IT & ITES: Growth and Trends

Outsourcing work in India began in 1993 when American Express started using its India
operations to provide book-keeping support to its other Asian operations. India’s ITES
industry can trace its origins to the Y2K problem, which first started in 1995-96 and
culminated in December 1999. It required fixing the codes of hundreds of thousands of
mission critical computer programs before the arrival of the year 2000. A vast portion of the
work fixing these programs was outsourced to India. Another factor contributing to the
initial growth of the India ITES industry was the buoyant US (and global) software market
during the late 1990s.

Many companies outsourced their software requirements to India. While some companies
outsourced such work to their captive units in India, other contracted out to external, third-
party providers. Following the stock market down run of 2000 and the economic recession
in the US during 2001-02, US companies began looking for ways to cut cost. One solution
was to outsource back-office functions to the other countries with cheaper but qualified
labour. The cost of significantly qualified and competent labour in India is among the
lowest in world. Another reason for companies to outsource is the competitive advantage
gained by working around the clock. BPO continues to grow in scale and scope, with firms
increasingly adopting a vertical focused approach. The India ITES industry has evolved
significantly over the past few years.

The Indian IT-BPO industry has grown by 6.1 percent in 2010, and is expected to grow by
19 percent in 2011 as companies coming out of recession harness, the need for information
technology to create competitive advantage. India’s fundamental advantages—abundant
talent and cost—are sustainable over the long term. With a young demographic profile and
over 3.5 million graduates and postgraduates that are added annually to the talent base, no
other country offers a similar mix and scale of human resources. Realising the wealth of
potential in the IT-ITeS sector, the central and state governments are also working towards
creating a sound infrastructure for the IT-ITES sector.

Indian IT and ITES industry is continuously providing a world class platform by for
understanding and adoption of the new developments & best practices worldwide in this
sector, taking up issues and concerns of the Indian industry with the relevant ministries at
National and State level, coming up with studies, reports and surveys to help understand the
potential of Indian IT and ITeS market and the issues faced.

Here in this Chapter, researcher has kept in view the strengths and potential of the Indian
IT/ ITeS industry, strives to enhance these aspects so as to transform the Indian IT identity
to an iconic status. As one of the key growth engines of the economy, the Indian IT/ITeS
industry has been contributing notably to the economic growth accounting for around 5.6%
of the country’s GDP and providing direct employment to about 2.3 million people and
indirect employment to many more. The sector witnessed an interesting 2010 which saw the
industry move beyond the economic slowdown and shift its focus on building revenues,
creating innovative service models, broadening geographical reach and optimising cost.
Amidst the growth story, however, the falling margins and subdued growth of many small
and mid-tier companies served as a wakeup call for that segment. Going forward, we expect
to see a consolidation wave in the years to come, where small and medium players would
merge to compete for large scale deals and keep up with the changing industry dynamics.

3.1 Indian IT-ITES: Review 2010

Indian IT-ITES sector generated revenues of about USD 73.1 billion in FY2010, a growth
of 5.4 % over FY2009. Sector provides direct employment to 2.3 million people and
contributes to about 6.1 % of India's GDP. Indian IT-ITES sector continues to be export
oriented with about 69 % ($50.1 billion) of India's total IT-ITES sector (US still being a
major contributor). Indian IT-ITES sector created 90,000 addition jobs for FY2010 and as
per Nasscom estimates next year Indian IT-ITES sector would add another 1,50,000 (Net
hiring) professionals for FY2011.Top 20 IT Exporters from India (Includes services and
product firms) as shown in the following Table:

1 Tata Consultancy Services 11 Patni Computer Systems

2 Infosys Technologies 12 Hewlett-Packard India
3 Wipro 13 Capgemini
4 Cognizant Technology Solutions 14 CSC India
5 HCL Technologies 15 L&T Infotech
6 IBM India 16 Syntel
7 Accenture India 17 Aricent
8 Tech Mahindra 18 Prithvi Solutions
9 MphasiS 19 Polaris Software Lab
10 Oracle India 20 Mindtree Consulting
Top IT-ITES firms are optimistic about the global demand in the next coming years and
hence all the top players are hiring aggressively. However companies across the globe are
focusing on reducing capital expenditure hence concepts like "Cloud Computing and SaaS"
have taken a center stage. Global economies especially US and Europe are still battling with
lower private consumption and high unemployment. Slight recovery in the US is largely due
to government spending & stimulus. While MNC's and top five Indian IT-ITES players are
doing well most mid to small size companies are still struggling to stay afloat. Mid and
small IT-ITES players have failed to close deals in the domestic market.

IT/ITES market is touching new heights year by year. Since, the base has become
significant over the last few years; the next five years will require industry as well as
government to identify new uses of IT, new user segments and new relevance in a common
man's life."What's triggering the IT/ITES market is a buoyant economy and more disposable
incomes, say experts. Consumers are now spending more on ICT products and services
which include not just PCs, but smart handheld devices, digital cameras, MP3 players,
gaming devices as well. The domestic market has been growing rapidly in the last three-four
years. In the next five years, the IT/ITeS market is expected to grow at 19.7 %. IT alone will
grow at 16.4 %, while ITeS is expected to register a 40.4 % growth. The future lies not in
the exports market, for that path is well-established, upgrading the domestic market should
be priority. When a product is developed, the company should concentrate first on selling it
domestically and then look out .The key issues for Indian IT exports market will lie less in
worldwide market growth and more in the internal dynamics around IT outsourcing, Indian
labour supply, and competition from other regions. The developing IT market should
include creating the right ecosystem. It's important to create suitable products which are
made in and made for India. A strong local hardware manufacturing industry will play a
crucial role in achieving this.

3.2 The ITES industry in India and the opportunity for SME

Ever since the Indian economy was liberalised in the 1990’s, the Indian IT industry has
grown by leaps and bounds. And a major contributor to this growth has been the IT enabled
services (ITES) industry. Speaking broadly, IT enabled services are services which use
Information Technology as a resource to help improve and implement various business
processes. As an example, data entry is not an IT enabled service, but if the data entered is
used to collate and analyse information using the various IT tools available, it becomes an
IT enabled service. Speaking of the IT industry as a whole, the ITES sector contributes as
much as 27% of the total IT revenue in the international market and 10% in the domestic
market.

Talking of ITES, the services can be broadly broken down into the following:

3.2.1 Transcription services- This involves breaking down of recorded information,

segregating the important information and collating it to give businesses useful and
thorough data to refer to. India is a hotbed for outsourcing transcription services, especially
medical transcription, legal transcription and business transcription. The US accounts for a
major portion of outsourcing transcription services to India. The medical transcription alone
in the US is estimated to be worth USD 25 billion.

3.2.2 Document Processing- Managing documents for archiving purposes or for

distribution, providing end-to-end solution for methodical storage and retrieval of
documents, converting documents into electronic form and distributing the same etc., all
this comes under the document processing services.

3.2.3 Data Entry and Processing- This is perhaps the starting point of the Indian ITES
industry. It involves feeding data into the system, collating and analyzing it to provide
useful and actionable information to businesses.

3.2.4 Data Warehousing- Data warehousing is gathering of data from various sources and
then collating into one unified source of data which is updated from time to time. This data
is then used by businesses for understanding trends and charting out long term growth
strategies of the company.

3.2.5 IT Helpdesk Services- IT Helpdesk is the first point of contact for the end consumer.
It is through the helpdesk that the user informs the company about his grievances,
suggestions and the general feedback. Thus, IT Helpdesk forms a very important part of IT
services. However most of the times organisations find maintaining a helpdesk, a very
costly affair and that’s where outsourcing comes in. IT Helpdesk Services involve serving
customer queries through phone as well as e-mail 24/7.

3.2.6 Application Development- Most of the Indian companies in the ITES domain offer
application development as one of their services. This service involves developing custom
applications for businesses to improve their processes as well as integrating new
applications with the already existing system.

3.2.7 Enterprise Resource Planning- This is perhaps the newest entrant in the Indian ITES
segment. Enterprise Resource Planning or ERP involves automating the flow of information
within and outside an organisation to streamline various businesses processes viz. accounts,
sales, HR etc.

3.2.8 Telecommunication Services- Telecom services are another type of IT enabled

services provided by the Indian companies. Patni Computers is one of the top players in this
domain. Telecom services involve consultation, integration and adoption of the latest in
technology to help improve the efficiency of a telecom organisation.

The latest kid on the block when it comes to ITES is cloud computing. The need for better
cost efficiency and faster set of services is contributing to the growth of cloud computing.
The pay-as-you-use model of cloud computing, in contrast to the conventional IT model is
attracting companies the world over. Cloud computing services can further be broken down
into:

1. Infrastructure as a service (IaaS)

2. Platform as a service (PaaS)

3. Software as a service (SaaS)

According to a recent survey by Confederation of Indian industries (CII), 79% of the

companies in the ITES sector feel that including SaaS as one of the services in their service
package would help give them the edge and make them more competitive. Furthermore, the
biggest reason for Indian companies to include SaaS in their service package is to increase
the customer base. The ease of product maintenance as a reason comes a close second. The
survey also states that the bigger players in the market are more enthusiastic about SaaS
than the SMEs. SMEs view it primarily as an opportunity to increase the basket of their
services.

3.3 The scope for SMEs in ITES

Going by the survey of CII, the traditional markets of US and UK are going to be less
lucrative for the bigger players. However, there may be a lot of growth at the base of the
pyramids which could prove to be an engine of growth for SMEs in the US and the UK
market. According to CII, almost 71% of the SMEs still see the US and the UK market as
an expansion opportunity while the bigger players have shifted focus to the eastern
European countries. The CII predicts that the Middle Eastern countries, Asia-Pacific and the
European market are going to be the next big reasons for fuelling growth of the ITES sector
in India. It also advises the SMEs to focus on relatively untapped markets like the Middle
East. In short, SMEs in the ITES segment have a lot to look forward to and have plenty of
growth opportunities to explore, if only they tap the right areas.

The Indian information technology (IT) / IT enabled Services (ITeS) industry has played a
key role in putting India on the global map. Over the past decade, the Indian IT-BPO sector
has become the country’s premier growth engine, crossing significant milestones in terms of
revenue growth, employment generation and value creation, in addition to becoming the
global brand ambassador for India. The Indian IT-BPO sector including the domestic and
exports segments continue to gain strength, experiencing high levels of activity both
onshore as well as offshore. The companies continue to move up the value-chain to offer
higher end research and analytics services to their clients.

India is referred to as the back office of the world owing mainly to the Information
Technology-enabled Services (ITeS) sector. The ITeS sector is not only responsible for
putting India on the global map but has also made significant contributions to the Indian
economy. According to the National Association of Software and Service Companies
(NASSCOM), the IT/ITeS industry's contribution to the country's gross domestic product
(GDP) has grown from 1.2 % in FY 1997-98 to an estimated 5.5 % in FY 2007-08.

3.4 Indian IT-ITES 2012

India will be uniquely positioned to sustain its global leadership position, grow its offshore
IT-ITES industries at an annual rate of 24% to 25%, sustain nearly 10 million jobs, and
generate export revenues of more than US$ 86 billion by FY12 (as per NASSCOM
estimates). Additionally, industry participants can further accelerate this export growth
through deep and stable innovation. Such extensive innovation could generate an additional
US$ 15 to US$ 20 billion in export revenue over the next five to ten years. Further,
establishing India’s leadership in the global IT-ITES sector will mean more than achieving a
targeted growth in exports. Achieving these growth targets will entail a significant demand
for incremental human and financial capital in the country. US$ 86 billion in IT-ITES
exports by FY12 translates to incremental direct employment of about 2.5 million people
and capital investment of approximately US$ 20 bn. This is based on industry average
capital to revenue ratio of 1:5 and lead-time of 3 years in the investment cycle.

IT-ITES exports (US$ bn)

FY06 23.6 FY14E 124.9
FY07 29.8 FY15E 150.0
FY08E 37.6 FY16E 175.5
FY09E 47.5 FY17E 205.3
FY10E 60.0 FY18E 240.2
FY11E 72.1 FY19E 281.1
FY12E 86.6 FY20E 328.9
FY13E 104.0 CAGR 20.7

Source: NASSCOM McKinsey Research

India holds a dominant share of the global offshore IT-ITES sector (65% of the global
market in offshore IT and 46% of the ITES market). Yet, at US$ 31.3 bn in FY07, Indian
IT-ITES exports accounted for less than 3% of the global spend on IT-ITES. This clearly
indicates significant headroom for growth. If India maintains its current share of the global
offshore IT-ITES market, IT-ITES exports from India will exceed US$ 60 bn by FY10 and
US$ 86 bn by FY12. Further, growing at current trends, Indian IT-ITES exports are
projected to reach nearly US$ 330 bn by FY20 (nearly 14% of the projected worldwide
spend). But the Indian IT companies will have to move up in the value chain and
concentrate more on high value added services. Table-6

IT Exports in US$ bn % of market

FY05 FY06 FY07 FY05 FY06 FY07
IT Consulting 0.3 0.3 0.5 1.1 1.4 1.8
System Integration 0.2 0.4 0.5 0.3 0.5 0.6
Network consulting and integration 0.2 0.2 0.2 0.6 0.6 0.7
Custom Application development 5.0 6.5 8.9 22.5 27.8 36.4
Application management 2.7 1.6 2.2 14.8 7.8 9.6
IS outsourcing 0.6 0.8 1.1 0.7 1.0 1.2
Support and training 1.1 1.2 1.7 0.9 0.9 1.2
Others - 2.3 3.0 - - -
10.1 13.3 18.1 40.9 40.0 51.5

Source: NASSCOM
Infrastructure management services (included in IT outsourcing) and system integration
services are forecasted to be high growth areas in offshore IT services sourced from India.
In case of offshore BPO, relatively lower penetration levels and significant untapped
potential is expected to lead significant growth (CAGR 33% to 45%), across vertical
markets, over the next five years. But to achieve these targets, there lies some big
roadblocks in between them. They are:

3.4.1 Shortage in supply of suitable talent:

While India’s young profile has the country favourably placed in terms of its quantitative
manpower requirements, gaps in suitability and access to the entire available pool are
beginning to reflect in talent supply shortages which are indicated by continued above
average wage inflation and high attrition levels in the sector. To achieve US$ 86 bn in
export revenues and to continue to grow the domestic IT industry, the IT and ITES
industries will need to employ nearly 2.5 million professionals. Further, the number of
Indian students going abroad annually is currently over 100,000 and is projected to cross
200,000 by the end of FY10. In comparison, the number of foreign national students
coming to pursue studies in India is estimated at less than 10,000 each year. As a result, the
net annual outflow on account of education, currently estimated to be in excess of Rs 150 bn
(US$ 3.5 bn), is likely to continue to rise rapidly.

3.4.2 Lack of adequate infrastructure:

The demand for infrastructure and indirect resources poses a key challenge for the IT-ITES
sector. The incremental infrastructure required to support the projected growth is unlikely to
be absorbed into the existing city centres in Tier I and Tier II cities, which are already
witnessing signs of strain. With Tier III and Tier IV cities lacking important elements of
business and social infrastructure, decentralized growth of the IT-ITES sector will require a
coordinated, large-scale urban planning exercise. The IT-ITES sectors will likely employ
additional 2.5 m professionals (export sectors alone) by FY12. In addition to basic utilities
and physical infrastructure, growth in the sector will also generate significant demand for
world-class business and social infrastructure. Existing Tier I and Tier II cities are already
overcrowded, choked, and struggling to provide basic urban services. Upgrading these
existing centres is necessary, but can only reduce rather than solve the problem. Further,
decentralizing the industry beyond existing hubs is essential to allow wider distribution of
the development benefits driven by the growth of the sector. Therefore, this demand will
need to be met by developing new townships to house the young population.

3.4.3 Sustaining cost competitiveness:

Cost savings remain the primary driver for offshore sourcing of IT-ITES. In addition to the
potential loss of absolute cost arbitrage due to wage inflation, firms are becoming
increasingly concerned about increasing cost of doing business in India due to infrastructure
constraints. The recently introduced SEZ policy is a positive measure; however, it does not
adequately accommodate the requirements of this sector and is likely to have unfavorable
implications for SMEs and smaller cities. Further, India still ranks poorly on other aspects
of ‘ease of doing business’ when compared to other emerging competitor locations which
also impacts the cost of doing business in India. India currently ranks 116th out of 155
countries. (Source: www.doingbusiness.org)

The IT and ITES have been the largest industry segments responsible for contributing to the
growth of the Indian economy in the past few years. A gradual shift has been seen, in terms
of the choice of one’s profession, with an increasing number of people from diverse
backgrounds opting for a career in IT and ITES. In the past few years a large number of
graduates, from a diverse range of backgrounds, have been leaving their chosen disciplines
and joining the IT sector. Shortage of graduates in basic science and engineering streams
may result in the near future. This is likely to have an impact on research and innovation
and also on other primary and secondary sector of economy. Further, as the ITES-BPO
industry shifts to Tier II cities, there will be an increase in the infrastructure requirements in
those semi-urban areas also. In addition to this, there are challenges arising out of social and
cultural changes that are being brought out by the IT- ITES Industry growth, since the
professionals are employed in the virtual environment of the target industry. There is a need
to continuously study the changes that are taking place in economic as well as cultural
domain of various sectors also as a result of IT-ITES growth.

According to the press release, in the backdrop of one of the worst ever global financial and
economic meltdown, it is estimated that in 2009, the overall IT/ITES industry of India is
expected to grow at 10.8 percent. Going forward, the industry is expected to grow at 13.9 %
(CAGR 2008-2013) to touch over $110 billion in 2013. The growth will be led by spending
by the government, manufacturing, telecom, pharmaceutical, utility and healthcare sectors.
Retail, IT/ITES along with banking and financial services would also continue to spend on
IT.

The exports of the industry are expected to grow 12.7 %, reaching Rs 3,28,081 crore by
2013 as compared to Rs 1,80,064 Crore in 2008. The IDC's study estimates total IT industry
revenue of Rs 3,09,573 Crore in 2009. The exports would reach Rs. 2,00,168 Crore, as the
domestic IT/ITeS market would account for Rs 1,09,406 Crore. The hardware market will
remain under pressure through the year, while the software and IT services markets will also
be affected, though to a comparatively lesser extent. The share of IT/ITeS in the Indian
domestic market is expected to rise from 31.7 % to 41.9 % in 2013, signaling the increasing
focus of enterprises to 'leverage' the capacities built-ups. The Indian information technology
(IT) - business process outsourcing (BPO) sector including the domestic and exports
segments continue to gain strength, experiencing high levels of activity both onshore as well
as offshore. The companies continue to move up the value-chain to offer higher end
research and analytics services to their clients. India’s fundamental advantages—abundant
talent and cost—are sustainable over the long term. With a young demographic profile and
over 3.5 million graduates and postgraduates that are added annually to the talent base, no
other country offers a similar mix and scale of human resources.

National Association of Software and Service Companies (NASSCOM)—the apex body for
software services in India—has recently released publication-Strategic Review 2011, the IT-
BPO sector's revenue as a proportion of the country's gross domestic product (GDP) has
grown from 1.2 % in 1998-99 to an estimated 6.4 % in 2010-11. Further, NASSCOM
predicts that the Indian IT-BPO revenues may touch US$ 225 billion by 2020.

As per the Strategic Review 2011, the BPO sector continues to be the fastest growing
segment of the industry and is expected to reach US$ 14.1 billion in 2010-11, growing at
14%. The year also witnessed the next phase of BPO sector evolution - BPO 3.0 -
characterised by greater breadth and depth of services, process re-engineering across the
value chain, increased delivery of analytics and knowledge based services through
platforms, strong domestic market focus and SMB centric delivery models.

Further, as per NASSCOM, within exports, IT Services segment was the fastest growing
segment, growing by 22.7 % over FY2010, and aggregating export revenues of US$ 33.5
billion, accounting for 57 % of total exports.
Domestic BPO segment is expected to grow by 16.9 % in 2010-11, to reach US$ 2.8 billion,
driven by demand from voice based services, in addition to adoption from emerging
verticals, new customer segments, and value based transformational outsourcing platforms.

India’s core proposition of talent, quality, security and cost advantage would be
inconsequential without the rapid growth in availability of high quality telecommunication
connectivity across the country. Over a span of little over a decade, the Indian telecom
market has evolved from a public sector monopoly to thriving free-market competition.
Carefully crafted policy has helped drive a balanced agenda for the sector by influencing a
decline in pricing and increased affordability on one hand and increasing access penetration
and usage on the other, resulting in strong growth. The IT-BPO sector has been a key
beneficiary, with the cost of international connectivity declining rapidly and service level
quality improving significantly.

Telecom penetration in the country has increased from a modest 3.6 percent in 2001 to
Telecom penetration in the country has increased from a modest 3.6 percent in 2001 to over
12.6 percent in 2006, and is targeted to reach to 29.6 percent by 2009. While the wire-line
segment continues to witness steady growth, rapid adoption of wireless telephony has made
India the fastest growing market in the segment. At the end of 2006, there were over 98
million wireless subscribers in India, up from barely 4 million in 2001. Importantly, this
growth is taking place, not only in existing urban centres – but increasingly in satellite
towns and smaller cities, with IT-BPO firms driving much of the demand.

3.5 Moving up the value-chain

ITeS, which started with basic data entry tasks over a decade ago, is witnessing an
expansion in its scope of services. It now offers services such as knowledge process
outsourcing (KPO), legal process outsourcing (LPO), games process outsourcing (GPO) and
design outsourcing, among others. The Indian BPO sector has not only added scale in the
last nine years, but has also matured significantly in terms of scope of service offerings,
buyer segments served and service delivery models. Apart from achieving maturity in the
horizontal segment, providers are increasingly developing vertical/ domain specialisation to
capture greater value.

According to the DIT, among the verticals serviced by India's IT/ ITES-BPO industry those
that account for the largest share of revenue are banking, financial services and insurance
(BFSI) (41%), Hi-Tech/ Telecom (20%), manufacturing (17%), retail (8%), with smaller
contributions coming from media, publishing and entertainment, construction and utilities,
healthcare and airlines and transportation. Important industry verticals being serviced by the
BPO segment are insurance, retail banking, travel and hospitality, auto manufacturing,
telecom and pharmaceuticals. Horizontals such as Customer Interaction and Support (CIS),
Finance and Accounting (F&A) and Human Resource Management (HRM) are important
areas in the BPO segment. The Indian animation industry is estimated to grow at a
compounded annual growth rate of 22% to reach US$ 1 billion by 2012, according to
NASSCOM. It also estimates the gaming industry to grow 49%, reaching US$ 830 million
by 2012. According to a report 'Globalization of Engineering Services', published by
NASSCOM and Booz Allen Hamilton, India may capture 25 to 30% of the projected US$
150 billion to US$ 225 billion market for off-shored engineering services, i.e. around US$
50 billion, by 2020.

3.6 Advantage India

According to AT Kearney's 'Global Services Location Index 2011', a ranking of the top 50
most attractive off-shoring destinations, India continues to be the most preferred destination
for companies looking to offshore their IT and back-office functions.

According to NASSCOM, by 2014-15, the Indian IT-BPO industry is expected to

contribute about 7% to global annual GDP and create about 14.3 million employment
opportunities (direct and indirect). By 2020, new segments (SMBs), new verticals (Public
sector and Defence, Healthcare, Utilities, Printing and Publishing) and new geographies
(BRIC) will account for 50-55% growth in the addressable market. India supply base is well
placed to tap this potential, with their two decade long experience, mature service
capabilities, presence in almost all verticals, global footprint and an abundant talent pool.

In a year when top markets for software exports are recovering and expected to grow at less
than 5%, India’s domestic market for IT is set to grow three times faster, mainly on the back
of higher government spending on IT and new outsourcing projects from local banks.

With a compounded annual growth rate (CAGR) of over 24% in the last decade, the Indian
IT/ITeS industry has emerged as a key growth engine for the economy, contributing around
5.6% to the country’s Gross Domestic Product (GDP) in FY 2010 and also providing direct
employment to about 2.3 million people (from just about half a million in 2001). It remains
one of the biggest sectors for wealth generation in the country. As per the industry body,
NASSCOM, the sector is estimated to provide direct employment to 10 million and indirect
employment to 20 million by 2020.

3.6.1 Size of the Industry

The Industry is categorized into four broad segments:

1. IT services 2. Software products and engineering services

3. IT enabled services (ITeS - BPO) 4. Hardware

These segments generated combined revenues of $73.1 billion in 2009-10 from $69.4
billion in 2008-09 - a growth of 5.3%. The revenue from IT services constitutes about 50%
of the total industry revenues. It has grown at a CAGR of 21.8% from $13.5 billion in 2004-
05 to $36.2 billion in2009-10 (refer figure 9).

Figure 9: Revenue contribution by main components (in $ billions)

%
2 3

2 3
$% & '()

2 3
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2 3 ./ ( ( & '()

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2 3

2 3
The total ITeS revenues reached $14.7 billion in 2009-10 from $5.2 billion in 2004-05, with
a CAGR of 23% (refer figure1). While IT services continue to be the largest contributor, the
ITeS segment has grown faster over the last five years.

(Revenue share shown in figure 10 for 2009-10 mentioned in this section are estimates)

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3.6.2 Export and Domestic Market

The export revenues touched $50.1 billion in 2009-10, accounting for over 68% of the total
Indian IT/ITeS Industry revenues. The export revenues have grown at a CAGR of 22.4% in
the last five years (refer figure 1)

Figure 11: Component-wise contribution – Export revenues (in $ billion)

0 !

& - ! )
./ ( ( & '()
$% & *+,

$% & '()

Source: Nasscom
India has become one of the fastest growing IT markets in Asia Pacific, owing to its
increased IT spending in the last few years. The domestic IT/ITeS market revenues are at
$23 billion for the year 2009-10 compared to $21.9 billion in 2008-09 (refer figure 12).
Over the last five years, the domestic market has grown from $10 billion in 2004-05 at a
CAGR of 18.1%.

Figure 12: Component-wise contribution – Domestic revenues (in $ billion)

0 !

& - ! ) ./ ( (
& '()
$% & *+,

$% & '()

Source: Nasscom

The IT services segment has been the major contributor (54%) to the export revenues (refer
figure 13). The export revenues from IT services have grown from about $10 billion in
2004-05 to $27.3 billion in 2009-10 at a CAGR of 22.2% (refer figure 9). Over the years,
the ITeS/BPO segment has been the second largest segment in the Indian IT/ ITeS sector
and in growth, the second fastest. The growth of the segment for the next five years is
expected to be driven by a shift in the service mix towards higher value services like
business analytics, knowledge process outsourcing (KPO) including legal services, etc.
 4 !4

!4 4

In the case of the domestic market, Hardware continues to account for the largest share
(39% in 2009-10) of the total revenues (refer figure 14). The high share of hardware spends
points to the fact that the Indian users are still in the nascent stages of IT adoption.
However, Hardware revenues have either declined or remained flat over the last two years.

!"

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/ ( ( & '()
0 !

On the other hand, the IT services segment has grown by about 5% in 2008-09 and 7.2% in
2009-10. The growth in this segment is driven by an increased demand in the system
integration (SI) and custom application development (CAD) space. The ITeS-BPO revenues
grew by 21% in 2009-10, slightly higher compared to about 19% in 2008-09.

The growth in the IT services and Software product segments in the domestic market is led
by increased IT adoption in some of the key domestic sectors like Telecom, Manufacturing
and BFSI. Emerging segments like Media, Retail and Healthcare are expected to drive
additional growth in the next five years.
3.6.3 Key verticals

In terms of verticals contributing to IT consumption, the Banking, Financial Services and

Insurance (BFSI) vertical continues to be the dominant IT consuming vertical. It contributes
to over 40% of India’s total IT/ITeS exports (refer figure 7).

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The Telecom vertical is the second largest consumer of IT, after the Financial Services
vertical, contributing to about 20% of India’s IT/ITeS exports in the year 2009-10. With a
contribution of about 16% to Indian exports, the Manufacturing vertical becomes the third
largest IT consuming vertical. Together the top three sectors account for around 76% of the
total exports.

Mirroring the export market, the BFSI vertical has been a dominant contributor to the
domestic market as well with a share of 41% followed by the Hi-Tech/Telecom and
Manufacturing verticals with a share of 20% and 19% respectively (refer figure-8).
Together the big 3 sectors (BFSI, Hi-Tech/Telecom and Manufacturing) account for around
80% of total IT spends in the Indian market.
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The year 2010 has been a comeback year for the Indian IT/ITeS sector with the demand
picking up after the global economic meltdown. The sector had demonstrated remarkable
resilience during the downturn.

The sector, which witnessed around 75000 to 1 Lac job cuts and a drop in salary increments
from about 14-18% levels to 6-10% during the slowdown, saw a turnaround in 2010 with
the industry providing a positive outlook on the hiring scenario as well as on remuneration.
Most of the large IT companies have shown healthy project pipelines, in addition to a
significant growth in revenues this year, indicating a strong recovery. There is also a strong
focus on both market and business line expansion. However, the small and medium
companies faced a tough year with sluggish growth, in sharp contrast to their bigger
counterparts, the small and medium IT/ITeS providers bringing out the critical focus areas
for them to be winners. As per Nasscom, the Indian IT industry has added close to 90,000
jobs during FY’10, taking the total workforce to 2.3 million professionals. The industry also
saw an average salary hike of 10-14% and an increased number of promotions this year.

Despite the positive vibes around the industry, there are trends emerging (for the inserts on
Large tier versus Mid tier companies) which indicate that the small and medium players
could face slower top-line growth compared to larger players and a drop in profit margins.
Expectation of a phase of consolidation in the coming years where small players would
merge or collaborate to be able to compete for large deals. The iGate-Patni merger is likely
to be the harbinger of many more such deals. With clients looking at consolidating
suppliers, the size and scale of the company plays an important role while competing for
large deals. The year 2011 should also witness companies starting to focus on many
emerging trends and discontinuities which will shape the future of the industry in the years
to come. This is imperative if the industry is to maintain its growth and profit performance
and achieve NASSCOM’s estimated revenues of US$ 225 billion by 2020.

3.7 Trends: affecting Growth

The trends like Cloud Computing, Platform BPO, Emergence of Tier 2 cities as IT/ITeS
destinations, growth of Indian software products industry are prominent in the current
economic scenarios.

3.7.1 Cloud Computing

3.7.1.1 Business case for moving to a cloud oriented environment

Today’s IT environments are built on a series of costly compromises that drive unintended
consequences. IT environments are configured and over-provisioned for just-in-case traffic
scenarios and then sit largely idle until the extreme case occurs, if ever. Hardware, too, is
often planned and purchased to meet long term operational goals such as transaction
increases; although in the immediate term the technology sits underutilised. Ironically, by
the time the anticipated long term goal arrives, the hardware can be purchased for less.

3.7.1.2 Cloud enables IT to reduce its capital footprint

A cloud-oriented environment avoids these compromises even as it enables high levels of

efficiency, flexibility, and responsiveness while ensuring a way to control IT costs. At the
same time, a cloud environment enables new business models and opportunities. For
example, it can deliver levels of customer self-service previously not possible or allow for
the creation and delivery of new automated on-demand revenue producing services.

Specifically, a cloud-oriented environment enables the following:

Efficiency - through automation, this becomes essential to handle the scale of operations
that can be supported.

Flexibility - through the ability to configure and provision systems and resources on
demand, effectively scaling systems up or down as needed.
 Control IT costs - by eliminating the need to over-buy and over-provision IT resources
far ahead of demand, relying instead on an on-demand pay-for-use only when you use it
model and virtualisation of shared computing resources.

Scalability - enables organisations to scale resources up or down as needed.

Extensibility - through hybrid clouds organisations can extend the scalability of their
private cloud temporarily through linkages to public clouds based on a pay-per-use
model. The above mentioned efficiency, flexibility, cost control, scalability - can alone
save the enterprise enough and improve operational performance sufficiently to justify
moving to a cloud-oriented environment.

Then, on top of that, add the revenue captured through new business models and revenue
opportunities, typically revolving around on-demand services, and the business case for a
cloud-oriented environment starts to look very attractive. The level of attractiveness would
however depend on the creativity and innovation of the organisation. By enabling the
efficient use of IT through sharing of resources, high agility, enhanced collaboration and
consumption driven costing, Cloud Computing is fast emerging as an answer to the business
need of driving down IT costs as a proportion of operating and capital expenditure.

IT has a new mandate

IT is being asked to shift its focus from cost reduction (automation to increase
productivity through the elimination of manual labour and contraction of elapsed time
required to execute a process) to value delivery (creating a strategic advantage by
increasing revenue).

This shift requires strategic alignment with the business.

The business has learned to be agile by minimizing its capital footprint (leverage the
assets of others).

How does IT meet the agility requirement with its capital intensive footprint?

So far IT is behind the curve...

Business agility is threatened:

– Of 1,150 global CEO’s, 76%6 say the ability to adapt will be a key source of strategic
advantage.

Complexity is growing:

– CIO’s see complexity as a threat to the very survival of their business

Operation costs exceed hardware costs:

– CEO’s view growth as a key focus area

– Operational costs far exceed the budgets for new hardware

…resulting in serious challenges for IT today

Significant cost pressure and budget constraints; economic climate calls for companies
to do more with less

Innovation and transformation capabilities to enable and manage new business demand,
models and Products/Services:

Ability to support a more global ecosystem and leverage global capabilities in- and
outsourced

Ability to acquire new talents, develop and retain the best resources

Increase IT credibility throughout the business

Build capabilities to respond quickly to new business opportunities and challenges,

optimise business processes and develop new applications.

Modernise and rationalise a complex and inefficient technology environment

Implement a service-driven operation and a value-based delivery balancing demand and

supply.

Improve quality of services and flexibility to internal and external customers and
partners.

Improve visibility/data to manage risk, portfolios and demonstrate IT performance and

its contribution to the business.
 Ability to support business security and recovery so what does cloud deliver?

Efficient use of infrastructure possible through sharing of resources.

Highest level of agility possible for IT.

Built on a collaborative model enabling the sharing of logic, data, and processes.

Costs are variable, driven by consumption.

Shift spending from CapEx to OpEx.

Minimizes time to market.

(Source: PwC’s 11th Annual Global CEO Survey)

3.7.2 Platform BPO

Platform BPO is a technology-integrated BPO that provides a complete business solution by

packaging a technology platform with a domain application. Some examples of domain
applications include Insurance Policy Administration, Claims Processing, Mortgage
Processing, Collection Management etc.

A Platform BPO provider takes care of software licensing, hosting, implementation,

application support and the requirement of personnel for running process operations
resulting in no capital expenditure for the buyer organisation. The buyer is required to only
pay a monthly fee based on usage of technology and BPO services (Pay-as-you-use model).
The service delivery moves from being people-centric in the traditional BPO model to
platform-centric in this new approach. Platform BPO – transaction to value by marrying
technology capability with domain expertise, the platform BPO is poised to push the Indian
service provider community into a Strategic Business Partner (SBP) mode from a
transactional vendor mode. By moving the service delivery away from the traditional
people-centric BPO, this new approach introduces an element of profit nonlinearity which is
essential for the industry.

From Employment to Employability By increasing the industry-academia engagement,

many educational institutes are trying to make the curriculum more relevant to the industry
needs and thus, enabling the service providers to save on initial training costs while creating
a workforce capable of hitting the ground running. We expect to see the engagement
deepening in the coming years accompanied by a marked improvement in the quality of
workforce.

Cracking the retention conundrum with recruitment and training costs contributing to the
erosion of the cost arbitrage, service providers are focusing more on retention as a means to
both retain expertise as well as to drive down internal costs. Towards this end, there has
been a renewed focus on innovative R&R mechanisms to make the organisation an
employer of choice. We believe there has to be a very strong focus on leadership coaching,
mentoring and development especially across the middle management layer to ensure that
the industry is able to train and retain a strong workforce that can convert human capital to
shareholder dividends.

Inclusive development – the emergence of new “Bangalores” the increasing participation of

various states in India to tap into India’s IT/ITeS growth story has opened up entirely new
possibilities for both, companies as well as the people at large. An attractive business
centric taxation and benefits regime has seen a greater interest amongst the IT/ ITeS
provider community as well as a more widespread distribution of wealth across the country.
We expect this trend to continue in the near future.

Growth story built on strong fundamentals…

Access to a large, growing pool of highly qualified talent.

A high degree of quality orientation and demonstrated service delivery expertise.

Keen emphasis on information security reflected in the comprehensive legal framework

and elaborate security practices supplemented by enabling intervention.

World class telecommunication infrastructure.

Enabling (and progressively improving) business environment through strong

government support; incentives, favorable regulations and policy.

Emerging trends in service delivery like Cloud Computing and Platform BPO are likely to
remodel the industry by creating new business opportunities for the IT/ITeS vendors and
driving changes in the traditional service offerings. Today, margin pressures are pushing
companies to proactively look for ways to contain costs while enhancing output. For long,
Tier-2 cities have played around the fringes of mainstream IT/ITeS delivery. Today,
Government is seeing more and more companies moving into Tier-2 cities to set up delivery
centres. The report is a result of our global thought leadership, real world survey of leading
industry practitioners, research and interviews with the facilitators of the industry like the
Software Technology Parks of India (STPI) and IT-parks. Through a judicious mix of
secondary and primary research, we aim to bring out a holistic perspective on the changing
industry dynamics and the emerging trends.

The Table-7 below provides a comparison of the Traditional BPO and Platform BPO
models

Parameter Traditional BPO Platform BPO

Business process management
Scope (Business
only)
FTE model / Fixed price contract
(manpower and timeline estimated
upfront and a lump sump payment
decided) Or Time and Material - T
& M model (billed per man-hour)
Pricing • Price not related to customer’s
business cycle
• Used when transaction volumes
are
not closely tied to service
provider’s cost drivers
Knowledge Management combining
Data/Information management as well as
Business process management
(Technology + Business)
Transaction based pricing model
(Payper-
use) - Typically, a base price is
provided for a specified volume band,
with a negotiated increase or decrease in
price as usage fluctuates around the
specified band.
• Encourages productivity and
efficiency
• Suitable when transaction volumes are
tied to service provider’s cost drivers

Very High – Same platform can be used

Low as specific/customised for
Scalability for multiple clients ; configured as a
each client
package

3.7.3 Tier 2 IT/ITeS destinations– moving to mainstream

The tier 1 or the larger cities in India have been the initial torchbearers of the IndianIT/ITeS
industry’s remarkable growth. Availability of talent, better infrastructure, connectivity, and
an evolved ecosystem were some of the major drivers for focusing on these larger cities.
This unprecedented growth was not easy to handle. While the large cities witnessed severe
pressure on the civic infrastructure, service providers faced myriad issues around the rising
cost of operation, employee attrition, employee work-life imbalance etc.

During this phase, many other states in India woke up to the benefits that the IT/ ITeS
industries could bring to their economy and began to frame beneficial IT policies to attract
the companies. The IT/ ITeS industries which were looking for alternative locations to
increase their delivery footprint and tap more resources, were happy to leverage this. The
figure 9 provides the service provider’s perception.

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All these advantages are provided in addition to an operational cost savings of

approximately 20-25%. Most of the tier 2 cities have also recognised the significance of
supplying adequate manpower to the industry and have started re-orienting their education
policies. Private investment in professional education has been encouraged to significantly
increase the skilled manpower output (e.g. the number of engineering college seats in of
Odisha have gone up from 2,000 to approximately 38,000 in last 12 years).

In all leading tier 2 cities, the presence of large players has also developed the ecosystem.
Local players are finding it much easier to operate. Additionally, the state governments and
the STPI have also been aiding the local players during incubation. This in itself is creating
a self sustaining ecosystem for the wholesome growth of the IT-ITeS industry.

3.8 Tier 2 IT/ITeS destinations: Rajasthan

The government of Rajasthan also joined hands with NASSCOM to undertake a series of
road shows to promote the state. The first major development took place in Jaipur in 2002,
when Genpact opened their BPO centre in the city. The Rajasthan government then realised
the potential of the city and started working on steps to make the city an IT-ITeS
destination. Some of the initial steps taken were to develop infrastructure (in collaboration
with Mahindra World City – a multi industry SEZ with a dedicated IT/ITeS business zone)
and align the education policy to attract more private participation in engineering colleges.

The Jaipur city was successful in getting some marquee clients like Infosys and Wipro, who
were trying to expand their footprint in north India. The presence of these clients had helped
the city to draw attention from the IT/ITeS community. Subsequently, the Jaipur was able to
attract a lot of NCR based companies who were looking for an alternative location with a
lower cost of operations. Currently there are approximately 100 companies (IT-ITeS
combined) operating out of the city.

IT-ITES exports (Figure-18)

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Jaipur is considered as one of the education hub of northern India. Being the capital city of
Rajasthan and a major tourist centre, the city has a strong infrastructure in place. Jaipur lies
on the confluence of northern and western India and thus, enjoys a large catchments’ area
for talent pool. Being an international tourism destination, local authorities are very
particular about the law and order standards. The social infrastructure is also geared up for a
large amount of floating population. Apart from these, industry experts believe that the city
of Jaipur provides approximately 18-20% savings in operations cost vis-à-vis a tier 1 city. In
terms of talent, Jaipur is considered to be a great place for finance and accounting (F&A)
specific work. Approximately 35% of India’s Chartered Accountants and commerce
graduates belong to the state of Rajasthan. As a result, many Jaipur based companies have a
clear F&A focus, particularly in the non-voice based BPO space. Unlike many of its peer
tier 2 cities, Jaipur maintains a balanced growth amongst both the IT and ITeS industry.
Marquee names from both IT (Infosys, Wipro) and ITeS (Genpact, EXL) have set up their
centres in the city. A wide variety of companies (Software Development, ADM, Product
Development) are present within the IT space, in the city.

Jaipur, however, has scope for improvement. Industry experts believe the soft skills of the
local talent can be refined to suit the requirement of international call centres. The city also
needs to improve its domestic and international connectivity (by air).
Growth Catalyst for IT-ITeS
Total IT & ITeS employees in the city
18,100
Total number of engineering graduates (including
MCAs) passing
15,000
out every year in the city

Total number of general graduates passing out every

year in the city 50,000

Two IT parks - 100acres

Total available office space in IT parks and SEZs (in sq. Mahindra world city.
ft.) – 2500 acres of multi product SEZ
with dedicated zones for IT - ITeS

Top IT-ITeS Companies operating out of the city

IT -Companies ITeS Companies
Infosys Genpact
Wipro Deutsche Bank
Data Infosys EXL BPO
Nucleus Software Congnizant
HCL Software TrueWorth Infotech

Top IT-ITeS Skills available

BFSI ERP / Banking Software Finance & A/c BPO

Software Testing BFSI KPO

JAVA
Cost of Operations
Rentals in IT parks and Rs. 20-40
SEZs (Rs/sq. ft./month)
Electricity cost in IT parks/ Commercial 2 KW
SEZs (approx) (300Kwh/month)-Rs. 556.7
Approximate savings for 18-20%
cost of operations
(compared to tier 1 cities)
3.8.1 Mahindra World City (MWC),

Jaipur’s Light Engineering & Handicrafts SEZ today spread across approximately 250 acres
each, the Light Engineering & Handicrafts SEZ form a part of the larger 3000 acre multi-
product SEZ that also has IT, Auto Ancillary, and Logistics zones, with an envisaged
investment of Rs. 10,000 Crore and projected employment of 1 Lac. MWC, Jaipur is a
74:26 joint venture between Mahindra Lifespace Developers Ltd. (MLDL) and the
Rajasthan State Industrial Development and Industrial Corporation (RIICO).

MWC Jaipur’s Light Engineering & Handicrafts SEZs are notified by the Ministry of
Commerce, Govt. of India. With state-of-the-art infrastructure like seamless power supply,
wide road network, water supply, serene landscaping, proposed logistics and warehousing
zones, professional operations and maintenance, Mahindra World City, Jaipur brings world-
class organizations to the state of Rajasthan.

Rajasthan is well known for its handicrafts, which command a significant share in the total
Indian handicrafts exports. Mahindra World City Jaipur - Handicrafts SEZ is being
developed as preferred destination with state-of-the-art facilities to give impetus to the
handicrafts exports of the country. The Light Engineering & Handicrafts SEZ client list
includes QH Talbros, Veto Electropowers, Om Metals, Marsons, Dynamic Engg. Tijaria
Polyprep, Polymed, AL Paper House, Rustic Furniture, Pink CityEnterprises, Readiprint
and numerous others.

Rajasthan has made rapid strides in its path towards industrialization and is emerging as the
country’s leading industrial hub. It is also the best location for industries such as light
engineering, automotive components and ancillaries, due to its close proximity to the
engineering nerve centre of the National Capital Region. Rajasthan is also renowned for the
quality and uniqueness of its handicrafts Companies setting up units at Mahindra World
City, Jaipur are poised to benefit from these inherent advantages, in addition to the
infrastructure and SEZ.

3.8.2Advantages offered by Mahindra World City, Jaipur

Mahindra World City, Jaipur go from strength to strength. MWC Jaipur is a striking
example of what Corporate Organizations can achieve in partnership with government both
in terms of employment and economic growth. The facilities at Mahindra World City,
Jaipur, will attract a larger number of organizations to establish a presence in the State as
well as provide further impetus to the region’s already thriving handicrafts industry.

The already operational IT/ITeS SEZ will give a major thrust to the industrial activity in the
State and create significant employment. Light Engineering & Handicrafts SEZ is another
milestone in Mahindra World City’s illustrious history. Within a short span of two years,
Mahindra World City, Jaipur has established itself as the destination of choice for leading
domestic and global organizations. This has been possible because of the tremendous
support received from the State Government and due to Mahindra’s commitment to the
creation of state-of-the art infrastructure and facilities at par with global standards.

The IT/ITeS SEZ at Mahindra World City already has clients like Infosys and Deutsche
Bank exporting from the SEZ. Other clients which are setting up their campuses in the 750
acre IT/ITeS SEZ include Wipro, Tech Mahindra, Nagarro, Connexions, Truworth to name
a few.

At its full capacity occupancy & operations level Mahindra World City, Jaipur is expected
to bring investment of over Rs.10,000 Crore and would create direct employment for
approximately 100,000 people and indirect employment for 1,50,000 people. It is expected
to have exports of more than US $ 1Billion year on year.

Spread over an area of 3000 acres, Mahindra World City, Jaipur will provide corporate a
world-class platform to expand their businesses to compete globally. Mahindra World City,
Jaipur is being developed as a multi-product Special Economic Zone on the format of an
‘Integrated Business City’ and is a joint venture between Mahindra Life space Developers
Ltd (a Mahindra Group Company and previously known as Mahindra Gesco Developers
Limited) and Rajasthan State Industrial Development and Investment Corporation Ltd
(RIICO, an agency of the Government of Rajasthan).

The SEZ includes exclusive zones for IT/ITeS Companies, Light Engineering companies
including Auto and Auto Component manufacturers, Handicraft Companies, Gems &
Jewellery Companies and Apparel companies. Besides these exclusive zones, the SEZ will
also have a Domestic Tariff Area (DTA) for catering to the demand of domestic industries.
Mahindra World City will also have a dedicated Logistics and Warehousing Zone for the
manufacturing companies in order to provide complete end to end solutions. Social
Infrastructure in the form of housing, education and health institutes, recreational zones, and
retail and hospitality centers also forms an integral part of the development. The company is
developing an integrated business city with ‘walk-to-work’ concept. As part of this dream,
the first phase of IT/ITeS SEZ is fully operational with Infosys and Deutsche Bank already
started their operations. The development work on the other two notified zones is going full
throttle. With 17 companies signed between Light Engineering & Handicraft Zones, the
SEZ will soon become the reference point for SEZ across the country.

The IT industry in India was forced into critical self-examination during the global
meltdown and its aftermath over the last two years. Today, the industry is back on its feet
albeit with a slightly changed profile with vendor consolidations and significantly higher
multi-sourcing deals. However, with the US and UK markets still accounting for more than
a lion’s share of revenues, a phase of rapid diversification is in order if the Indian industry
has to insulate itself from the global turbulence. We can look forward to a lot more activity
especially in the European and Asia-Pacific markets in the days to come.

The Indian domestic market is fast emerging as a globally significant market for services.
Critical areas like Aerospace, Defence and e-Governance beckon Indian IT vendors and
global giants eager to participate in the Indian growth story driven by domestic consumption
and demand for services.

Companies are increasingly investing in developing their Indian operations as think-tanks to

their global operations. Companies like GE have already been successful in developing rule
changing healthcare solutions through their Indian R&D set up. This is enabling them to
establish a presence in the cost conscious SE Asian market in the short run and remain
globally relevant in the long run.