kpmg morning keynote

Virtual Trade Mission to India: OpportunitiesMay 2009

ADVISORY

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Looking back, we can see some of the triggers:

Downturn in the U.S. housing market (“U.S. housing bubble”) and excessive speculation in housing market

Risky lending and flawed borrowing practices

Excessive individual and corporate debt levels

Poor securitization practices and hedging practices

Excessive underwriting of high-risk mortgages

Insufficient regulatory oversight of regulatory processes

The economy – It’s been tough!


Source: NASSCOM Strategic Review 2007, 2008 & 2009. Businessworld BPO Report and KPMG Analysis

The economy… and outsourcing have changed

• Global credit crunch

• Reset stock markets

• Record unemployment

• Slowing consumer spending

• Crisis of U.S. auto and financial industries

Now

• Impact of slowdown, and on outsourcing, varies by industry

• Going back to the basics: Companies look for cost optimization and innovation for sustainability

• Merger and acquisition activity is being postponed

• Interestingly, Small to Medium Business (SMB) market for outsourcing business is rising

• Companies are seeking newer destinations to lower costs and get added benefits

Then

Economy Outsourcing

• Growth expectations very high

• Investment funds were easily available

• Market capitalizations were high

• Housing, employment and credit boom

• Outsourcing was growing rapidly, new business, new geographies and new services were being continually added.

• Service providers were growing organically and inorganically, marketing and business development spends were high

• Companies were willing to invest in the outsourcing relationship in favor of longer term benefits

• Outsourcing billing rates were at a premium and service providers had an equal position at the bargaining table


44

At the same time… sourcing is becoming increasingly global

Increasing knowledge and maturity is leading to a search for newer locations.

CalgaryWinnipeg

Boise

Indianapolis

QueretaroGuadalajara

Curitiba

Campinas

Buenos Aires

Santiago

Port Louis

Cairo

Tunis

Belfast Gdansk

Rostov-on-Don

Cluj-Napoca

Lviv

Sofia

ZagrebBelgrade

Nagpur

Jaipur

Ahmedabad

Penang

Ho Chi Minh City

Davao City

Iloilo City

Brisbane

Hangzhou

Changsha

Source: KPMG, Exploring Global Frontiers, February 2009


… and developing economies have shown double digit growth in IT spending through 2008

Source: IDC, NASSCOM Strategic Review 2009

LATIN AMERICA

• 3% of the global IT services spend

• 10% growth in 2008

NORTH AMERICA


• 4.2% growth in 2008

WESTERN EUROPE


• 5% growth in 2008

CENTRAL EUROPE, ME, AFRICA

• 4.7% of the global IT services spend

• 14.7% growth in 2008

ASIA PACIFIC


• 6.8% growth in 2008, over 10% in developing economies (excl. Japan)

The total spend on IT Services in 2008 was estimated at over $557 USD Billion.

Global sourcing market has increased threefold since 2004.


Service providers are investing and gaining deeper BPO and ITeS capabilities in specific domain areas… looking to provide higher value

Companies increasing their exploration of Tier 2 and 3 locations, particularly within mature markets such as India and Eastern Europe

Both customers and providers are considering a variety of sourcing models… ranging from captive, outsourcing, hybrids, joint ventures, etc.

Cost savings are essential, but “partnering” is improving business agility and increasing access to capabilities

Other global trends in outsourcing


Back to basics (parallels)

Reaction to global recession:

• Housing speculation Ownership mentality

• Risky lending Credit worthiness

• High debt levels Debt reduction

• Flawed oversight Increased regulation

• Weak credit rating Improved processes and governance

Sourcing reaction to issues:

• “Lift and drop” Retain ownership of overall process

• Fire-walled relationship Transparent operations

• Turn-key operations Sustainable process

• Focus on transition Focus on operations

• Limited security concern Increased due diligence and audit


Back to basics – Five key questions

• Why are we outsourcing? Is the business goal to save money, improve operations or boost business performance? Efficiency focuses on cost improvement; Enhancement focuses on operational improvement; Transformation focuses on business performance improvement

• What services and functions should we consider to meet those goals? Across the enterprise, what services or processes are candidates for a sourcing review?

• Who can best perform or deliver these services to meet those goals? Should the job be performed in-house or outsourced to external resources?

• How should the work be done? Do we want a customized or standard service/process?

• Where should the work be done? Will this work be performed domestically/onshore or non-domestically/offshore?


Back to basics - Potential outsourcing concerns

Strategic RisksRisks associated with adverse business decisions or failure to

implement decisions

Regulatory RisksRisks caused by violation of laws, rules, regulations, prescribed

practices and ethical standards

Operational RisksRisks attributable to operational problems with service or product

delivery or inability of an entity to recover fully and timely from unforeseen events

Financial RisksRisks attributable to interest rate movements or movement in

foreign exchange rates that impact cross-border contracts and operating activities

Credit and Liquidity Risks

Risks attributable to the failure of an obligor to meet the terms of a contract or the entity’s inability to meet payment obligations as and when they fall due

Reputation RiskRisk of negative publicity regarding business practices associated

with the outsourced operation

Technology RiskRisks relating to the failure of the outsourced entity’s IT environment

to effectively process and deliver products to your customers on a fully secure basis


Back to basics – Build a strong sourcing framework

Bui

ldD

eliver

Service Management

Governance

RelationshipManagement

Planning Transition OperationsDesign


Clearly, India leads as a sourcing hub for IT and ITeS services, across virtually all verticals

Two-thirds of Fortune 500 companies already source IT/ITeS services from India

Illustrative

HP, Unilever Sign USD 675

Million Outsourcing Deal

Friday, February 15, 2008: India’s consulting, outsourcing and technology major, HP has signed a

seven-year outsourcing contract worth $675 million with Unilever. HP will now manage Unilever’s

technology infrastructure in the US, Asia, Africa, Turkey and the Middle East.

Through this agreement, HP will provide management of Unilever’s IT processes and services,

including corporate data centres, messaging and directory services, Internet and intranet systems

hosting, disaster recovery services, and the outsourcing of 4,500 multi-vendor UNIX and Windows

servers and storage environments

HSBC ramps up Indian

outsourcing presence24 November 2006 17:10 GMT: HSBC is expanding its offshore outsourcing operations in

India with a new BPO facility in Kolkata (formerly known as Calcutta) and a software

development centre in Hyderabad. HSBC already has one wholly owned BPO subsidiary -

HSBC Electronic Data Centre - in Kolkata, which has 2,000 employees working on back-

office operations, and is now planning to set up another centre in the same city. HSBC's

general manager and country head for India, Naina Lal Kidwai, said the second BPO

facility in Kolkata will employ another 2,000 staff, according to reports in India

Ford plans to raise its

outsourcing bill from India

February 09, 2006: More good news is coming in for the Indian outsourcing industry. Ford

Motor Company (FMC), world’s third largest car maker, has decided to outsource services

in the field of IT, engineering and components. The move has been made to cut costs.

Sources in the industry are indicating that Ford is likely to increase its purchasing power

of components from the domestic market by six times. Currently, the company purchases

worth $80 million.

Novartis to shift 100 jobs

to India

November 17, 2008: New Delhi: At a time when global pharmaceutical companies such as Merck and

Pfizer are trimming their workforce to beat the economic blues, Novartis, the Swiss pharmaceutical

major, has decided to shift 100 jobs to India.

The company plans to make Hyderabad as its back office hub for data management in clinical research

and financial service segments. Though Novartis’ global recruitments shows no increase in numbers, its

Hyderabad office will see an addition of at least 100 people in the coming months, said Jurgen

Brokatzky-Geiger, head (human resources), Novartis

Johnson & Johnson eyes

partnership models in

IndiaJohnson & Johnson Pharmaceutical Research & Development LLC (J&JPRD), the fifth largest

pharmaceuticals company in the world, is set to sign a number of research collaborations and in-

licensing deals with major pharmaceuticals companies soon.

Says Paul Stoffels, chairman, worldwide R&D pharmaceuticals group, J&J, “We want to exploit the cost

effective factor of the Indian pharmaceuticals R&D sector. The availability of skilled as well as cheap

services makes India the preferable R&D outsourcing hub for J&J.”

Source : KPMG Analysis, various media articles


Enhance agility

Policy approach has aided growth in the sector, creating an enabling environment

Targeted policy actions and progressive reform (Special Economic Zones, etc.)

Established methodologies and processes Well defined, quantifiable quality and

process metrics Global quality certifications a must to

operate

Wide scope – low to high value skills, across value chain – IT, BPO, R&D and analytics

Focus on new issues – Green IT, innovation

Large, qualified and young workforce India has the largest share of the global

offshore talent pool (28%)

30% to 40% cost advantage Additional benefits through low cost

process improvement, consolidation and automation.

Why offshore to India?

Growth-new

markets

Extractvalue

Releasecapital

Reducerisk

Reducecurrentcosts

Focus oncore

business

Government

Cost

Scale

Scope

Quality/ Information Security

Sources: NASSCOM Strategic Review 2009

The private sector providing quality business infrastructure (office space, telecommunication network)

Private Sector

Business benefits


General profileLocation: South Asia World’s 7th largest country

by area (3,827,263 sq kms) World’s 2nd largest country

by population Population: 1.15 billion No of dominant languages:

18 No of English Speakers: 100

million - 2nd largest English-speaking nation in the world

Securities market Leading stock exchanges:

National Stock Exchange (NSE) and Bombay Stock exchange (BSE)

No. of listed companies: 6,217 on BSE and NSE

Market capitalization (BSE): USD 1.1 trillion (2008)

Source: World Federation of Exchanges, RBI, World Statesmen.org

India: The Tiger Economy


India is the one of the youngest countries in the world with about 53% of its population under the age of 25; resulting in a large and increasing base of skilled professionals

16,000 colleges at the end of March 2005 with English being a very widely accepted medium of instruction (Ministry of Human Resource Department, Government of India)

Students graduating in 2005-06 (estimates)

Total number of Engineers

454,000

Total Number of Arts, Commerce, Science Graduates

2,440,0

00

Other professionals

CAs 130,000

MBAs (2002) 65,000

PhDs (Science & Engineering)

7,000Source: Ministry of HRD, Govt. of India; NASSCOM# Members as April 1, 2006 Source: NASSCOM Strategic review 2006

28%

11%

10%8%

7%5%

4%4%4%3%

16%

India

China

Russia

Philippines

Turkey

Thailand

Poland

Brazil

Mexico

Indonesia

18 other low wagecountries

Total suitable talent pool for offshore IT & BPO

India: Talent pool advantage


Moving to higher value added services

Data Entry

Call CentersCollections

Customer Service

F&A Processing Reporting

Technology Help DeskResearch

Analyticsand otherservices

Investment Banking,Equity Research,

High-end Analytics

Cost Arbitrage & Labour

Productivity

ProcessImprovement

ValueCreation

Phase 1 Phase 2 Phase 3


Infrastructure

Physical infrastructure in the country is improving… but still needs considerable investment. Connectivity of roads, airports, power availability definitely needs to be improved to sustain the growth currently seen in the country.

Rising Costs

Labor costs are rising at approximately 10% year on year basis, however India seems to be maintaining lead to other major destinations. Indian service providers looking to Tier 2 and 3 cities to improve cost profile.

Attrition

Higher levels of attrition is a problem being faced by the IT-BPO industry in India today. However, India still has a large talent pool available even in the Tier II and Tier III cities.

Security Threats

The recent terror attacks have unfortunately come in the wake of an economic decline and thus the IT-ITES industry has been affected in the short-term. Vendors, buyers and the India government are now making proactive efforts towards improved security, governance and business continuity plans.

Key concerns when offshoring to India


In summary…

• Economic crisis has demanded reexamination of

business needs… and opportunities

• Opportunities should be examined via “back to basics”

criteria

• In sourcing, India is still a leader… for several reasons

(talent pool, government, economy, cost, etc.)

• Understand risks and develop mitigating strategies

(eyes wide open!)

• Embrace opportunity!!!


Contact Information

Ronald Clanton

Partner, KPMG Sourcing Advisory Services

[email protected]

(919) 664-7247All information provided is of a general nature and is not intended to address the

circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is

accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a

thorough examination of the particular situation.

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