Indian IT-ITES – Driving Growth by Moving up the Value Chain

Indian IT-ITES – Driving Growth by Moving up the Value Chain Workshop on Transport Modeling Research & Software Development, Vadodara April 2005

Premier trade body and the chamber of commerce of the Indian IT-ITES industry Global trade body with over 900 members, of which nearly ~200 are global companies from the US, UK, EU, Japan and China Primary objective – to act as a catalyst for the growth of the Indian IT-ITES industry. Facilitation of trade and business in software and services Encouragement and advancement of research Propagation of education and employment Providing compelling business benefits to global economies by global sourcing Partner with the Central and State Governments in formulating IT policies and legislation Partner with global stakeholders for promoting the industry in global markets Strive for a thought leadership position and deliver world-class research and strategic inputs for the industry and its stakeholders. Encourage members to uphold world class quality standards Strive to uphold Intellectual Property Rights of its members Strengthen the brand equity of India as a premier global sourcing destination Expand the quantity and quality of the talent pool in India Continuous engagement with all member companies and stakeholders to devise strategies to achieve shared aspirations for the industry and the country About NASSCOM NASSCOM is… Strategy Objective Vision: To establish India as the 21st century’s software powerhouse and position the country as the global sourcing hub for software and services

Discussion Outline The Emerging Landscape of Global Services Evolution of Indian IT-ITES Q&A

Global sourcing of services is not just a passing fad… In 2003, 300 of the Fortune 500 employed offshore resources… …in 2004, this figure is expected to have risen to 400 2003 Have nots40% Have60% 33% increase in offshore penetration year over year 2004 Have nots20% Have80% Source: Gartner

…but a business imperative • Widespread acceptance of the benefits of offshore outsourcing – based on significantly favourable total transaction cost economics • Maturing industry structure, highlighted by vendor consolidation and greater standardization of infrastructure elements • Multi-tier suppliers, and multiple country options - enabling clients to appropriately balance cost, control, quality & risk • Transition from one-off offshore outsourcing contracts to an integrated global delivery model • Increase in addressable market, re-definition of ‘offshore-able’ activities to include more complex, higher value-added services and increasing offshore penetration • Distinction between domestic and offshore service providers beginning to fade – as each begin to adopt a mix of onshore-offshore delivery strategies

IT-ITES has emerged as the poster child of the global economy… Classic example of a disruptive technology... …with significant potential for value creation… Source: McKinsey Global Institute …across multiple business functions and industry sectors… …without geographic boundaries

…with global service delivery becoming a mainstream phenomenon $ Billion $ Billion 800 70 Total Offshore IT Services Revenue 700 60 Total Offshore BPO Services Revenue 600 50 500 40 400 India Offshore IT Services Revenue 30 300 India Offshore BPO Revenue 20 200 10 100 0 0 2004 2005 2006 2007 2008 2009 Global BPO Revenue Global IT Services Revenue Source: neoIT

The list of services sourced globally is expanding rapidly… Information Technology (IT) Business Process Outsourcing (BPO) Application Development Human Resources Application Support & Maintenance Finance and Accounting Infrastructure Services Back Office Administration Engineering/ Design Services Payment Processing System Integration & Consulting CRM Tech Support Knowledge Process Outsourcing

...indicating strong forecasts for offshore IT Services… Source: neoIT

…as well as offshore BPO Source: neoIT

Indian IT-ITES – the eye of the storm, is witnessing unabated growth… • Indian IT-ITES has grown at a CAGR of 28% over FY 1998-2005 • Share in India’s GDP has more than doubled from 1.9% to 4.1% - expected to reach 7% by FY 2008 • Industry aspires to reach USD 50 billion in export revenues by 2008 Source: NASSCOM …that is expected to continue

While the IT Services and Software segment remains the mainstay of the industry… Source: NASSCOM • IT Services and Software revenues have accounted for half to two-thirds of the industry aggregate • ITES-BPO revenues have witnessed significant growth – currently account for nearly 20% of the industry aggregate • Services (IT + ITES-BPO) together account for over three-fourths of the industry revenue – mirroring the composition of the worldwide industry ...ITES-BPO is growing rapidly…

Transactional Data Entry Data Entry …with the service portfolio moving up the value-chain 1980 1985 1990 1995 2000 2005 & beyond Transformational BPO Design & Integration Product Development & Testing Remote Infrastructure Management Customer Contact Research and Analytics Customer Contact / Hardware & Installation Support Full Process Outsourcing BPO Problem Solving/Decision Making Value Rules-based Processing Out-Tasking Maintenance Technical Support Application Support Strategic Impact Cost Control Focus on Core Competence Business Transformation IT Mutual Gains BPO Re-invest Mutual Gains Source: neoIT

Indian vendors are expanding their addressable market…

Case Example: Remote Infrastructure Management

…and unlocking the potential in high-end, specialized areas

…such as product development and engineering services

Today, several large global corporations source IT-ITES from India… Research / Analytics/ Engineering Shared Services (IT / HR / FA) Customer Relationship Management Back Office Processing BFSI ICT Auto Healthcare Others Data Entry / Transcription …across industry verticals and business functions

Industry maturity has fostered the evolution of multiple engagement models… From primarily captive… …to a hybrid model Indian best-of-breed vendor Indian best-of-breed vendor Outsource to Global brand Outsource to Global brand Feasibility of outsourcing the process JV/ Alliance JV/ Alliance Delay Delay Captive Captive Cross-border operation sophistication Source: McKinsey Analysis

…and a diverse vendor landscape… • Custom application development support and maintenance • Customer Fulfillment • Accounts & administration • Engineering services • Remote infrastructure management • IT consulting • Research & Analytics / KPO • Animation MNC Vendors with Indian Ops Indian IT Firms Services with High Penetration Emerging Service Lines MNC Captive Units Indian BPO 3PSPs

…addressing the specific needs of different client groups India Business Models Captive Models Strategic Alliance/Joint Venture Models Outsource Model Pure Captive Model • An internal cost center or a 100% subsidiary company set-up to execute offshore business processes and/or IT services • Amex, Dell, Standard Chartered, HSBC, Ford, Sun Joint Venture (JV) • Joint Venture with equity participation from customer and vendor. Customer retains control due to investments in entity. • British Telecom - Mahindra Pure Outsource • Use of a India-based provider to offshore business processes or IT services Managed Outsource • Full-/part-time resources on the ground in India to facilitate transition, relationship mgmt and transfer of organization and domain knowledge to third party providers BOT and Inverted BOT • Where the Indian Provider sets up facility and provides implementation support to start with • Customer can buy out at a predetermined stage • Reverse scenario has also been seen in the market • Aviva-WNS/EXL,24/7, AIG- Polaris

While cost advantage was the initial attraction… • Significantly favorable total transaction cost economics • Gross savings on factor cost up to 78% • Net realized savings ranging between 25-60% Source: McKinsey Global Institute Source: GECIS, FT Outsourcing to India Conference – November 2004 Source: NASSCOM, Evalueserve Analysis Blended rate for voice and non-voice operations The above figures are indicative and the actual costs – savings could vary by process; further the cost advantage may be partially offset by travel, transitioning and non-process communication costs

…access to a large, highly qualified pool of talent, Source: NCAER, Registrar general of India Source: NASSCOM, US Census Bureau • Favourable demographic profile • High annual graduate turnout • Attractive employment prospects – beyond monetary compensation • Rapid scaling up of employment in the sector Source: NASSCOM

…a high degree of quality orientation... Quality practices in Indian IT-ITES have evolved through three distinct stages… STAGE I STAGE II STAGE III • Creation of basic processes • Alignment of Quality Management Systems (QMS) with global standards (e.g. ISO) • Framework for measurable improvement • Consistent and orderly execution of engagements • Emphasis on software engineering • Alignment of QMS with the CMM framework • Acquisition of CMM certifications at progressive levels of maturity • Development of processes, metrics and a framework for improvement in all areas (e.g. sales, billing and collection, etc.) • Adoption of process methodologies such as People CMM and Six Sigma to deliver ‘end-to-end’ quality

…and demonstrated process expertise… • India has far more SEI CMM Level 5 companies than any other country in the world • Productivity and efficiency gains achieved through process expertise • Significantly lower error rates compared to similar units in the exporting country Source: NASSCOM …have enabled firms to achieve significant productivity gains ** Compiled after October 2002 – may not be current for all the countries

A comprehensive legal framework… • Though India does not have an independent data protection act – the existing legal framework matched with their independent contracts provide adequate safeguards to companies offshoring to India • Further, Indian authorities are committed to further strengthening the existing frameworks to keep them current and relevant

…and elaborate security practices • Significant (5-15%) IT budget allocation to security • Dedicated security teams • Compliance with international standards and laws • Documented security policies • Regular security audits – internal as well as external (independent and by client) • Periodic security training for all employees • Robust physical security, data back-up / recovery and business continuity arrangements

World class telecommunication infrastructure • International connectivity via 3 under sea cables as well as satellite • Bandwidth prices fast approaching international rates • Cost of an E1 half circuit has declined by ~60% over the last three years • In 2005, TRAI has proposed to reduce the cost of an E1 by a further 35% • Price declines for higher capacities up to 70% • Increased FDI limit (74%) to attract more global players

International standards in real estate and office facilities • Large efficient floor plates • Independent control and high-end security systems • Liberal parking standard to accommodate employee transport fleets • Flexible lease terms and rent free period (e.g. during fit-out) • Better cost management through flexible service agreements24/7 operations and complete backup for essential services including power • Tenant controls employee amenities and facilities • Phased procurement/leasing of office space in a single campus • Plug and play facilities for temporary accommodation

...and strong government support • Setting up of export promotion zones / special economic zones • Financial incentives • Income tax exemptions and tax holiday under Section 10A/10B • Service tax exemptions • Concessions on excise duties • Concessions on foreign exchange regulations • Proactive support by the state governments • Employment linked exemptions and rebates • Single window clearances …are other factors that complete India’s value proposition

Complementing the industry’s success in exports is a steadily growing domestic market… • Domestic revenues of Indian IT-ITES valued at over USD 10bn • CAGR of 19.2 percent over FY 2000-05 • Electronics consumption in India estimated at $9.7 billion in 2005 • Still very low compared to other nations (China is at USD 150bn and the US is at USD 450bn) • MNCs currently account for leading shares in most segments – especially in hardware Source: NASSCOM …with significant untapped potential Source: In-Stat / MDR

While on a strong footing – India also has its share of challenges… • Demand for trained talent outpacing supply resulting in attrition and increasing direct and indirect costs • Overburdened infrastructure in existing hubs of IT-ITES activity – inadequate infrastructure in some of the smaller towns • Anti-offshore outsourcing debate still lurking • In spite of its proven dominance, the Indian IT-ITES industry is still largely a price taker – creating unwarranted pressure on margins • Maintaining its lead over competing locations • Leveraging the untapped potential of the domestic market • Bridging the digital divide in the country …industry stakeholders are committed to overcoming them

Indian IT-ITES – Driving Growth by Moving up the Value Chain