validating the opportunity - tholons - consulting. research. …€¦ · · 2012-02-08post 2005,...

India Domestic Market:

Validating the Opportunity

August 2009

© 2009 Tholons 2 of2

Background and Introduction

Dramatic improvements over the last few years in the Indian

industrial and economic scenario, has set the platform for most

Indian firms to go global. India, with an average GDP growth rate

of 8% for the last four years is one of the fastest growing

economies in the Asia Pacific region making it a highly attractive

business proposition. Increasing shareholder value and

transparency required to win confidence over not just Indian, but

global stakeholders has remained the key to such success. This

has driven most firms to achieve state of efficiencies and global

standards. Hence the need to streamline processes/outsource

activities has become an imperative.

We spoke to multiple clients and suppliers to get a clearer picture

and crystallize our hypothesis. In this paper we analyze and

present a summary of our findings on the opportunity and trends in

outsourcing in the Indian market.

Market and Potential for Outsourcing

Establishing the Market

Outsourcing in the Indian market started since the early 2000.

However the maturity and rate of speed of adoption has still

remained low, characterized by low spending on technology and

related services. Post 2005, the domestic market has witnessed an

increase in the number outsourcing contracts.

In order to establish the opportunity in the market, we analyzed the

current revenues and spend on technology across industries in

India.

Table showing Industry Classification and Current

Outsourcing Potential (Sample Set)

# Industry Industry Size

(Revenues in $B) IT Spend

Current Outsourcing

Potential

1 Agriculture $213 Bn

2 Banking $ 90 Bn

3 Education $80 Bn

4 Government * $167 Bn*


5 Insurance $54 Bn

6 Logistics & Transportation

$100 Bn

7 Manufacturing $ 182 Bn

8 Telecom $34 Bn

Sources: Industry Reports, Tholons Research

* Industry size based on planned and unplanned budget expenditure

** Industry size based on annual average investment outlay

Industries such as telecom, BFSI and the government have

inherently remained high spenders in technology. However,

the Indian industry is yet to attain the level of maturity as seen

in the global markets such as the USA and UK. A quick

comparison showed us that the Indian banking industry spent

only 1% of its revenues on technology and technology related

expenditure annually. On the contrary, this number was 7%-

8% in the US, revealing the scope for technology up gradation

to be immense, thereby scope for outsourcing. Areas such as

Healthcare, Logistics and Education are beginning to see the

importance of technology in streamlining and implementing

processes.

With significant maturity in global outsourcing/offshoring, it will

be easier for these industries to adopt technology and BPO in

their growth planning.

Currently:

� Government is the largest spender in the country

� Government controlled sectors such as healthcare,

education & e-Governance are opening to private

� IT adoption is minimal. significant untapped potential

� Client market: BPO has not matured lack of structure


Client Market Classification in India

Source: Tholons Research

Government – Single Largest Spender and Employer

In a largely populous country like India, the role of the

government in economic development and social security is

immense. Our estimates revealed that close to 64% of

revenue contribution across all industries came from

government/government owned Public Sector Undertakings

(PSU)

� SBI and top 7 nationalized banks contribute 40% of the

revenues from scheduled commercial banks

� BSNL & MTNL account for over 30% of the total

telecom services market

� Retail – PDS is the largest form of distribution in India

reaches over 30% of the population

� Road transport and rail transport is largely monopolized

by the state

Government is the

largest client across all

key verticals - cannot be

ignored



Public sector IT expenditures in India is expected to increase

yearly by at least 15%-20%, outpacing all other countries in

Asia Pacific. Spending will remain largely driven by hardware

but is predicted to decline slightly from 57% this year to 54% in

2011.

E-governance activities, infrastructure set up and management

and ICT implementation across departments, ministries and

states are some of the top initiatives undertaken by the PSU’s.

A National e-Governance Plan (NeGP) was launched in 2006

with a proposed outlay of US$5.1 billion, covering 27 mission

mode projects. However, till 2008 only 25% of the outlay was

spent, leaving a significantly large pie yet to be tapped. This

project included initiatives such as establishment of State Wide

Area Networks (SWAN), Common Service Centers (CSC),

Land Records Digitization, Computerization of Transport

System at Regional Transport Office (RTO) and Passport

departments and India Post, development of the India Portal

etc.

Our estimates reveals

that close to 64% of

revenue contribution

across all industries

came from

government/government

owned Public Sector

Undertakings (PSU)

Increased spending on

citizen development and

e-governance activities


Snapshot of Current Outsourcing in India

For the past two decades Indian service providers have been

providing services to the global market. Success in the global

arena has provided Indian corporations to venture and adopt

outsourcing. However, the market is still nascent and clients

are still testing waters.

NASSCOM estimates the size of the current Indian

outsourcing market for IT services to be US$7.7 billion and the

BPO market to be US$1.8 billion.


ITO – Excludes hardware

BPO – Excludes revenues from captives

Tholons estimates the potential for domestic outsourcing

services to reach US$40 billion by 2013 from the current

US$23 billion (2008).

Service Provider Landscape in India

Composition of service providers includes MNC’s, Large Indian

majors and India based vendors.


Tholons estimates the

potential for

outsourcing to reach

over $40 Bn by 2013

50% has been tapped

spending on citizen

development and e-

governance activities


Contribution from captives forms a significant part of the

landscape. Large part of the potential US$20 billion market

has still remained in captives.


Key Characteristics and Trends of the Indian Domestic

Outsourcing Market

� Multiple region specific vendors are emerging to the

foray with advantages of local demographic knowledge

and language capability.

� Highly fragmented market – currently there seems to

be a no clear winner in market share. However, MNC’s

such as IBM and HP have adopted well to penetrate

the Indian market, having a full suite of IT and BPO

services to offer

� Telecom and Banking are the two main verticals

adopting outsourcing, currently, in a large scale

� Most engagements in ITO are end-to-end

transformational deals including hardware,

application outsourcing, infrastructure outsourcing and

system integration

� Maturity of BPO has remained very low – 80%

outsourcing is voice based customer support and

acquisition

� Total Contract Values (TCV) for IT outsourcing in

India varies from ~ US$ 75-100 million

� IT players leverage their existing global outsourcing

delivery teams, infrastructures. However, a center in

the client location is preferred. Tier II low cost location

delivery model is significant in BPO


Analyzing Client’s Key Drivers to Outsource

Significant growth in various industry segments such as

Telecom, Banking, Insurance, Utilities etc has spurred the

market potential for outsourcing of technology services and

BPO. In addition to growth, the maturity of the services

industry in catering to the global markets and the increased

demand for service quality has only catalyzed the adoption

rate for outsourcing.

Decision to do in-house or procure services is dependant on:

� Maturity of vendor capabilities

� Benefits from outsourcing

� Savings potential

Unlike, global outsourcing which provides a significant cost

arbitrage, the lever for domestic clients to gain direct labor cost

benefits from outsourcing remains low. Multiple other drivers,

providing indirect topline and bottom-line impact, influence the

CTO/COO’s decision to outsource.

Drivers to Outsource

We spoke to clients/buyers from various industries, to gain a

perspective on their need for an outsourced environment in a

maturing India market. Key findings are:

� Process Standardization – Having geographically

widespread business units, buyer environments are

relatively less process efficient with minimal

synchronization. Coupled with this, the legacy and

home grown systems are not geared up to facilitate high

growth environments.

� Faster Time to Market – India has been experiencing a

high growth environment. Industries such as telecom,

Banking, Insurance, Retail etc are growing at 50-60%

annually. Telecom service providers are aggressively

launching newer, more innovative and high margin

services such as Value Added Services (VAS).

Outsourcing helps firms achieve lesser Turn Around

Time (TAT) in launching such products/services and

gaining first mover advantages.

� Access to Skills – With need to grow in leaps and

bounds, buyers need access to “Right Skills”.

Analyzing clients’ key

drivers for outsourcing:

We spoke to clients/buyers

from various industries, to

gain a perspective on their

need for an outsourced

environment


Outsourced environments provide significant leverage

of teams having experience of global best practices with

options of easy ramp up to meet demand variations.

� Talent Availability and Retention –. With minimal

onsite opportunities and ability to pay highly competitive

salaries, has created a threat to recruit and retain high

quality talent.


� Long Term Cost Advantage – Outsourced

environments offer improved process efficiencies and

mitigating risks of project overruns. It helps convert

fixed costs to variable costs thereby in the long run

reducing the total cost of ownership

� Increased Customer Service Levels – Achieving

higher levels of customer satisfaction has become the

priority for Indian firms. Outsourcing is a key element to

reach and sustain the desired levels.

Cost reduction clearly

not the top driver to

outsource


Business case from Outsourcing

Indian clients are highly cost sensitive and hence the need

for constantly reducing costs is an imperative. The need for

outsourcing in the India market is quite evident. However, its

translation to direct financial benefit needs to be ascertained.

Unlike global outsourcing, cost arbitrage from direct labor is

minimal. However, delivering from Tier II/III locations could

offer a 3%-5% labor cost savings.

Service Provider Landscape in India


Our initial findings reveal that most Indian corporations and

firms are yet to adopt cost rationalization techniques such as

moving to a shared services model, providing a 10%-12%

reduction in cost of operation. This would help them achieve

efficiency levels through aggregation of services, streamlined

processes, vendor consolidation and economies of scale.

Our cost analysis reveals that moving to an outsourced model

could potentially provide a 20%-25% savings on costs.

Limited labor cost

arbitrage

Outsourcing could

deliver upto 25% reduced

cost of operations.


Implementing Outsourcing

In order to leverage and to achieve best results from

outsourcing, both clients and service providers need to adopt

best practices.

What buyers must do?

� Clearly understand the benefits of Outsourcing -

Understand various outsourcing models prevalent and

undertake a business case to identify the savings

potential

� Adopt a ‘Portfolio Approach’ to outsourcing –

Clients are often seen to make the decision to

outsource on a more ad-hoc basis. Adopting a portfolio

approach may deliver value across the value chain.

� Outsourced Vendor to Partner – the imperative from

outsourcing to deliver and support, has driven clients

to adopt the service provider to not just be a part of but

a facilitator to growth

� Identify your ‘Partner of Choice’ – selecting the right

partner is critical. Clients must evaluate their potential

partners across parameters such as

o Skill/capability

o Past Experience

o Assets they possess – tools, technologies,

platforms etc

o Delivery model – tier II delivery capabilities

o Financial stability

� Leverage the partner for innovation and growth

� Leverage skilled/experienced advisors to

undertake outsourcing initiatives – In order to get

access to global best practices in vendor selection, it is

advisable to use services of a full service advisor

What service providers must do?

� Understand/Align services to meet client

requirements – Indian client is highly cost sensitive

� Build capability and competency – reach and

customization to satisfy client needs


o Set up delivery frameworks to support

domestic markets – need for more regional

and tier II location delivery to provide added

cost advantage

o Develop new operations and delivery

models such as SaaS, platform based

services to reduce costs and increase margins

o Build Assets – Assets help creating a

differentiator in the market

� Create niche value propositions – revenue share

models, partnership approach, cost effective delivery

models


Conclusion

Are we there yet? It is well established that the Indian market

is at a point of inflection. Indian clients are seeing value in

outsourcing. ‘Best of Breed’ service providers are leveraging

skill/expertise from global operations to provide solutions to

domestic client.

Industries in India such as Telecom, Banking, and Insurance

are experiencing high growth providing a significant

opportunity for outsourcing

In order to remain competitive globally, clients need to achieve

considerable levels of process standardization, have access to

the right skills and reduce time to market.

Translating the market, moving in-house operations to a more

efficient model of shared services or outsourcing is in the

offing. Clearly, moving to an outsourced model offers

significant savings on costs which could be repatriated for

growth.

Coupled with the cost advantage, the maturity of the service

providers in delivering to global clients has instilled the

confidence amongst the ‘risk averse’ Indian client community.

Outsourcing adoption growth in the Public Sector is the best

example to such success.


About Tholons

Tholons is a Services Globalization and Investment

Advisory firm that combines "Best of Breed" consulting

experience with deep execution expertise and

investment insights to deliver truly effective services to

its clients. Tholons offers a detailed understanding of

business processes and combines it with practical

hands-on expertise in executing the strategy. Tholons

draws upon the considerable experience of a hand-

picked team, which has successfully formulated and

executed globalization strategies to unlock value for

Global Fortune 1000 companies. Service providers

leverage Tholons expertise to optimize their global

delivery model. Tholons advisors engage with

government bodies to build compelling strategies for

making countries attractive destination for outsourcing.

THOLONS Global Offices

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Phone: +1-646-290-9320 Fax: +1-646-349-3546

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Phone: +44-1628-566140

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Copyright Notice This Tholons document was published as part of the Tholons Advisory, Investments and Research Services portfolio, covering all consulting projects and publications. For further information related to this document, reprint rights or general inquiries regarding other Tholons services, contact [email protected] or call any of our global offices. Reproduction of this document and all content within is prohibited unless authorized by Tholons. All rights reserved. For more details about Tholons' Services Globalization and Investment Advisory capabilities, please visit our website at: www.tholons.com You may also contact: Saugata Sengupta [email protected]

Author:Ankita Vashistha Editor: Sabyasachi Satyaprasad Partner

validating the opportunity - tholons - consulting. research. …€¦ · · 2012-02-08post 2005,...

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