An overview of the IT-BPO sector in India
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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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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


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India fact sheet

FY 07 unless indicated otherwise

Sources: IBEF, EIU, RBI, CIA fact book

3


The indian economy l.jpg
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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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Buyer needs

Source: NASSCOM-Mckinsey Report 2005

…driven by mature buyer needs evolving towards beyond-cost benefits

16


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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THANK YOU

Rajeev Kumar

[email protected]

www.indiaconsulate.org.br


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