india inc oct 08

Copyright © NASSCOM 2008

India Inc.An Overview of the IT-BPO Sector in India

October, 2008NASSCOM


About NASSCOM

2

• Apex body for the IT-BPO sector in India

• Plays a leading role in trade development, policy advocacy

and research

• Representing over 1200 IT and BPO companies (including

Indian companies, global companies including US companies

and captive centers) which make up more than 95% of the

Indian IT-BPO industry.

• Membership accounts for over 90% of exports and a majority

of the 2 million professionals employed in the sector


Agenda

1. The rise of the Indian economy

• The Indian economy at a glance• Drivers of rapid growth

2. Dynamics of the Indian IT-BPO industry

3. Sustaining India’s value proposition

• Current trends• Future outlook

• Talent availability• Cost competitiveness• Risk management

• Business environment

3


India Fact Sheet

DemographicsPopulation (billion) 1.13

Population growth (%) 1.6

Labor force (million) 516

Less than 30 years (%) 52

Urbanization (%) 28

EconomyGDP (nominal, US$ billion) 1171

Inflation (%) (Aug. 08) 12

Fiscal Deficit (% of GDP) 5.6

FDI (US$ billion) 32

Forex reserve (US$ billion, Jul 08) 307

Social/DevelopmentalLiteracy (%) 61

Unemployment (%) 7.2

Infant mortality (per 1000) 34.6

Life expectancy (years) 68.5

Transport/TelecomPassenger cars (million) 13

Two wheelers (million) 53

Mobile users (million) 295

Internet users (million) 52

TradeExports (US$ billion) 159

Imports (US$ billion) 240

Top 3 export markets US (13%)UAE (10%)China (7%)

Top 3 import partners China (11%)Saudi Arabia (8%)UAE (6%)

FY08 unless indicated otherwise

Sources: IBEF, EIU, RBI, CIA fact book

4

Growing Domestic Market


Indian Economy at a Glance

The Indian economy has experienced rapid growth buoyed by a shift from an agriculture to a services-led economy

India

Developing World Average

Developed World Average

Real GDP growthPercentage, 1991-2007

Changing Composition of India’s GDP

Source: Usda.gov Source: RBI

5

0%

20%

40%

60%

80%

100%

FY80 FY90 FY02 FY08

Agriculture Industry Services

18%

19%

63%


0.2 32

FY 91 FY08

19

295

1998 2008

Key drivers of Growth

• Lifting of import restrictions• Streamlining of tariff structure• De-licensing and re-deregulation of sectors,

e.g., Telecom, Civil Aviation, Infrastructure• Progressive ease of FDI caps

• Free-market competition driving costs down and quality up

Telecom exampleSubscriber base (millions)

Long distance tariffs (US$ per min)

0.65

0.03

1998 2008

Progressive liberalization from 1991Impact

• Upsurge in international investment

0.05x15x

Source: Merrill Lynch

FDI growth (US$ billion)

Source: Ministry of Commerce

160x

Rating Pre-’91 2008

Maximum excise duty

105% 24%

Maximum import duty

400% 15%

Examples

6

The rapid growth of the Indian economy has been driven by a unique combination of progressive liberalization…


Key drivers of Growth

…in an inherently lower-cost & high volume economy

Inherent lower-cost economy

Good/ Service

Price in US (US$)

Eq. price in India (US$)

Peak mobile rate (per min.)

0.4 0.05

Taxi (per km) 1.33 0.2

Skilled labor – manufacturing (per hour)

25 1.5

5.2 4.5

1997 2007

US/India GDP (PPP) ratio

Price comparison US vs. India*

* Indicative based on ranges

Sustained PPP* advantage

7* A purchasing power parity exchange rate equalizes the purchasing power of different currencies in their home countries for a given basket of goods.

Indian middle-class household growth 2002-2006

16.5

Source: Morgan Stanley

16.5 million households (~80 million people) added over 4 years - greater than the population of UK!


Summary of key messages

• As a large stable democracy with 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

8


Agenda








9


Current Global Uncertainties

10

•Signs of US Slowdown post sub-prime; impact on other

economies

•Economic instability

– Oil crisis, food prices, inflation, unstable currencies,

volatility in stock markets etc.

•Concerns over US election; forthcoming Indian

elections

•Constraints within India on talent, infrastructure etc.


Positive growth in FY08 under clouds of uncertainty

FY04 FY05 FY06 FY07 FY08

21.6

28.5

37.4

48.1

64.03.6%4.1%

4.7%5.2% 5.5%

32%

31%

29%

28%*

US$ billion, percentage

Indian IT-BPO SectorRevenue Aggregate and Share of GDP

ExportsDomesticPercentage of GDP

• Sustained export growth – revalidates strong fundamentals

• Revenue aggregate as a percentage of GDP continues to rise

Source: NASSCOM

11* Domestic Revenue Adjusted for Currency


0.5

4.9

8.4

18.0

0.5

6.4

10.9

23.1

Hardware

Product Dev and Engg Services

BPO

IT Services

FY2008FY2007

All segments grew well in FY 08

100% = US$ 64 billion

DomesticMarket

Exports 62-66%

34-38%

*Includes product development and engineering ** Negligible

12%

18%

70%

40%

27.5%

32%

28%

Sourcing model

BPO

IT*

Global CaptivesGlobal Providers

Indian Providers

**

29%

30%

28%

Source: NASSCOM Source: NASSCOM

12

YOY growth

13

FY09 outlook: Software and services revenue to grow by 21-24%; exports to reach $50bn

• FY09 software and services growth forecast 21-24% (USD)

• Recent reversal in INR appreciation trends provides an extra cushion, if sustained it will contribute to higher INR growth

• Increased focus on cost and productivity in the recessionary environment is likely to fuel demand for offshore services

• Domestic story remains strong, though sustained inflation may be a medium-term risk

$39.6

Source: NASSCOM

$62-64

$52.0

Figures may vary slightly due to rounding off

USD Billion

INR/USD 44.9 40.2 43

Growth of 21-24%(Currency Adjusted)


Key drivers of growth in FY 09

The Indian IT-BPO industry is actively building on its leadership position to deliver beyond cost benefits to global buyers

0

20

40

60

80

100

2004 2007

Key benefits driving companies to offshore

Per

cent

age

of re

spon

ses

Cost Savings

Process redesign

Speed to market

Access to Skills

Source: Duke Offshoring Research Network (ORN)

Global delivery model

Innovation

Process maturity

• Expansion of delivery network to include nearshore and onshore centres

• Provision of 24x7 services

• End-to-end process delivery capabilities

• Active service-level improvement

• Process reengineering expertise

• Service innovation e.g., customization for new markets

• Active IP creation – increased filing of patents

Key value-add initiatives

14


61%

18%

12%

6%2%

Geographical spread diversified

US

UK

Continental Europe1

APAC2ROW100% = US$ 31.4 billion*

30%

US

UKContinental

Europe

APAC

43%

>55%

36%

Percentage

FY2007

CAGR FY2004-07FY2007FY2004

Indian IT-BPO Exports grew at a CAGR of 35% over FY2004-07

•Excludes hardware exports1 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%)

Europe, APAC and Middle East markets growing rapidly

Source: NASSCOM

15


• 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

New verticals reduce dependencyFY2007

* Excludes hardware exports

Vertical market exposure for industry exports is well balanced across several mature and emerging sectors

BFSI40%

Hi-tech / Telecom19%

Manufacturing15%

Retail8%

Media, Publishing and Entertainment

3%

Construction and Utilities4%

Healthcare3%

Airlines and Transportation

3%Other

5%

Source: NASSCOM

16


Industry progressing to offer end to end service

CoveragePercentage of full service

Revenue Split by Service Offered

FY2008E

Export growth is also being supported by increasing breadth and maturity of the service portfolio.

44%

22%

3%

1%

8%

4%

18%

Customer Interaction & Support

Finance & Accounting

Human Resources Mgmt.Procurement Services

Knowledge Services

Other Horizontal

Services

Vertical-specific BPO Services

100% = US$ 10.3 billion

BPO EXAMPLE

25

15

15

14

11

42

34

35

48

22

82

76

73

100

42

Customer Interaction & Support

Finance & Accounting

Knowledge Services

Procurement Services

Human Resources Management

Best in class 2007 Median 2007 Median 2004


17


1.1

1.6

5.5

8.0

1.6

2.2

7.9

11.5

BPO

Software

IT Services

Hardware

FY2008FY2007

Domestic Market continues to show traction

DomesticMarket

Exports 62-66%

34-38%

Domestic market is gaining momentum, driven by overall economic growth, increased adoption of technology and outsourcing

100% = US$ 64 billion

• Rapid economic growth

• Increased consumption of goods and services

• Growth in tech-related spends by enterprises

• Internet connectivity

Source: NASSCOM

44%

38%

43%

44%

18

29%

23%

29%

30%

USD INRGrowth in*

* Difference between growth in USD and INR due to impact of forex changes (INR appreciation)


378450

553

700690

860

Domestic Market

BPO Exports

IT Exports

Healthy employment growthDirect Employment ‘000s

Indirect Direct TotalEmployment

8-10 mn6-8mn

~2mn

FY2007 FY2008

Direct employment to reach nearly 2 million; indirect job creation estimated at 6-8 million

FY2008 estimates

• Industry directly employs >2 million professionals

• Over 1.5 million in the exports segment; a yoy increase of ~26%

• Indirect employment multiplier estimated to be 3-4x, translating to ~6-8 million additional jobs*


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Domestic technology adoption is growing rapidly – across enterprise as well as household consumers

Largest and fastest growing IT outsourcing market in the region in 2007

Increasing PC adoption and internet penetration across households

(in Million)


Enhancing Global Delivery capabilities

Significant addition of onshore presence enabling firms to offer end-to-end service capabilities

Progressive near-shore expansion to enhance “follow-the-sun” and “multi-lingual” capabilities

Over 77 cities* across more than 25 countries

Global Delivery Footprint of Indian IT-BPO Firms

* Excludes Indian cities / India

Expanding Global Delivery capabilities complemented by a widening service portfolio is helping providers deepen client relationships

21


Summary of key messages• The Indian IT-BPO market continues to grow at a robust pace despite

the current global uncertainties; however there is a need to watch closely

• 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

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Agenda








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Is India’s value proposition sustainable?

• “High attrition and wage inflation… is India’s talent pool running dry?”Talent availability

Cost competitiveness

Risk management

Business environment

Common questions...

• “With cost increases, is India still cost competitive?”

• “How have quality and security standards matured?”• “What is the geo-political risk exposure?”

• “Will policy and infrastructure keep pace with the industry’s rapid growth?”

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Talent Availability & Crunch

India has large talent capacity. There is a need to make them employable.

Technical Graduates

‘000s

Non-technical Graduates

‘000s

Annual Output

Year Net employee addition (‘000s)

FY 08 389

FY 06 328

FY 05 234

IT-BPO Demand

Source: NASSCOM

Source: NASSCOM

25

Pressure Points

• Talent is trainable – need to make them employable• Demand from other sectors increasing• Tier 3 colleges yields low


Comprehensive Plan for making India’s large talent base “employable”

Recognizing this imperative, the industry is proactively working on several initiatives to strengthen India’s long-term cost advantage

Short Term

Medium Term

Long Term

• Enhance overall yield• Improve employability• Expand to tier 2

locations• Lower skill dependence

Objectives Initiatives

• Industry to enhance investments in training • Entry-level assessment for BPO and IT,

finishing schools : Through NAC, NAC-Tech• New locations identified; govt’s engaged

• Lower training investment

• Enhance specialist and project management expertise

• Add education capacity• Promote education

reform

• Faculty Development Program: to increase the suitability of teachers

• Facilitating industry access to specialist programs offered by independent agencies

• 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

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Overcoming Talent Crunch : Supply will not be a constraint in future

Source : BCG

47Mn

19Mn 7

Mn

3Mn

5Mn3Mn

India

Bangladesh

PakistanIran

Brazil

Mexico

Philippines

5Mn

4MnVietnam

2Mn

Turkey

-10Mn

China

-6Mn

Russia

5Mn

Indonesia

1MnMalaysia

0Mn

Ireland

Israel0Mn

Iraq2Mn

-1Mn

CzechRepublic

4Mn

Egypt

-17MnUS *

-2 MnUK

-2 Mn

Italy-3 Mn

France-9 Mn Japan

* -5.6 m in 2010

Global working age population 2020

With an increasing imbalance in the global workforce, India’s demographic advantage is likely to be a key driver of future growth

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Cost Competitiveness is sustainable…

Despite cost increases, India continues to leverage its cost structure to deliver a compelling cost advantage. Additionally, India’s long-term cost advantage is likely to remain robust.

Loaded Costs per IT FTE p.a.2007, US$ ‘000s

Source: Everest, NASSCOM

28

2007 2008 2009 2010 2011 2012 2013 2014 2015

India @ 28K

US @ 100K

~67%

~60%

~53%

~72%

Cost Saving

Projected cost comparison, 2007-2015 US$

CAGR increases

@ 3%

Wage @ 15% Other @ 5%



Source: NASSCOM estimates


Industry is responding well to economic pressures

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•Wake up call 9 months ago when USD touched Rs. 39

•Focus on productivity, efficiency, resource utilization

•Wage moderation, reduced lateral hiring, reduced

attrition

•More efficient asset utilization – real estate, IT etc

•Expansion into tier 2/3 cities

These improvements will have lasting impact over

years!


43 tier 2/3 Delivery locations identified

Bangalore 36%

Mumbai, Pune

15%

Chennai 15%

New Delhi, Noida, Gurgaon

17%

Hyderabad 14%

The industry is well spread across multiple locations. Tier 2/3 cities emerging

Others 3%

Source: NASSCOM

30

Leader Cities

New Emerging Cities

• 7 centers account for over 95% of exports• 43 tier 2/3 cities emerging; will reduce pressure on these centers• On an average, costs in tier 2/3 cities is 28% less than leader cities• By 2018, it is forecasted that 40% of IT-BPO exports will originate from non-leader locations

Employment Distribution Amongst Location Categories (‘000s)

1,996

8,0742

Non-Leader

Leader1

CAGR

40%

60%

34%

10%

>18X

>2.5X

Note: 1. Leader locations are Bangalore, Chennai, Hyderabad, Kolkata, Mumbai, NCR (Delhi, Noida, Gurgaon, Faridabad), Pune 2. Assuming a conservative growth in employment at 15% CAGR over next decade


Information Security & Risk Management

Standards

Physical security

Personnel security

• Compliance with global standards e.g., ISO 27001, CoBIT

• Contractual safeguards, robust BCP/DR planning

Network security

Laws

• Secure design, documentation & implementation of network e.g., firewall, antivirus encryption

• Isolation of sensitive areas• Access control systems e.g., CCTV

surveillance, security guards

• Background checks• Non-disclosure agreements

• Compliance with international laws• Strengthening of Indian legal system

• Maximum ISO 27001 certifications obtained globally

• Data Security Council formed

• Documented security policies covering use of information, mobile computing, user access

• Robust and uniform best practices

• National Skills registry (NSR) to facilitate personnel background checks

• Cyber security training and awareness• Amendments to strengthen the IT Act

2000 and Indian Penal Code being enacted

Objectives Initiatives/Impact

In addition, the industry continues to evolve its already high standards for data security and IP protection.

31


Business Environment

SEZs are expected to build on the success of STPI at a larger scale

IT SEZs

Other SEZs

IT-BPO Sector Accounts for the Highest Number of Proposed SEZs (Total# = 572)

SEZ highlights

Term 15 years

Fiscal benefits

• 100% tax holiday for first 5 years, 50% for next 5 years, and up to 50% for balance 5 years

• Exemption from excise duties, service and sales taxes

Location and size

Restricted to prescribed zones with a minimum area of 25 acres

Other Procedural ease, single-window clearance

Source: NASSCOM, CLSA

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Sector Current status FY 07 spend (US$ bill.)

Roads • 10% of national highways four-laned

• Average speed less than 50 km/hr

7.8

Telecom • India has done well here. Average per min cost decreased by 90% over 7 years

2.1

Airports • Top 6 airports (~75% of traffic) currently overstretched

3

Power • High cost of electricity, losses due to theft

15.7


Summary of key messages• Reducing product / service life cycles

• Demographic shifts & war for talent will drive innovation & increased globalization of services

• India’s talent pool large; needs focused attention & yield improvement; improve employability

• India’s value proposition strong and sustainable. In spite of inflationary pressures, cost advantage to continue. Moreover, operation efficiencies will have a lasting effect

• Global focus on information security & privacy driving more robust processes

• 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

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THANK YOU

india inc oct 08

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