outsourcing 3.0: india the market and the factory for software products

Copyright © NASSCOM 2008 Copyright © NASSCOM 2008

Outsourcing 3.0: India the Market and the Factory

for Software Products

Anand Deshpande

([email protected])

Persistent Systems Limited

http://www.persistentsys.com/

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Copyright © NASSCOM 2008Copyright © NASSCOM 2008

Outsourcing 3.0:

India as the market and the factory for software

products

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India fact sheet

Demographics

Population (billion) 1.12

Population growth (%) 1.6

Labor force (million) 516

Less than 30 years (%) 52

Urbanization (%) 28

Economy

GDP (nominal, US$ billion, FY08E)

1135

Inflation (%) 3.5

Fiscal Deficit (% of GDP)

6.1

FDI (US$ billion) 19.5

Forex reserve (US$ billion, FY08E)

280

Social/Developmental

Literacy (%) 61

Unemployment (%) 7.2

Infant mortality (per 1000) 34.6

Life expectancy (years) 68.5

Transport/Telecom

Passenger cars (million) 13

Two wheelers (million) 53

Mobile users (million) 240

Internet users (million) 32

Trade

Exports (US$ billion)

126

Imports(US$ billion)

191

Top 3 export markets

US (17%)UAE (8.3%)China (7.7%)

Top 3 import partners

China (8.7%)US (6%)Germany (4.7%)

FY 07 unless indicated otherwise

Highlights

Trillion Dollar Economy – 4th

largest in terms of PPP

India's National Stock Exchange (NSE) ranks first in the stock futures trade

World's largest sales of mobile phones (24.5 million in Q3 2007)

2nd largest two-wheeler and 4th largest passenger car market

Fastest growing domestic retail market, US$ 350 billion in 2007

Sources: IBEF, EIU, RBI, CIA fact book

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The Indian economy at a glance

The Indian economy has experienced rapid growth buoyed by a shift from an

agriculture to a services-led economy

India

Developing World Average

Developed World Average

Real GDP growthPercentage, 1991-2007

Manufacturing Agriculture

Services

Composition of India’s GDP, 2007( ) - share in 1991

Source: Usda.gov Source: Economic Survey

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Key drivers of rapid growth

Source: UN, WTO

India

SE Asia

Latin Am.

China

USA

Japan

Europe

Working age population 19-59 years, 2007

…along with the significant advantage of a large & young working-age population with a strong domestic consumption group

Indian middle-class household growth 2002-2006

16.5

Source: Morgan Stanley

• Highest growth (~6% from 2005)• Constant median age of ~25 years for the last 25 years

16.5 million households (~80 million people) added over 4 years - greater than the population of UK!

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Copyright © NASSCOM 2008

Indian Industry 2005 2007 2010

Auto Components $ 6 B $ 10 B $20 B

Automobiles $ 7 B $ 10 B $ 15 B

Infrastructure Spend $ 35 B $ 75 B $ 150 B

Textile Industry $ 15 B $ 37 B $ 85 B

Tourism $ 27 B $ 39 B $ 65 B

Health Care $ 20 B $ 30 B $ 70 B

Health Tourism $ 300 M $ 350 M $ 2 B

All Sectors of the Indian Economy are Growing


Indian Industry 2005 2007 2010

Airline passenger traffic 20 M 45 M 60 M

No. of Cell Phones 49 M 203 M 425 M

No. of Internet Users 45 M

No. of Broadband Users 2 M

No. of Personal Computers 12 M 27 M 80 M

New PCs sold 4.4 M 7.5 M 22 M

IT/ITeS $ 36 B $ 48 B $ 80 B

All Sectors of the Indian Economy are Growing


Outsourcing 3.0:


products

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The Indian IT-BPO industry at a glance

FY04 FY05 FY06 FY07 FY08E

21.6

28.5

37.4

48.1

64.03.6%4.1%

4.7%5.2% 5.5%

32%

31%

29%

33%

US$ billion, percentage

Indian IT-BPO SectorRevenue Aggregate and Share of GDP

Exports

Domestic

Percentage of GDP

• Sustained export growth – revalidates strong fundamentals

• Revenue aggregate as a percentage of GDP continues to rise

Source: NASSCOM

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378427

553

704690

865

Domestic Market

BPO Exports

IT Exports

Direct employment 2 million; indirect job creation

estimated at 7-8 million

Direct Employment ‘000s

Indirect Direct TotalEmployment

9-10mn7-8mn

~2mn

FY2007 FY2008E

FY2008 estimates

• ~2 million professionals employed directly

• Indirect employment ~4x, creating additional 7-8 million jobs

Source: NASSCOM Source: NASSCOM

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Exports constitute a major part of IT Revenues

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100% = US$ 64 billion

DomesticMarket

Exports 62-66%

34-38%

*Includes product development and engineering

** Negligible

Export revenue remains the mainstay with steady growth across segments; Industry structure is well-balanced between Indian and Global providers

12%

18%

70%

40%

27.5%

32%

28%

Sourcing model

BPO

IT*

Global CaptivesGlobal Providers

Indian Providers

**

29%

30%

28%

Source: NASSCOM Source: NASSCOM

28%


Domestic market is growing rapidly

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DomesticMarket

Exports 62-66%

34-38%

Domestic market is gaining momentum, driven by overall economic growth, increased adoption of technology and outsourcing

100% = US$ 64 billion

• Rapid economic growth

• Increased consumption of goods and services

• Growth in tech-related spends by enterprises

• Internet connectivity

Source: NASSCOM

44%

38%

43%

44%


Talent Availability: About 3M graduates/year

Technical Graduates

‘000s

Non-technical Graduates

‘000s

Annual Output Composition

Postgraduates3 yr Eng. Dip. / MCA

4 yr Eng. Degree

Science Graduates

Commerce Graduates

Arts + OtherGraduates

Year Net employee addition (‘000s)

FY 08E 375

FY 06 328

FY 05 234

IT-BPO Demand

Source: NASSCOM

Source: NASSCOM

Source: NASSCOM

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Cost competitiveness (1/3)

Despite cost increases, India continues to leverage its cost structure to deliver a compelling cost advantage

Loaded Costs per IT FTE p.a.

2007 normalized to US costs

Source: Everest, NASSCOM

Break-up of Loaded Costs

2007, Percentage

Source: NASSCOM estimates

Salary

Delivery OHFacilities

INDICATIVE

SG&A

Lower impact of wage inflation

• Semi-variable

• Non-linear inflation

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Best-in-class players are successfully offsetting increasing factor costs with ongoing productivity gains, process improvements, and delivery innovation

FY06 Loaded Cost

Wage inflation

US$ depreciation

25.4

FY07 Loaded Cost

Effective cost management

Inflation of Loaded Costs per IT FTE, FY06-07US$ per FTE

ILLUSTRATIVE

Utilization & Productivity gains

100

8

3

105

42

• Volume / scale expansion• Lower cost structure through

expansion to Tier 2 cities• Flatter pyramids• Lower overheads (e.g., travel,

• Improved seat/resource utilization

• Process improvements reengineering


Due to wide differential in cost base, absolute inflation in developed countries is still higher than India

Net impact of 5%, lower absolute inflation vs. onshore

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2007 2008 2009 2010 2011 2012 2013 2014 2015

@ 3%

India @ 28K

~67%

Projected cost comparison, 2007-2015US$

~60%

~53%

Additionally, India’s long-term cost advantage is likely to remain robust


US @ 100K

Wage @ 5% Other @ 5%



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Distribution of the software industry by region in India

Bangalore 36%

Mumbai, Pune 15%

Chennai 15%

New Delhi, Noida, Gurgaon

17%

Hyderabad 14%

The industry is well spread across multiple Indian locations. Additionally, the next wave of locations is on the rise.

Others 3%Source: NASSCOM

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Summary of key messages

• India has the raw talent capacity to comfortably service the IT-BPO industry in the future. While talent suitability is a concern, industry initiatives such as NAC will help improve overall employability

• Despite cost increases, the Indian IT-BPO industry continues to leverage its lower cost structure to deliver a compelling cost advantage

• Overall risk exposure is low with mature quality and data security mechanisms and negligible geopolitical risk

• Proactive government policy is helping address existing infrastructure gaps. Further, SEZs will take over from STPI in propelling industry growth.

• Providers are maturing their service delivery capabilities to actively deliver value-adds through global delivery models, process expertise, and innovation

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Outsourcing 3.0:


products

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Four Stages of Outsourcing

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Outsourcing 1.0: Labor Cost Arbitrage

Outsourcing 2.0: Process Efficiency

Outsourcing 3.0: Design for Manufacturing

Outsourcing 4.0: Original Design and

Manufacturing


Getting from “idea” to “live”

Flexibility with accelerated time to market and reduced risk

of engineering failure.

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Processes, Configuration management, installation, test harnesses, test data,

testing grid, performance, internationalization, connectors,

integration with other products, multi-platform support, docs, training, usability,

UI, 24x7 support, deployment, maintenance.

Branding, Credibility, Balance Sheet.

$8M Series A Funding,12-18 months to go “live”

Live at Customers

Idea,prototype,algorithms

EntrepreneursCEO

70% of the Engineering Costs


1975 1985 1995 2005 2015

Outsourcing in the Software Industry will follow the patterns

for other industries.

222008

Labor Cost Arbitrage

Process Efficiency

Design for Manufacturing

Original Design and

Manufacturing

Electronics and

Semi-conductor

Industry

Labor Cost Arbitrage

Process Efficiency

Design for Manufacturing

Original Design and

Manufacturing

Software

Industry


� Established in 1990

� More than 1500+ product releases for customers in the last

five yearsChanging the way

software is

designed,

developed and

delivered

to increase

revenue,

margins, and

brand value

for our customers.

Persistent at a GlanceLeadership in Outsourced Software Product Development

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� More than 4000 employees with over 80% software

professionals

� Development Centers in Pune, Nagpur, Goa, Bangalore,

Hyderabad.

� Sales offices in Silicon Valley, Seattle, Chicago, New York,

Boston, Dallas, Japan, UK, Netherlands and Singapore.

� Venture Investment by Norwest Venture Partners, Gabriel

Venture Partners, Intel Capital and Hewlett-Packard

� More than 20% stock held by Employees and ESOP Trust.

� Acquired Controlnet India in Goa for Embedded Systems 2005

and assets of Metrikus India in Hyderabad for Dashboard and

Monitoring Software in 2006.


NASSCOM Delegation of Emerging Companies

Software 2008

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Please visit

Booth 3220 Located on the Software 2008 Expo Floor

Please visit

Booth 3220 Located on the Software 2008 Expo Floor


Outsourcing 3.0:


products

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• Outsourcing 3.0: India the market and the factory for building software products

•• Software outsourcing has evolved over the last two decades. In this session I propose

to discuss how software outsourcing has moved beyond cost-arbitrage to partnerships to build products with faster time-to-market and lower risks of engineering failure. I propose to use the Web 3.0 framework to describe best practices of managing distributed software product teams.

•• Representing NASSCOM, I will provide details on the availability Indian software talent

and will discuss some of NASSCOM’s initiatives to maintain India’s leadership in software outsourcing.

•• Rapid growth rates in the Indian economy has created several exciting opportunities for

software products to be built for the Indian market. I propose to discuss the market size and the dynamics of the Indian market and encourage product Companies to consider India as a market for launching innovative software products.

•

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outsourcing 3.0: india the market and the factory for software products

Economy & Finance

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