India’s IT/ITeS Industry: The Next Phase

Non-linear Growth & Broad-Based Innovation

Dr. Anupam Khanna. Chief Economist
Knowledge-Based Capital Conference
OECD, Paris February 14, 2013
Implications for the IT-BPO Industry

22-Feb-13
2
The IT-BPO industry segmentation
IT-BPO

Services Products Hardware

• Software • Personal
Products Computers
IT Services BPO ER&D OSPD
• System • Network
Software Equipment
• Project • Enterprise • Storage and
• Horizontal
Oriented Embedded applications Security
Specific
Systems
• Outsourci • Vertical • Servers
• Vertical
ng applications • Printers
Specific
• Support &
Training
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INDIAN IT-BPO INDUSTRY

Brief history of Indian IT-BPO revenue

Source: NASSCOM

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INDIAN IT-BPO INDUSTRY

Brief history of Indian IT-BPO direct

employment
Figures (‘000)

The industry added 230,000 jobs in FY2012

* Excluding Hardware
22-Feb-13 Source: NASSCOM 5
Trends in World Exports and Indian Exports of
Goods and Services in current USD (Index=100 in
1990)

6
Growth Rate of Services Exports, VariousCountries

7
Share of Services Exports
Composition of India’s exports basket

Source: Eichengreen and Gupta, 2012

22-Feb-13 9
Current Scenario – IT Contd……

Sophistication of Services Exports

10
Trends in Service Exports of India Since 1990
2000-01 Service Exports = $16,268 million

1990-91 Service Exports = $4,551 million

Transportati Misc Services

on (Bus, Fin, etc.)
Software+M
22%
Insurance 22% isc Services
Software
2% (Bus, Fin, Services
etc.) 41%
44%
Travel
Travel
22%
32%

2010-11 Service Exports = $1,31972 million Transportation Insurance

13% 2%

Misc Services
(Bus, Fin, etc.)
26%
Software
Services
48%
Travel
12%

Insurance
Transportation
2%
12% 11
Services Trade – Surprising Resilience

• Experience During Last Crisis (2008)

• Comparison with Manufactures
• Differences Across Service Sectors
• Transport vs Tourism vs Business Services
• Finance vs Insurance
• Supply Side – Low Vulnerability to Credit Squeeze
• Demand Side Features of Business Services
• No inventory or vintage effects
• Less Discretionary Decision-Making

12
• Long-Term relationships
22-Feb-13
Industry moving from “Enterprise service providers”
to “Enterprise solution creators”
CUSTOMER CENTRIC

DIMENSIONS 1990 2000 2010 onwards

STRUCTURE STRUCTURE STRUCTURE

SERVICES One client, one solution Enterprise services Enterprise solutions

SERVICE DELIVERY Custom,

STRUCTURE Industrialised,
STRUCTURE capacity STRUCTURE
Capacity and IP-driven
People-driven and method-driven

TECHNOLOGY STRUCTURE
Mainframe to Client STRUCTURE
Y2K, dotcom STRUCTURE
Cloud, virtualisation,
server enablement Mobile computing

Source: CLSA, NASSCOM

PRICING Input-based, Output-based, fixed
STRUCTURE STRUCTURE STRUCTURE
costs or gain share Pay per use
Fixed costs

DEALS STRUCTURE Deals related to CAD/M

STRUCTURE Multiple vendors, large
STRUCTURE Small STRUCTURE
deal wins, short
and maintainence size, long duration duration. End-to-end

RESOURCES Staff augmentation

STRUCTURE STRUCTURE STRUCTURE
Non-linear
Fixed capacity

TIME TO DEPLOY
Years
STRUCTURE Months
STRUCTURE Weeks or Days
STRUCTURE

Source: CLSA, NASSCOM

 Service Providers

Service providers’ value proposition maturing beyond

cost to delivering business outcome
‘Verticalisation’–Business transformer
Shift to “Pay Per
Use” model 1. Organisational Design

Verticalised across business functions –

Shift to Managed going beyond sales
services
2. Organic- Internal Capability

Investments in vertical specific tools and

• Shared, talent
• Shared, Managed services
Managed • Business Tech E.g. Hiring doctors/nurses for domain
VALUE

•Asset-light services Mgmt intensive healthcare - medical coding etc.

•Shared services • SLA driven •Monetisation of
•Resource sharing •Agile assets/platforms 3. Inorganic- Value Additions
•Test Labs •Cloud, Platform •XaaS, Cloud,
•Asset heavy •Test Labs, CoEs
•Dedicated/captive •Emergence of Mobility, Social Fill vertical specific gaps through
Managed services • Pay-per-use acquisitions or enter newer verticals
model •Agile
•Time & material QUALITY DIFFERENTIATION methodology E.g. Acquisition of platforms such as Life
• Verticalised CoEs Admin / Claim adjudication (Insurance)
•Staff • Process excellence • Lower lifecycle
augmentation costs • Pay-per-use,
OUTCOME
COST
• Faster time to • Risk-reward
Verticalisation 4. Alignment of KPIs, metrics
• Labour arbitrage
market • Innovation
Vertical specific P&L accountability, goals
• Differentiation • Transformation
E.g. Horizontal capabilities such as
analytics getting aligned to verticals

<2004 2004-2007 2007-2009 2009-2013

Efficient Delivery MATURITY Effective Outcomes

Source: NASSCOM
Building successful “Alternate Business Models” – leading
to significant shifts in business models
Industry 1. Go-to-market
NEW SLIDE
recognized thought Direct + Indirect (Multi-
1. People leaders
model
product, Multi-
expertise Advanced domain business)
experts Direct sales – Services +
Basic domain Products
2. Talent
Patented Bench- experts Direct sales – Services +
process marks on Reposi- deployment
Process/ Solutions/ IP
flow process tory of model
project mgmt
2. Process metrics best Direct sales –
practices Standard- experts People
expertise ized approach/ Services
Team factory
process flow shared at
Dedicated -
Define the Dedicated - invisible
account
level
business visible
3rd party/ outcome
custom s/w you want to
Accelerators/ deliver
Proprietary APIs Customer
platform owned Single
Proprietary Customer data Effort
Effort based tenant – Single
software product management 3. Technology
pricingbased limited tenant –
3. Technology/ pricing control full deployment
Multi tenant
Basic analytics on Transaction/ – On
IP customer data control model
Usage based demand
Advanced analytics on pricing
customer data IP based
Advanced Analytics on pricing 4. Transaction/
proprietary data Outcome/risk Pricing model
4. Data and
based pricing
analytics

Build the foundational capabilities required to deliver ABM

(1. Consultative selling, 2. Product/IP management, 3. Customer Relationship
management, 4. Alliance/ Partnership management, and 5. Risk management)
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SERVICE PROVIDERS

Rise of the first Indian MNCs- Industry leveraging

alternate offshore locations to greater advantage INDICATIVE
Global Footprint 2008 2012 Hiring1 2008 2012 CAGR (%)
Delivery centres ~400 ~580 Total Employees (‘000 Nos) ~242 ~471 18
Number of countries ~52 ~75 Foreign Nationals based overseas
(per cent) 6.2 7.4 23

• Second largest customer

market
• Most Indian firms present in
some form
UK
Poland
• Asia and local market access
Romania
• TCS: IT, outsourcing, consulting
United States • Serves Europe, Middle East, services to MNCs and local firms
• Largest customer market Russia China
• Most Indian firms present in
India • Over 90 per cent of TCS
• WNS: Nearshore centres for workforce in China is local
some form European clients; multi-lingual
Costa Rica services in French, German, Sri Lanka
Philippines
• CIS, pre-sales, technical, etc Italian, Spanish
• Serve global demand for • Serve south-east Asian
• Eastern Software Systems knowledge services markets

• Firstsource: JV (~580 • Aegis: Employs ~13,400

Chile emps) with Dialog Axiata people across six centres

• Cater to growing need for • Over 99 per cent of this

• Near-shoring to US South Africa
• Serve Europe, Russia, CRM in telecom workforce is local
• Ealueserve: Serves Middle-East
the US timezone
• Zensar: Preferred IT
partner to banking sector
• Services top five FIs in SA

1: Includes the data for top 4 companies

Source: NASSCOM
The Indian IT-BPM industry today moving
along three paths to offer more value

High

Initiate Non Linear Play

Moving up Value Chain Offerings- Products, Platforms,
Non Price

Software assets, Solution

Value

Offerings- Consulting and SI, Accelerators

Specialized voice
Through- Global delivery and
workforce

Extending Cost
Proposition
Offerings- RIM, Testing, BPM
Through- Changing employee
mix, pyramid, tier 2/3
Low

High Cost Low

Source: NASSCOM
 ER&D Industry - India as Innovation Hub
• Global Offshorable Revenue of USD
100 Billion by 2020 – Huge untapped
Evolution of Work Performed in E R&D Industry potential

• Developing Products from First

Design Principles (Frugal
Engineering)

• New Business Models, Flexible

Resource Capacity, Co-Creation, Art-
to-Part

• Participation in Patents Creation –

Grown 30x in last 5 years

• Full Product Development

• High end offerings like prototyping,

tooling, manufacturing support,
program management, supplier
management

• Localized products for Emerging

Markets
INDIAN IT-BPO INDUSTRY > EXPORTS

ER&D exports to cross USD 10 billion; Key players

driving product and process innovation
ER&D Exports by Industry,
FY2012E
100% = USD 10.2 billio

CAGR
12%

• ER&D exports at USD 10.2 billion; y-o-y growth
of 14 per cent
• ~15 per cent share in Indian IT-BPO exports
• 400+ players with >200,000 engineers
• ~90 per cent exports from North America and
Europe
Source: NASSCOM
• Established hub for Aerospace, Automotive and
Telecom
• Emerging as hub for energy and medical
devices
• 65 per cent exports from Telecom,
Semiconductors, Automotive 19
Spearheaded India’s thrust on innovation –
30X increase in patents
Focusing on R&D and Boosting Innovation

Strengthening role in Developing software Attracting global

Growing R&D spend
IP creation products technology players

 Average R&D  Patents in the  Software products • Number of offshore

spend 0.5–1% of Computer/Electronic revenues more than development centers
revenues; 2.5-5% of s segment increased tripled over FY06–09 (ODCs) in 2009 is 3x-
profits 30X over 2005–09 4x of ODCs in 2006

Breakdown of R&D costs

Innovation driving
additional GDP
contribution of ~2%
by 2020

Key initiatives driving innovation include setting up R&D centers, conducting trainings, events
and workshops around innovation, and collaborating with academic institutions
Improved hiring and revenue in FH2013 hint
at renewed demand uptake
Q-o-Q Revenue* growth (per cent) Industry Structure

Foreign service Global in-

5.9% house centres
providers
10-15% 20-22%
3.5%
2.1%
1.2%
0.8%

Indian service
Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 63-65% providers

Q-o-Q Employee* growth (per cent)

4.9%

3.7% Indian/Foreign service providers -

3.4%
Revenue growth and robust hiring
2.2% indicate improved demand scenario and
1.8%
positive outlook

GICs - Currency volatility and global

freeze on headcount may lead to lower
Sep-11 Dec-11 Mar-12 Jun-12 Sep-12
growth
* Includes quarterly data for the top public IT-BPO companies constituting ~50% of total industry revenues Source: NASSCOM
“SMAC” – Social Media, Mobility, Analytics and Cloud
reshaping the future of the Indian IT Industry
Mobile payments Smart cities Connected Health Pivot merchandising
mBanking mHealth Smart Buildings mGovernance Platform-as-a-Service

Drivers/ factors contributing to the Impact is highly evident

SMAC, is becoming a business reality changing landscape of Technology
• Create a new digital
Social, mobility, analytics and cloud are reshaping
operating model and
the business, the consumers and all traditional
Transformation transformation to a
approaches, Indian Industry has seen till now
Remodelling business processes permeable enterprise
through harmonizing technology
 Movement towards the next orbit of innovation with advancement
consumerization of IT • Engagement with a
growing digital ecosystem
Opportunity to move to higher-margin business
by offering creative solutions
Client- specific outcomes
• Empower enterprises to
 Help businesses grow dynamically instead of A meaningful change in the business
embrace emerging
increasingly cutting margins for typical IT contracts requirements i.e., end-to-end solutions
technology trends and to
benefit from the value
Launching luxury product lines that comprise the expectations of customers
SMAC suite of technologies to go the next level
New paradigm for business
 Huge potential for revenue generation Efficiency, Enhanced customer • Innovative thinking in
experience, Reduced time to market, business and enterprise
IDC Indian IT vendors expected to generate over Connectivity, IT Consumerization architectures
$225 billion in SMAC related revenue by 2020

Journey to the Cloud continues; enthusiasm for Big Data, Mobility and Social Analytics also remains strong
INDIAN IT-BPO INDUSTRY > DOMESTIC

Domestic IT-BPO market growing fastest in India;

driven by increased PC/broadband and mobile penetration

PC and Mobile Penetration in India Broadband Subscribers and Active Internet

(Million nos) Users in India

23
Source: NASSCOM-Zinnov India’s Domestic IT-BPO Market: Winds of Change
Hypermobility…but only for some ??
Technology can transform India’s ability to
provide basic services
Basic services Potential technology and services’ solutions

50% of Indians do not have access to primary healthcare –

Healthcare technology can provide it at half the cost

Financial 80% of Indian households are unbanked – technology can

services enable access for 200 million families

India faces a 3-fold shortage in teachers – technology can

address this through remote solutions (e.g., virtual
Education classrooms, recorded lectures by senior faculty, modular
multimedia content)

Public India suffers from a leakage of 40-50% in public food

services distribution – technology can ensure transparency
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25

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Inclusive ITeS Innovation Examples

• Mobile Financial Services: EKO

• Mobile Phones for Data and Text
• Rural Development: Ekgaon , Nano Ganesh
• Health Diagnostics (Avoidable Blindness): 3nethra
• Public Health (Maternal & Child Health): e-Mamata
• Travel Services: iXiGO
• Unique Identification System: Aadhar
 Blindness
A Global threat
Problem
• Blindness is a Global threat to health and productivity
• Of the 39 Mn blind people in the world 12 Mn live in India
• Africa has approximately 19% of the world’s blindness
• 80% blindness caused due to –
• Cataract / Glaucoma / Refractive Errors/ Diabetic Retinopathy/AMD
• Of the 60 Mn Diabetic patients in India 20% will develop diabetic retinopathy

80% of blindness can be prevented if pre-screened

Challenges
• Scalability – Low Patient-to-Ophthalmologist ratio; 1:70000 in India
• Affordability – Expensive devices which require trained ophthalmologist
• Rural reach – Only 7-10% of the people are screened on time
• Awareness – Lack of awareness about detecting eye disorders early

An Effective Pre-screening tool is the Unmet need! 27

 Addressing the Unmet Need!

Scalability
• Take the Ophthalmology pre-screening closer to the patient
• Create a new market for remote ophthalmology pre-screening – “Paradigm Change”
• Enable diagnostic labs, diabetes centers, clinics etc to perform ophthalmology screening

Affordability
• Indigenously developed in India
• Robust device with minimum complexity
• Low maintenance cost and zero consumables
Rural Reach
• Non-Mydriatic, Non-invasive & portable device
• Robust system to be operated in rustic environments
• Minimally skilled technician required to operate device
Awareness
• Create awareness about the importance of detecting ophthalmic diseases early
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 Forus 3nethra
A Pre-screening Ophthalmology Device
3nethra is an affordable multi-functional portable ophthalmic imaging system

Retina Imaging

Cornea Imaging Refractometer

 3nethra ForCare
Cloud based Tele-ophthalmology capability
Take Away’s for Policy & Strategy
• IT not just for “big boys” or rich yuppies...can play
transformational role in society, polity and economy
• Refocusing Strategic Priorities for Indian IT in Next Decade
...Domestic Markets and Developing/Emerging Countries
...Not just about Growth, also about Learning
• Affordability, Scalability, Reach and Education/Awareness
Key to Direction of Entrepreneurship & Innovation
• Innovation is More Than R&D, Even D&E of Products
...Service Dimensions and “Business Models” also Salient
• Government Critical to Shaping “Demand” or Ecosystem
• Advance Market Commitment (e.g. Laptops for Students)
• Platforms (e.g. Aadhar)
• Incentives and Regulation
THANK YOU
 Total Value of Human Capital Value of Human Capital per Employee
140,000 (in Rs Cr.) 1.2

120,000 1

100,000
0.8
80,000
0.6
60,000
0.4
40,000

20,000 0.2

- 0

22-Feb-13
 R&D/ Total Revenue (%) Technology Investment / Total Revenue (%)
4

3.5

2.5

1.5

0.5

0
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

22-Feb-13
 60,000 50%
Brand Value (in Rs Cr.) Brand Value as a % of Market Cap
45%
50,000
40%

35%
40,000
30%

30,000 25%

20%
20,000
15%

10%
10,000
5%

- 0%

22-Feb-13