STRATEGIC REVIEW 2008 by kaushal312

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									Executive Summary
               A gem is not polished without rubbing, nor a man perfected without trials.
               – Anonymous
2007 was a test of resilience for the Indian Information Technology – Business Process Outsourcing
(IT-BPO) sector. Nonetheless, the sector successfully countered fresh headwinds of a slowing economy
and a financial sector crisis in the US, and sharp appreciation of the INR against the USD, in addition to
the already existing supply-side constraints – and maintained its double-digit revenue growth. Driving
the sector’s strong performance was more diversified geographic market exposure and continued
expansion of the service portfolio, leading steady growth in scale by Indian-origin service providers as
well as Multinational Corporations (MNCs) having operations in India.

While many of the challenges faced by the sector persist, and are likely to remain over the foreseeable
future, Indian IT-BPO’s demonstrated ability to overcome them and continue on its strong growth
trajectory reinforces the conviction in its fundamentally strong and sustainable value proposition. India
continues to be the ‘nerve-centre’ for global sourcing with over 2/3rd of the Fortune 500 and a majority
of the Global 2000 firms leveraging global service delivery – now sourcing from India.
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Positive market indicators and a strong track record strongly support the optimism of the industry in
achieving its aspired target of USD 60 billion in software and services exports and USD 73-75 billion in
overall software and services revenues, by FY2010 1.

Yet, the size and scope of the opportunity for Indian IT-BPO, and the strategic advantages in realizing
its full potential – are significantly larger. Though India is uniquely advantaged to best address these
opportunities, they are not lost to others. Timely, coherent and continued action is needed to ensure
that India makes the most of these opportunities and maintains its lead..


Global Sourcing Trends in 2007
               Not all problems have a technological answer, but when they do, that is the
               more lasting solution.
               - Andy Grove, Founder of Intel Corporation

Worldwide technology products2 and related services sector spends are estimated to have grown at
7.3 per cent to nearly reach USD 1.7 trillion in 2007 – overcoming concerns of budgetary cutbacks due
to an economic slowdown in the US and its spill-over effects on other key markets.

IT-BPO services, growing at an above-sector-average rate of nearly 8 per cent, remain the largest
category, accounting for an increasing share of the worldwide technology sector revenue aggregate.
1
    The fiscal year for the Indian economy follows a twelve month cycle spanning 1 April – 31 March
2
    Technology spending defined as per IDC classification of IT Services, software, hardware and BPO; worldwide spending on R&D and engineering which is increasingly technology
    enabled, was estimated at over USD 800 billion in 2007 but has been excluded to avoid possible double counting



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                              Outsourcing continues to be the primary growth driver, albeit sustained by gradual shifts in regional
                              spending patterns – with increasing traction in Europe and Asia Pacific offsetting a marginal decline
                              in share of the Americas.

                              Underlying this steady growth in services spends is the increasing adoption and continued evolution of
                              the global sourcing supply-chain. Global sourcing of technology related services is estimated to have
                              grown by about 30 per cent to reach USD 70-76 billion in 2007. Increasing emphasis on innovation-led
                              growth added to the secular trend in technology related spending, with IT-enablement and global
                              delivery now being recognized as complementary means of effectively increasing productivity, reducing
                              time-to-market and thereby increasing the returns on innovation investment.

                              Consequently, players with demonstrated global delivery capabilities continue to close-in on the market
                              shares of the incumbents (US Big-Six and European Big-Five), with India-heritage players reporting
                              the sharpest gains in their share of the total value of large3 outsourcing contracts awarded in the
                              year 2007.

                              While the portfolio of sourcing destinations continues to evolve, India remains the nerve-centre for
                              any major global sourcing strategy. Sustained growth amongst indigenous players is being
                              complemented by a continued flow of MNC investments – reinforcing India’s growing role in the new
                              world technology order.
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                              Indian IT-BPO Performance in 2007
                                              Twenty years and USD 40 billion. They seem like good round numbers
                                              - Michael Dell, Founder of Dell Computers

                              Continuing on its established track-record, the overall Indian IT-BPO revenue aggregate is expected
                              to grow by over 33 per cent and reach USD 64 billion4 by the end of the current fiscal year (FY2008).5
                              Over the same period, direct employment in the sector is expected to reach nearly 2 million, an
                              increase of about 375,000 professionals over the previous year. As a proportion of national GDP, the
                              Indian technology sector revenues have grown from 1.2 per cent in FY1998 to an estimated 5.5 per
                              cent in FY2008. Net value-added by this sector, to the economy, is estimated at 3.3-3.9 per cent
                              for FY2008 6.

                              Exports: Contributing 64 percent to the overall revenue aggregate, exports remain the mainstay of
                              the Indian IT-BPO growth story. Software and services exports, accounting for over 98 per cent of the
                              total exports, are expected to cross USD 40 billion and directly employ nearly 1.6 million professionals,
                              in FY2008 – a commendable achievement over just about two decades.

                              Exports by geography: While the US and the UK remain the largest export markets (accounting for
                              about 61 per cent and 18 per cent respectively, in FY2007), the industry footprint is steadily expanding
                              3
                                  Here, large indicates contracts with a total contract value of greater than USD 25 million
                              4
                                  This figure includes the revenues from IT services, software, BPO, engineering services and hardware, earned in the domestic market as well as through exports either by Indian
                                  firms or by India-based centers of multinational firms. Employee-base figure does not include employment in the IT hardware sector.
                              5
                                  The fiscal year for the Indian economy follows a twelve month cycle spanning 1 April – 31 March. Hence all the figures reported for the current Indian fiscal year (FY2008) pertain
                                  to the industry’s performance during April – December 2007 that have been used to arrive at the year end estimates
                              6
                                  Value added in the technology services sector is estimated at 60-70 percent



    NASSCO M STRATEG I C R E V I E W 2 0 0 8
to other geographies. Exports to Continental Europe in particular have witnessed notable gains, growing
at a CAGR of more than 55 per cent over FY2004-2007.

Exports by vertical market: The industry’s vertical market exposure is well diversified across several
mature and emerging sectors. Banking, Financial Services and Insurance (BFSI) remains the largest
vertical market for Indian IT-BPO exports, followed by High-technology and Telecom. These sectors
together accounted for nearly 60 per cent of the Indian IT-BPO exports in FY2007. Manufacturing
and Retail followed, contributing 23 per cent to the aggregate. Other key segments include Media,
Healthcare, Airlines and Transportation, and Utilities.

Exports by service-segment: Broad-based growth, across all the segments of IT services, BPO, product
development and engineering services, is reinforcing India’s leadership as the key sourcing location for
a wide range of technology related services. Further, being able to demonstrate credible scale across a
wider service portfolio is helping firms deepen relationships with existing clients as well as drive access
to previously untapped opportunities.

IT services (excluding BPO, product development and engineering services), contributing 57 per cent
of the total exports, remains the dominant segment and is expected to cross USD 23 billion, a growth
of 28 per cent in FY2008.

Over the past 5-6 years, the service-line mix of Indian IT providers has evolved considerably – from                               7
being predominantly driven by custom application development and maintenance to a wider portfolio of
services including software testing, applications management and system integration. With providers
and clients keen to adapt more services to remote delivery and automation, and Indian providers actively
building onshore and near-shore capacities, the industry service portfolio continues to expand rapidly.
In this context, remote infrastructure management is emerging as a key growth driver.

BPO services, accounting for over 1/4th of the export aggregate, is the fastest growing segment across
software and services exports driven by scale as well as scope. Export revenues for this segment are
expected to cross USD 10.9 billion, a growth of 30 per cent in FY2008.

The last few years have seen the Indian BPO services landscape expanding to include increasingly
complex processes involving rule-based decision making and even research services requiring informed
individual judgment. The expansion in scope of BPO has been accompanied by an equally rapid adoption
across a range of vertical industries – with several providers offering vertical specific services, adopting
focused go-to-market strategies and making significant investments in tools and technologies, new
skills (functional as well as multi-lingual) – in India as well as in other locations through a combination
of organic and acquisitive routes.

Complementing the strong growth in IT services and BPO exports is the continued growth across product
development and engineering services, which also reflects India’s increasing role in global technology
IP creation. Export revenues from these relatively high-value-added services such as engineering and
R&D, offshore product development and made-in-India software products is estimated to be growing
at about 27 per cent, and are forecast to reach USD 6.3 billion in FY2008.

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                              Industry structure: Industry structure reflects a healthy balance between ownership / origin and size.
                              Today there are a large number of Indian and foreign multinationals, successfully operating a range
                              of sourcing models including owned captives, outsourced to third-party vendors, and variety of hybrid
                              models – providing buyers with the flexibility to choose the engagement models best suited to their
                              requirements. In terms of size, while larger players continue to drive industry growth, small / emerging
                              companies also play a key role in nurturing innovation – and continue to attract VC/PE7 interest.

                              Domestic market: Technology adoption in the domestic market also reported steady gains in 2007.
                              This segment is expected to cross USD 23 billion in FY2008, reporting healthy growth across all key
                              segments. Hardware remains the largest segment of the domestic market, and is expected to grow
                              at 44 per cent in FY2008. Domestic IT services spends are estimated to be growing at about 43 per
                              cent in FY2008, and are showing strong signs of increasing sophistication as building enterprise IT
                              infrastructures and applications, networking and communication become key priorities for India Inc.
                              Software and BPO spending growth in the domestic market is being supported by increasing adoption,
                              and is expected to grow by over 37 per cent and 43 per cent, respectively.

                              With several large Indian enterprises now counted in the league of multinationals and often in head-on
                              competition with the latter – in India as well as overseas, their technology related demands (in terms
                              of value and scope) are evolving rapidly – in order to deliver world-class services. Equally promising is
8                             the relatively less visible, and yet slow – albeit very important, trend of growing technology adoption
                              in the mid-market segments of the domestic industry. Providers, Indian as well as multinational, are
                              paying more attention to specific needs of mid-sized customers – with reasonable success. Growing
                              levels of technology adoption are now accompanied by a steady appreciation of the rupee, which is also
                              making India more attractive as a market – even for players that had earlier maintained a stricter focus
                              on exports. This self-feeding combination, of increasing demand met by a larger mix of experienced
                              and world-class providers is expected to drive further growth in the domestic market.

                              In addition to enterprise demand, there is also a steady growth in usage of computers and the internet
                              amongst households / individuals. Further, e-governance initiatives at the state and national levels
                              are other key levers to unlock a significant ‘network effect’, and are progressing steadily


                              India’s IT-BPO Value Proposition
                                              The winner is the chef who takes the same ingredients as everyone else and
                                              produces the best results.
                                              - Edward de Bono, Motivational Author

                              Strong fundamentals of a large talent pool, sustained cost competitiveness and an enabling business
                              environment have helped establish India as the preferred sourcing destination. Despite attempts by
                              the Governments in several other locations, to replicate the factors and policies that have contributed
                              to India’s success – superior execution has ensured that India remains the distinct leader in the global
                              7
                                  Venture Capital / Private Equity



    NASSCO M STRATEG I C R E V I E W 2 0 0 8
sourcing arena. A mix of provider, industry and Government initiatives are helping further strengthen
India’s lead.

Sustained cost competitiveness: India continues to deliver a significant cost advantage, driven by a
wide differential in wages and other lower factor costs, and enhanced through productivity gains.

Large and growing talent pool: India’s young demographic profile complemented by a vast and
growing academic system continues to add to its pool of educated talent. There is no other country
that offers a similar mix and scale of human resources. While some gaps in talent suitability exist,
they are being adequately addressed through strong provider-level initiatives, focussed on skill
development. Additionally, industry-led initiatives such as the National Assessment of Competence
(NAC), complemented by Government support, are helping further enhance India’s long term
talent advantage.

               It is only the farmer who faithfully plants seeds in the spring, who reaps a
               harvest in the autumn.
               - Bertie Charles Forbes, Founder of the Forbes Business Magazine
Keen emphasis on quality and security: The Indian IT-BPO sector has built a strong reputation for its
high standards of service quality and information security – which has been acknowledged globally
and has helped enhance buyer confidence. The industry continues its drive to set global benchmarks                                   9
in quality and information security through a combination of provider and industry-level initiatives and
at strengthening the overall frameworks, creating greater awareness and facilitating wider adoption
of standards and best practices. The Data Security Council of India (DSCI) was launched in 2007 to
institutionalize efforts to further enhance the information security environment in India.

Enabling business environment: Supportive policy and active private enterprise have helped in creating
an enabling business environment to facilitate the rapid growth of Indian IT-BPO. Government policy
played a key role in catalysing growth in the early years and continues to aid growth with progressive
reform. Public and private enterprise has contributed by building the required capacities of key business
infrastructure, helping this sector enjoy world-class facilities and services. The private sector is now, in
partnership with the Government, also beginning to play an increasing role in the overall infrastructure
development in the country. While the relative merits of STPI8 / SEZ9 (for IT-BPO) continue to attract
healthy debate, overall Government policies have prioritized education and infrastructure and are
aligned with industry needs.

Enhanced value delivery: Indian IT-BPO is at the forefront of enhancing the global sourcing value
proposition. The maturing supplier landscape in India is also helping buyers explore means of enhancing
the global sourcing proposition, by delivering additional business and strategic value beyond the
established primary benefits. Indian IT-BPO is delivering this additional value through a combination of
improvements in quality, speed and flexibility, productivity and delivery innovation. India-based IT-BPO
companies are making focused investments in capability building across domain, process, technology
expertise coupled with enhanced flexibility to deliver on this enhanced proposition.
8
    Software Technology Parks of India
9
    Special Economic Zone



                                                                                             N ASSC OM STR ATEGIC R EVIEW 2 0 0 8
                               While the context somewhat differs, the value proposition is just as applicable in the Indian market,
                               and its appreciation amongst domestic buyers is increasing.


                               Future Outlook
                                               The future you see is the future you get.
                                               - Robert G Allen, co-author of ‘The One Minute Millionaire’ and ‘Cracking the
                                               Millionaire Code’’

                               From a fundamentals viewpoint, the drivers for global sourcing are likely to remain strong in the near
                               future. Most environmental factors affecting global sourcing also look favourable despite concerns of a
                               possible economic slowdown. While the short-term US outlook is muted, global tech spending forecasts
                               remain strong, supported by momentum in EMEA and APAC, and an expected resurgence in the US.
                               Nature of short-term cutbacks in US technology spends are unlikely to impact global sourcing negatively;
                               in fact could even boost its growth. Worldwide adoption of outsourcing, another key influencing factor,
                               is also expected to grow rapidly over the next five years. Overall thus, global sourcing of services seems
                               well-placed to continue expanding its share of worldwide IT-BPO spending.

                               Sufficient demand, strong fundamentals and a favourable environment support a positive outlook for
10                             Indian IT-BPO exports. Further, strong imperatives for increasing technology adoption in India represent
                               significant potential for growth in the domestic market. Indian IT-BPO on track to reach USD 60 billion
                               in exports and USD 73-75 billion in overall software and services revenues, by 2010.

                               Achieving these targets will also increase the IT-BPO sector’s contribution to India’s socio-economic
                               development. At the aspired levels of growth, IT-BPO will employ about 2.5-3 million professionals
                               directly in the sector, account for direct investment of about USD 10-15 billion, and contribute 7-8 per
                               cent of the national GDP 10.

                               Yet, the size and scope of this opportunity, and the strategic advantages in realizing its full potential
                               – are significantly larger. At USD 52 billion (excluding hardware), India accounts for about 4 per cent
                               of the worldwide spend on IT software and services11.Further, global sourcing penetration is estimated
                               to be growing at nearly four times the rate of absolute technology spends. The combination of these
                               two facts alone signifies immense opportunities for rapid growth. While India is uniquely advantaged
                               to best address these opportunities, they are not lost to others. Key stakeholders need to continue
                               working in a focussed and coordinated manner, for India to realize its potential.

                               Firms: Indian IT-BPO companies need to maintain a keen emphasis on ensuring that they continue to
                               deliver the core benefits as well as enhance the overall value proposition for their clients. This will entail
                               increased investments across the key axes of people, processes, and technology, in building deeper
                               domain / functional skills, and may also require firms to adopt a more global footprint.

                               Indian IT-BPO firms have demonstrated continuing success in driving efficiency and productivity gains
                               from innovation in sourcing inputs and running business processes. While sustaining innovations are
                               10
                                    GDP: Gross Domestic Product
                               11
                                    Including hardware, Indian IT-BPO is estimated at USD 64 billion in FY2008, which is about 3 per cent of the worldwide spending aggregate for 2007



     NASSCO M STRATEG I C R E V I E W 2 0 0 8
important, only a significant shift towards more market-facing breakthrough and enhancing innovations
will provide the necessary revenue impetus in the medium to long-term. These could include penetrating
new customer segments in intellectual asset-intensive service lines like engineering and R&D services,
creating IP in emerging technology areas, developing and codifying specific domain expertise to target
consulting and system integration services, technical innovations to develop own standards for next
generation of technologies.

Leading providers have already started making these investments in enhancing capabilities to deliver.
This needs to be adopted in an industry-wide manner to ensure that the required momentum is
achieved.

Additionally, the providers should also enhance their role in addressing some of the larger developmental
challenges faced by the country. India IT-BPO, with its exposure to global best-practices across a range
of sectors, can well take the lead in helping drive efficiency and productivity gains across the spectrum
of Indian industries.

Providers can also leverage their understanding of technology and superior process orientation to
enhance the process of government-business and government-citizen interactions.

Finally, providers may also enhance the role they are already playing in helping improve the quality
of education – especially since that directly feeds into the industry’s future growth potential. A large                            11
number of players are already running world-class training programs to up-skill their employees – and
are engaging with universities and colleges to facilitate changes in the curriculum and pedagogy, which
directly influences the quality of graduate output. These efforts could deliver a greater impact if they
are institutionalized.

Industry: The industry as a whole needs to continue working in a cohesive manner, to rigorously
ensure that high standards of quality and information security are sustained, to effectively facilitate
initiatives to address supply-side constraints and to proactively prepare to address any developments
in key / potential markets that could potentially influence international trade. To do this the industry
needs to continue engaging closely with the relevant constituents and key stakeholders, in India as
well as overseas.

There is also a strong case for the Indian industry to take on a broader leadership role in driving the next
phase of global sourcing evolution and help increase its penetration not just in more buyer geographies
but also in other emerging destination countries. This will require the industry to build stronger ties
with industry in other countries (including potential competition) and work towards building a mutually
beneficial agenda.

Government: Government actions continue to play a key role in shaping the impact achieved by
industry and firm-level efforts, by enabling the supporting business environment and influencing
India’s attractiveness as an investment destination.

The overall policy approach adopted by the Indian Government is oriented towards sustaining rapid
economic growth and broad-based development, and further integrating India into the world economic

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                               order. Its specific emphasis on enhancing the education system / output, increasing infrastructure
                               development and strengthening India’s role in international trade is in line with the needs of the IT-
                               BPO sector.

                               However, in addition to the broad alignment in industry needs and policy objectives, more targeted
                               actions are needed for India to capitalize on its long-term IT-BPO growth opportunity.

                               First, the Government’s efforts towards enhancing the education system need to lay special emphasis
                               on the talent needs of knowledge intensive industries, technology and innovation. The need of the
                               hour is to ‘raise the floor as well as the ceiling’ by a) improving the graduate output in terms of basic
                               language / communication skills and computer literacy; and b) increasing and institutionalizing an
                               emphasis on research and innovation by actions such as creating a National Innovation Policy to guide
                               all related efforts, launching mission mode projects to lead innovation in select areas of strategic
                               importance, nurturing clusters of research institutes, academia and industry, and establishing a nodal
                               body to oversee these efforts and provide though leadership.

                               Secondly, there is a strong case for continuing the current framework of fiscal incentives for IT-BPO
                               – especially for the emerging segments / companies in the sector. The demonstrated success of the STPI
                               model and its relative advantages over the proposed alternative warrant special consideration, especially
                               in the light of the fiscal incentives now being offered in potentially competing destinations.
12
                               Thirdly, development of basic and social infrastructure needs to keep pace with the growth of
                               industry. Private enterprises have shown high levels of interest in participating in basic-infrastructure
                               development projects and need to be further encouraged.

                               There is also scope to deploy policy measures that allow more effective utilization of invested assets.
                               Examples include facilitating an option of availing increased FSI limits for units dedicated to providing
                               IT-BPO services and easing restrictions on the use of VOIP and converged networks.

                               Fourthly, while IT-BPO companies in India operate under relative procedural ease (e.g. single window
                               clearance, no FDI restrictions, etc.), there is still scope for review of key aspects of fiscal regulation (e.g.
                               transfer of assets, tax filing and refund mechanisms, etc.), labour laws (e.g. limits on working hours /
                               days, maintenance of registers, terms of contract employment, etc.).

                               Finally, increased technology usage by small / micro enterprises and end-consumers can yield significant
                               gains and must also be encouraged.

                                        The most important single central fact about a free market is that no
                                        exchange takes place unless both parties benefit.
                                        - Milton Friedman, Nobel Laureate Economist

                               Achieving its full potential will no doubt, further strengthen India’s leadership in the new world
                               technology order. However, that is not all.

                               The growth of the IT-BPO sector has also had a perceptible multiplier effect on the Indian economy as
                               a whole. In addition to the direct positive impacts on national income growth, foreign exchange reserve

     NASSCO M STRATEG I C R E V I E W 2 0 0 8
accumulation and employment generation, the sector has also spawned several ancillary industries,
triggered a rise in direct-tax collections and propelled an increase in consumer spending, attributed to
the significantly higher disposable incomes. It is estimated that every rupee earned in the Indian IT-
BPO sector induces nearly another rupee of economic spending in the rest of the economy and every
job created in the sector induces the creation of 4 more jobs in the economy.

Further, the magnitude of potential gains from technology could be significantly amplified – especially
in a developing country such as India. Increasing adoption of technology in the domestic industries
is already beginning to reflect in their enhanced performance and competitiveness. As already
demonstrated in some measure by the IT-BPO sector, technology can play a key role in addressing
important issues of gender and economic disparities by promoting greater participation of women in
the workforce and creating widespread employment opportunities. A continued emphasis on leveraging
technology to induce greater inclusiveness will contribute to long-term payoffs, and will structurally
strengthen India as a more technology-enabled society.




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