to grow at a robust pace revalidating its strong fundamentals While exports remains the mainstay, the domestic market is gaining momentum With the industry maturing, it is well distributed across a breadth of services and verticals While US and UK continue to be the dominant markets, Continental Europe has exhibited strongest growth over the last two years Going forward, the Indian IT-BPO industry is poised to expand significantly on the back of its strong fundamentals and global head-room 20

  21. Agenda 1. The rise of the Indian economy 2. Dynamics of the Indian IT-BPO industry • Current trends • Future outlook 3. Sustaining India’s value proposition • Talent availability • Cost competitiveness • Risk management • Business environment • Value-add The Indian economy at a glance Drivers of rapid growth 21

  22. 1. Talent availability (1/2) Annual Output Composition 3 yr Eng. Dip. / MCA Technical Graduates ‘000s Postgraduates 4 yr Eng. Degree Arts + Other Graduates Science Graduates Commerce Graduates Source: NASSCOM Non-technical Graduates ‘000s IT-BPO Demand Source: NASSCOM Source: NASSCOM Overall, India’s large talent capacity is well placed to meet industry demand 22

  23. 1. Talent availability (2/2) Objectives Initiatives Short Term • Enhance overall yield • Improve employability • Expand to tier 2 locations • Lower skill dependence • NAC, NAC-Tech: Entry-level assessment for BPO and IT • Finishing schools • Location studies and engagement with state governments to expand tier 2 locations Medium Term • Lower training investment • Enhance specialist skills and project management expertise • FDP, Faculty Development Program: to increase the suitability of teachers • Facilitating industry access to specialist programs offered by independent agencies Long Term • Add education capacity • Promote education reform • Expansion of higher-education infrastructure: government to set-up 20 new IIITs • Program to increase PhDs in technology • NASSCOM VC fund focused on technology innovation Recognizing this imperative, the industry is proactively working on several initiatives to strengthen India’s long-term cost advantage 23

  24. 2. Cost competitiveness Projected cost comparison, 2007-2015 US$ @ 3% US @ 100K ~67% ~60% ~53% Wage @ 15% Other @ 5% Wage @ 10% Other @ 5% Wage @ 5% Other @ 5% India @ 28K Source: NASSCOM estimates Additionally, India’s long-term cost advantage is likely to remain robust 24

  25. 3. Risk management: quality and data security (1/2) Objectives Initiatives/Impact Standards • Compliance with global standards e.g., ISO 27001, CoBIT • Contractual safeguards, robust BCP/DR planning • Highest number of ISO 27001 certifications obtained globally Network security • Secure design, documentation & implementation of network e.g., firewall, antivirus encryption • Documented security policies covering use of information, mobile computing, user access Physical security • Isolation of sensitive areas • Access control systems e.g., CCTV surveillance, security guards • Robust and uniform practices for physical security in delivery centres Personnel security • Background checks • Non-disclosure agreements • National Skills registry (NSR) to facilitate personnel background checks • Cyber security training and awareness Laws • Compliance with international laws • Strengthening of Indian legal system • Amendments to strengthen the IT Act 2000 and Indian Penal Code under parliament review In addition, the industry continues to evolve its already high standards for data security and IP protection… 25

  26. 3. Risk management: quality and data security (2/2) Objectives Engage • Engaging policy makers, industry players, enforcement agencies, etc. to build common understanding of data security issues Educate • Educating industry constituents about data security best practices through publications, conferences, and training programs Data Security Council of India (DSCI) setup as first-of-its kind self-regulatory organization Enforce • Enacting policy reform including: a) strengthening the legal frameworkb) addressing country-specific challengesc) establishing a national security frameworkd) encouraging adoption of best practices Enact • Enforcing compliance through periodic audits, certification, incident response databases, and cooperation with enforcement agencies …and is adopting a four-pronged program to institutionalize ongoing efforts 26

  27. 3. Risk management: environmental risk exposure Concentration Risk Geopolitical Risk • Stable democracy • Neutral external affairs policies • Consistent economic agenda to push free-market reforms • Conducive business environment with established practices Additionally, low geopolitical and concentration risks provide India with a favorable ecosystem for the sustained growth of the IT-BPO industry Tried and tested - Multiple centers of significant scale with established firm-level practices and maturity in BCP and DR Well distributed - Industry dispersed across the breadth of the country, e.g., Mumbai, New Delhi, Chennai 27

  28. 4. Business environment (1/2) Indian IT-BPO Growth US$ Billion Estimate Forecast Key policy actions that have aided IT-BPO growth 2001 onwards: Progressive reform continues; regular easing of fiscal / procedural issues 2005: SEZ Act introduced with special provisions for IT-BPO Alignment of developmental policy with industry needs; education and infrastructure are key priorities 1991: STPI formed to promote the Indian IT-BPO industry 1991onwards: Economic liberalization 1994 onwards: Telecom sector de-regulation Early investment on education (e.g. IITs/ IIMs), science and R&D (e.g. CSIR) • Pre-1990 1990-2000 2001-07 • 2007-12 The strong growth of the Indian IT-BPO industry is complemented by a sustained emphasis on creating an enabling business environment 28

  29. 4. Business environment (2/2) Almost all IT SEZs have formal approval IT-BPO Sector Accounts for the Highest Number of Proposed SEZs (Total# = 572) IT SEZs Other SEZs SEZ Highlights Source: NASSCOM, CLSA SEZs are expected to build on the success of STPI at a larger scale 29

  30. 5. Value-add Key benefits driving companies to offshore Key value-add initiatives • Expansion of delivery network to include nearshore and onshore centres • Provision of 24x7 services Global delivery model Savings Skills Quality • End-to-end process delivery capabilities • Active service-level improvement • Process reengineering expertise Process maturity Process redesign Speed to market Percentage of responses Access to new markets • Service innovation e.g., customization for new markets • Active IP creation – increased filing of patents Innovation Source: Duke Offshoring Research Network (ORN) The Indian IT-BPO industry is actively building on its leadership position to deliver beyond cost benefits to global buyers 30

  31. Summary of key messages India has the raw talent capacity to comfortably service the IT-BPO industry in the future. While talent suitability is a concern, industry initiatives such as NAC will help improve overall employability Despite cost increases, the Indian IT-BPO industry continues to leverage its lower cost structure to deliver a compelling cost advantage Overall risk exposure is low with mature quality and data security mechanisms and negligible geopolitical risk Proactive government policy is helping address existing infrastructure gaps. Further, SEZs will take over from STPI in propelling industry growth. Providers are maturing their service delivery capabilities to actively deliver value-adds through global delivery models, process expertise, and innovation 31

  32. THANK YOU Rajeev Kumar Consul.rk@indiaconsulate.org.br www.indiaconsulate.org.br

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