Indian IT-ITES Driving Growth by Moving up

Indian IT-ITES – Driving Growth by Moving up the Workshop on Transport Modeling Research & Software Development, Vadodara April 2005 This material was used by NASSCOM during an oral presentation; it is not a complete record of the discussion. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from NASSCOM. TM

About NASSCOM Strategy NASSCOM is… • • 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 Objective • 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 India as the Vision: To establishglobal 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 21 st century’s software powerhouse aspirations for the industry and the country and position the country as the global sourcing hub for software and se

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… 2003 Have nots 40% Have 60% 33% increase in offshore penetration year over year 2004 Have nots 20% Have 80% Source: Gartner …in 2004, this figure is expected to have risen to 400

…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

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

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

The list of services sourced globally is expanding r 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 Service Total Market Size ($ B) 2002 17. 6 2005 29. 9 2008 51. 8 Source: neo. IT

…as well as offshore BPO Total Market Size ($ B) 2002 8. 1 2005 19. 8 2008 42. 2 Source: neo. IT

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

Indian IT-ITES – the eye of the storm, is witnessing unabated growth… Source: NASSCOM • Indian IT-ITES has grown at a CAGR of 28% over FY 19982005 • 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 …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…

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

Indian vendors are expanding their addressable ma Remote Infrastructure Management Remote management of services such as helpdesk services, server management, data centre management, network management, asset management, desk-side support, IT security services, maintenance services and applications operations. IT Consulting IS strategy, IT architecture assessment and planning, operational analysis, technical system and network designing, product / solution specific consulting Knowledge Process Outsourcing Financial services: Equity research analyst support, valuations, financial modeling and analytics, buy/ sell-side research, sector and specific stock tracking. Actuarial analytics, credit risk analytics and modeling. Fund management and administration. Professional services: Accounting, tax and audit support, legal and litigation support, business / corporate and market research Others: Contract research in pharmaceuticals and biotechnology, animation and graphics for the entertainment sector

Case Example: Remote Infrastructure Management

…and unlocking the potential in high-end, specializ Texas Instruments Develops embedded software for broadband, DSP, wireless terminal and OMAP applications and OS. The company has filed 225 patents out of its India-based facility over the last 17 years. Has over 900 employees at its India center, plans to increase its employee strength to 2, 500 by 2005. Intel Has an end-to-end product development lab in Bangalore that was set up in 1998. Announced plans to double the number of engineers employed to 3000 by the end of 2004. Adobe’s R&D center at Noida is its largest facility of this kind outside the US. 15 Ten percent of the company’s global R&D workforce is based out of India. Microsoft (IDC) Works as an extension of its R&D team in Redmond and employs over 150 professionals. Has announced plans to increase its investment in India to USD 400 million by 2005. Others IBM, Veritas, Baan, SAP Labs, Cadence Design Systems, Cisco, CSC, EDS, Huawei Technologies, Motorola, ST Microelectronics, and more

…such as product development and engineering se Daimler Chrysler Has had an R&D facility in India since 1996 that undertakes software development for its super luxury cars, encryption, image/signal processing, telematics; engineering services-finite element modeling, CAD/CAM and PDM Ford Established in 2001, Ford Information Technology Services India provides design capabilities and e-business solutions to Ford’s Asia Pacific operations. General Motors Established in 2003, GM India undertakes research in mathbased tools, vehicle development and automotive electronics, vehicle design tools, enterprise modeling & virtual manufacturing, automotive materials and chemical systems Honeywell Undertakes software product development and support, technology development and hardware engineering for the company’s aerospace, automation and control businesses. Others TCS, Infosys, Wipro, Akzo Nobel, GE, KPIT Cummins , Nielsoft, and more

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

Industry maturity has fostered the evolution of multiple engagement models… From primarily captive… Indian best-ofbreed vendor Outsource to Global brand Feasibility of outsourcin g the process …to a hybrid model Outsource to Global brand JV/ Allian ce Delay Source: Mc. Kinsey Analysis Indian best-ofbreed vendor JV/ Alliance Captive Delay Cross-border operation sophistication Captive

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

…addressing the specific needs of different client g India Business Models Captive Models 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 Strategic Alliance/Joint Venture Models Joint Venture (JV) • Joint Venture with equity participation from customer and vendor. Customer retains control due to investments in entity. • British Telecom - Mahindra 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, AIGPolaris Outsource Model 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

While cost advantage was the initial attraction… • • • Source: Mc. Kinsey Global Institute COST ELEMENT USD / FTE / Year US Value INDIA Share Value SAVING Share On US Cost base Significantly favorable total transaction cost economics Gross savings on factor cost up to 78% Net realized savings ranging between 2560% PROCESS ACHIEVED SAVING Transaction Processing 25%-40% 42, 927 73. 3% 6, 348 48. 4% 85% Accounting / Contact Center Services 30%-40% IT/ Telecom Costs 2, 400 4. 1% 3, 770 28. 7% -57% IT Services 25%-50% Office Facility Costs 3, 700 6. 3% 1, 991 15. 2% 46% Finance / Insurance 40%-60% Other G&A Expenses 9, 571 16. 3% 1012. 5 7. 7% 89% Digital Content 30%-50% 58, 598 100% 13, 121 100% 78% Software/ ERP / Analytics 40%-60% Personnel Costs Total Cost Source: NASSCOM, Evalueserve Analysis Blended rate for voice and non-voice operations Source: GECIS, FT Outsourcing to India Conference – November 2004 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 II • Creation of basic • Emphasis on processes software engineering • Alignment of Quality Management • Alignment of Systems (QMS) with QMS with the global standards (e. g. CMM framework ISO) • Framework for measurable improvement • Consistent and orderly execution of engagements • Acquisition of CMM certifications at progressive levels of maturity STAGE III • 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… Country Level 5 # of Companies** Canada 1 China 2 India 76 Russia 1 USA 20 Source: NASSCOM • 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 …have enabled firms to achieve significant productivity gains ** Compiled after October 2002 – may not be current for all the countries

A comprehensive legal framework… Data Privacy and Protection Laws in India Copyright Patent Data protection Yes Product Patents 2005 Comprehensive Framework 2004 Vertical Specific Laws No Digital Signatures Yes Hacking Yes Privacy Yes • 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

…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 E 1 half circuit has declined by ~60% over the last three years – In 2005, TRAI has proposed to reduce the cost of an E 1 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 faci • 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 fitout) • Better cost management through flexible service agreements 24/7 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 10 A/10 B 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… • • CAGR of 19. 2 percent over FY 2000 -05 • Electronics consumption in India estimated at $9. 7 billion in 2005 • Source: NASSCOM Domestic revenues of Indian IT-ITES valued at over USD 10 bn Still very low compared to other nations (China is at USD 150 bn and the US is at USD 450 bn) • Source: In-Stat / MDR …with significant MNCs currently account for leading shares in most untapped especially in segments – potential hardware

While on a strong footing – India also has its share 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 …industry stakeholders are committed to overcomi • Bridging the digital divide in the country

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