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Offshoring and Outsourcing in India: The Global Business Debate

Offshoring and Outsourcing in India: The Global Business Debate. Poonam Barua Director PAMASIA Global Corporate Advisory New Delhi email: pamasia@vsnl.com. Economic Indicators. Largest democracy: 1.1 billion population 1991: Wide-ranging reforms to open and deregulate the economy

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Offshoring and Outsourcing in India: The Global Business Debate

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  1. Offshoring and Outsourcing in India: The Global Business Debate Poonam Barua Director PAMASIA Global Corporate Advisory New Delhi email: pamasia@vsnl.com

  2. Economic Indicators • Largest democracy: 1.1 billion population • 1991: Wide-ranging reforms to open and deregulate the economy • GDP growth over 8% in 2005-6 – fastest growing economies in the world, with compounded growth at 5.7% • Gross GDP - $3 trillion – fourth largest economy in the world – after USA, Japan and China • Annual per capital income is $2,880 – one of the lowest in the world • Indian’s remit about $18.3 b. back to India annually – one of the highest in the world • In 2003: total of 9, 500 listed companies on the BSE and NSE (23 registered stock exchanges) • Total market capitalization is 22 –25 % of GDP • Top 100 BSE companies represent almost 86% of market cap • State-owned enterprises account for nearly 32 % of BSE market cap

  3. India’s Market • India’s economy is expected to grow over 6% - faster than any other country in the world (Duetshe Bank Research) • India is one of the fastest growing markets in the BPO space • India is the world’s fourth largest economy- adjusted for purchasing power parity (PPP) – next only to U.S, China, Japan • There is a large potential in the SMB, and mid-market space, and for solutions enabling the (offshore) services industry

  4. Goldman Sachs Report of 1 October, 2003 – "Dreaming with BRICs: The path to 2050“ • India’s GDP will reach $ 1 trillion by 2011, $ 2 trillion by 2020, $ 3 trillion by 2025, $ 6 trillion by 2032, $ 10 trillion by 2038, and $ 27 trillion by 2050, becoming the 3rd largest economy after USA and China. In terms of GDP: India will overtake Italy by the year 2016 France by 2019, UK by 2022, Germany by 2023, and Japan by 2032.

  5. India Corporate Profile… Market Cap No. of Companies (April 2006) > $ 20 billion: 3 > $ 10 billion: 9 > $ 5 billion 18 > $ 1 billion 62 > $ 500 m 74 ** Growing over 100 Global Indian mnc’s that will be above $1 billion – ** 50% of the over $1 billion companies are currently in public sector No. of listed companies on BSE 10,000 No. of companies on Nasdaq No. of companies on NYSE

  6. Driving Global Leadership… • IT –led sectors McKinsey and Nasscom: India's revenues from IT industry will reach $87 billion by 2008 Profile of IT-led Sector: • Tier 1 companies – ie. Top 5 firms Account for 32 % of total software export • Tier 2 companies –ie. Revenues Rs. 1 billion - Rs. 10 million Account for 24 % of the industry • MNC – back-ends Account for about 26 % of the industry • Focused companies – domain/ service line/ products/ Account for about 3-4 % of revenues • Small companies – ie. less than Rs. 1 billion revenues, Account for 12-14 % of the market

  7. New emerging areas bio-informatics, bio-technology, genomics, clinical research and trials – Ranbaxy, Cipla, Piramal, Reliance Lifesciences, Biocon • Worldclass Manufacturing • Bharat Forge has the world's largest single-location forging facility, its clients include Honda, Toyota and Volvo amongst others. • Hero Honda with 1.7m motorcycles a year is now the largest motorcycle manufacturer in the world. • India is the 2nd largest tractor manufacturer in the world. • India is the 5th largest commercial vehicle manufacturer in the world. • Ford has just presented its Gold World Excellence Award to India's Cooper Tyres.

  8. Worldclass Manufacturing – ctd. • Hyundai India will become global small car hub for Korean giant -- supplying half a million cars to Hyundai Korea, HMI and Ford – by 2010 • Aston Martin latest luxury sports car, AM V8 Vantage, is being prototyped by an Indian-based designer. • 80 of the World’s 117 SEI CMM Level-5 companies are based in India. • 5 Indian companies recently received the globally acclaimed Deming (TQM) prize. Retail Sector: Late Riser • Largest retail density worldwide: about 15 million retail outlets • Retail trade will be 10-11% of GDP • Growing at 158 % between 2003-5 – compared to 40 % in other emerging markets • Valued at $19 billion currently compared to China’s $50 million

  9. Business Acquisitions: 2005-6 • Tata Tea: acquires Energy Brand USA- $677 m. • Wipro: cqired mpower, Cmangao, and Quantech USA- $58 m. • ONGC: takes over Ominex, Columbia -- $45 m. • Tata Steel: $8 billion bid for Corus Steel • Aban Llyod: buys Norwegian firm Sinvest for $425 m. • Dr. Reddys: acquires Betapharm Germany for 571 m. • Mahindra & Mahindra: takes over Jeco Holding in Germany for Euro 140 m. • Sulzon Energy: Buys Hanson Transmission in Belgium for $565 m. • Ranbaxy Labs: Takes over Terapia in Rumania for $324 m.

  10. Videocon India: takes over Daweoo Electronics in South Korea for $648 m.; buys CPT Thomson, France, for Euro 240 m. What are they buying: Oil and Gas Pharma and Healthcare IT & IT enabled services Food and Beverage Manufacturing Others

  11. Global BPO and process-engineering • Geneva-based STMicroelectronics is one of the largest semiconductor companies to develop integrated circuits and software in India. • Texas Instruments was the first to open operations in Bangalore, followed by Motorola, Intel, Cadence Design Systems and others.

  12. Market Dynamics… • Mobile phones are growing by about 1.5 Million a month. Long distance rates are down by two-thirds in five years and by 80% for data transmission. • Wal-Mart sources $1 billion worth of goods from India - half its apparel. Wal-Mart expects this to increase to $10 Billion in the next couple of years. • GAP sources about $600 million and Hilfiger $100 million worth of apparel from India. • There are about 200 call centres in India with a turnover of $2 billion and a workforce of 150,000. • 100 of the Fortune 500 are now present in India compared to 33 in China.

  13. Talent Dynamics… • Top 5 American employers in India: General Electric: : 17,800 employeesHewlett-Packard : 11,000 employeesIBM : 6,000 employeesAmerican Express : 4,000 employeesDell : 3,800 employees Top 5 Indian employers: Infosys: 40,000 Wipro: 35,000 TCS: 100,000 Reliance: 120,000 Satyam: 35,000

  14. India’s Talent Advantage • India has the world’s largest pool of English-speaking software engineers, permitting fast and large-scale project ramp-ups • Flexibility, eagerness to learn, and technical proficiency are key characteristics • More than 700,000 software professionals • 250,000 of them in top-tier companies • Access to talent from top universities available in the country at low cost • With more than 250 universities, 1,500 research institutions and 10,428 higher-education institutes, India produces 200,000 engineering graduates and another 300,000 technically trained graduates every year. 2 million additional graduates qualify annually. • The Indian Institute of Technology (IIT) is among the top three universities from which McKinsey & Company, hires most.

  15. Global Outsourcing Trends: IT-enabled Services – BPO’s & KPO’s Advantage India..

  16. Key drivers for Global offshore/ outsourcing as a strategic alternative • Increasing global competitiveness • Access to global talent • Economies of scale • Process engineering and enhancements • Wage arbitrage • Increased profit margins • Improvements in quality

  17. Advantage India.. India holds 55% of the global Offshore BPO IndustryMore than ½ of Fortune 500 companies have outsourced to IndiaIndia BPO Services grew by about 49% in 2004Indian BPO is growing at 7 times the domestic GDPIndian outsourcing is moving up the value-chainLOB’s developing: HR and FinanceIndian KPO (knowledge process outsourcing) to grow from $1.2 billion to $15.5 billion in 2010 (ie. 75% of the global KP market)

  18. 1.45-1.47 0.45-0.47 $1.00 0.67 0.33 • . . . deliversvalue to India . . . • . . . brings savings and returnsto U.S. . . . • Taxes ($0.04) • Revenues ($0.20) • Local suppliers ($0.09) • Cost savings ($0.58) • Goods/ services sold ($0.05) • Profits from Indian ventures ($0.04) The real economics of offshoring • $1 previouslyspent in U.S.,now offshored to India . . . • . . . creates new value from reemploying U.S. labor* . . . • . . . and makes the global pie that much bigger * Estimate based on historical U.S. reemployment trends Source: McKinsey Global Institute

  19. India’s Value Proposition for ITES-BPO Industry: PQRS – Productivity, Quality, Rate, Scalability factor • Abililty of Indian vendors to ramp-up operations rapidly • Widening breadth of services • Shift towards high-value services • Sustained cost advantage – nearly 40-50 % cost savings in India offshore operations • Delivery process enhancement and improvement • Access to an abundant skill pool : India has the largest english speaking IT talent pool in the world, over 120,000 trained IT professionals and about 3 million other graduates added each year. • Global quality credentials –ISO,TQM, 6 SIGMA

  20. Key markets: • U.S : 2/3rds of total market • Western Europe, mainly U.K. : 20 % approx. • Market profiles: • Customer Care: 35 % of the sectors employee base at 122,000 employees, and 1/3 of revenues • Finance: 25% of revenues • Administration: 16 % of revenue • Content Development: 13 % of revenue

  21. Ecosystem: View from SAP Labs- Offshoring India Center • Bangalore is one of the world’s top IT clusters • System Integrators can be enabled to implement SAP NetWeaver and the Business Process Platform for customers • Independent Software Vendors (ISV) can provide platform-based composite solutions

  22. Cost Factor • India is the one of the most cost-efficient locations for many mnc’s from Europe and U.S. Mckinsey Study: • and will be below 50% cost of Germany at least for the next 5 years (--SAP Labs) • “Context” can be outsourced to a large spectrum of service providers

  23. Offshoring Engagement Models • Outsourcing:contracting a single supplier to perform full range of Application Development and Maintenance • Selective Sourcing:contracting a vendor to perform a portion of Application Development and Maintenance • Co-Sourcing:a partnership that is developed on a shared management arrangement to cooperatively build applications or systems • Out-Tasking:engaging suppliers to perform a specific task whilst the organization maintains control of the strategy and integration • Skills Infusion:integrating experts into the team of impart & build expertise within • Resource services:hiring of delivery staff to manage performance bottlenecks • Advisory Services:ad-hoc services to fulfill gaps &/or specialist advice

  24. Phobias of Outsourcing : … view from IBM

  25. The Seven Phobias of Offshoring

  26. People

  27. Geo-Political

  28. Service Provider

  29. Fear Of Unknown

  30. What Executives are asking about India? • Will economic reforms continue…India’s noisy democracy perplexes many MNC Executives • Are the multinationals really welcome? • Isn’t China the richer opportunity? • How do successful multinationals approach India? • Is offshoring in India worth the political risk? • Will infrastructure be a problem? • Will India protect intellectual property?

  31. China Vs India Average Wage costs: China > India HR Managers: China $16,600; India $ 7,900 Financial Experts: China $ 6,900; India $ 4,400 Rate of Wage Increase: India 11.5%; China 7.5% Employment Culture: China.. Driven by personal accomplishment, fair pay and benefits; India.. Driven by confidence in senior management and organizational reputation

  32. Poonam Barua Director PAMASIA Global Corporate Advisory New Delhi email: pamasia@vsnl.com

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