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Achieving Sustainable

and Inclusive Growth

Through Global

Sourcing of Services

Achieving Sustainable

and Inclusive Growth

Through Global

Sourcing of Services

Barnik Chitran Maitra McKinsey and Company

Barnik Chitran Maitra McKinsey and Company

1

TOPICSTOPICS

The transformational role of the IT/BPO industry

Concluding remarks

Perspectives on the IT/BPO Offshore industry

2

PERSPECTIVES ON THE IT/BPO OFFSHORING OUTSOURCING INDUSTRY

PERSPECTIVES ON THE IT/BPO OFFSHORING OUTSOURCING INDUSTRY

Significant latent demand for BPO&O; less than 15% of the $450 billion plus addressable market penetrated yet

Adoption of offshore IT/BPO expected to accelerate given high client satisfaction, strong business case for offshoring

While many specialist destinations emerging, India continues to lead with around 65% and 46% shares in IT and BPO respectively

3

* Includes Philippines, China, Russia, Eastern Europe, Ireland, Mexico** Includes addressable markets in currently offshoring industries;

*** India revenues indicated refer to estimates for FY2008. Global numbers indicate 2007 year-end estimatesSource: McKinsey Outsourcing & Offshoring practice; McKinsey Global Institute; Gartner 2005 database; IDC; NASSCOM Strategic Review 2008

Addressable markets for offshore IT/BPO/R&D exports is at least US $450 billion

ESTIMATES

US$ billion US$ billion

55

25.5

29.5

Current size

~220-250

Addressable market

Others*

India

4-5x

11

Current size

~160-190

24

13

Addressable market

7-8x

SIGNIFICANT “HEAD-ROOM” FOR FURTHER GROWTH OF THE OFFSHORE IT/BPO/R&D SERVICES INDUSTRY

SIGNIFICANT “HEAD-ROOM” FOR FURTHER GROWTH OF THE OFFSHORE IT/BPO/R&D SERVICES INDUSTRY11

Global offshore IT & Engg exports, FY 2008***

Global BPO exports**, FY 2008***

4

SIGNIFICANT INCREASE IN ADOPTION EXPECTED IN OFFSHORE SERVICES-INFRASTRUCTURE IT SERVICES

SIGNIFICANT INCREASE IN ADOPTION EXPECTED IN OFFSHORE SERVICES-INFRASTRUCTURE IT SERVICES

76-100

51-75

26-50

1-25

0

Average*

76-100

51-75

26-50

1-25

0

Average*

76-100

51-75

26-50

1-25

0

Average

76-100

51-75

26-50

1-25

0

Average

* Estimated Weighted average of budget offshored

Source: McKinsey CIO survey 2006 and 2007; McKinsey Analysis

CIO response to question - What fraction of your infrastructure is offshored?

Today In 3 years Today In 3 years

Per cent of respondents

Per cent of infrastructure offshored

Per cent of respondents

Per cent of infrastructure offshored

Per cent of respondents

Per cent of infrastructure offshored

Per cent of respondents

Per cent of infrastructure offshored

Per cent of respondents

22

2006 CIO survey 2007 CIO survey

1

0

17

11

40

10

7

0

19

19

25

13

5

2

10

15

37

27

3

3

10

29

23

34

5

BPO AND IT SERVICES INDUSTRY CONTINUES TO DELIVER STRONG PERFORMANCE

BPO AND IT SERVICES INDUSTRY CONTINUES TO DELIVER STRONG PERFORMANCE

Basic data

Rules-baseddata

Basic voice

CLIENT SATISFACTION LEVELS WITHPercent

Back office operations Offshore IT operations

22

8685

8178

8585

20082007

Source: McKinsey P3600 benchmarking

Applicationdevelopment

Applicationmaintenance

8173

8070

8374

20082007

Packagesoftwareimplementation

6

PERFORMANCE ON BASIC METRICS CONTINUES TO BE STRONG

PERFORMANCE ON BASIC METRICS CONTINUES TO BE STRONG

Proportion of time SLAs are met Proportion of project completed on schedule

22

COMPLIANCE ON CONTRACTUAL OBLIGATIONSPercent

SLA Compliance Delivery compliance

9594

9391

8886

20082007

Source: McKinsey P3600 benchmarking

Applicationmaintenance

8479

8776

2007 2008

8380

Basic data

Rules-baseddata

Basic voice

Applicationdevelopment

Packagesoftwareimplementation

7

RATIONALE FOR OFFSHORING WILL REMAIN STRONGRATIONALE FOR OFFSHORING WILL REMAIN STRONG

8.5

78.0

6.0

Other direct costs

Direct people costs

2.3

84.0

10.8

73.2

10.2

83.0

6.0

2.3

89.0

12.5

76.5

2008 2010

India basedunit

US basedunit

Key assumptions

• Offshore salary costs at each level increases based on historical growth rates

• No changes in delivery pyramid (ratio between developer, analysts, PL, PMs)

• Other costs include all physical infrastructure costs (e.g., facilities, equipment)

• No increase in G&A costs for both India and US based units

22

India basedunit

US basedunit

Source: Watson Wyatt; NASSCOM-Hewitt Compensation Benchmarking; Project360 metrics database for offshore units; team analysis

US$/FTE/Hour

8

Indexed wage differential

India

LABOR COST ARBITRAGE WILL CONTINUE FOR SEVERAL YEARS, EVEN WITH OFFSHORE INFLATIONARY PRESSURE

LABOR COST ARBITRAGE WILL CONTINUE FOR SEVERAL YEARS, EVEN WITH OFFSHORE INFLATIONARY PRESSURE

1002005

1102010

1222015

1352020

- CAGR

14

46

74

120

86

65

39

11

* Assumes aggregate inflation of 20% from 2005-2010 based on local skilled worker wage inflation and historic rupee inflation

*** Assumes future wage inflation of 10% based on Oxford Economics forecast

Source: McKinsey Outsourcing and Offshoring Practice, Oxford Economics

• Despite wage inflation, leading Indian BPO providers have actually lowered operating costs 7 to 11% (2006 -2007)

• 5% wage inflation "lock-in" not un-common in vendor contracts

• Despite wage inflation, leading Indian BPO providers have actually lowered operating costs 7 to 11% (2006 -2007)

• 5% wage inflation "lock-in" not un-common in vendor contracts

2%

20*%

10**%

22

Real wage cost for skilled workforce in India vs. US

US

9

ITES

INDIA HAS INCREASED IT’S SHARE OF THE GLOBAL OFFSHORE BPO INDUSTRY & HAS A 50% OVERALL SHARE

INDIA HAS INCREASED IT’S SHARE OF THE GLOBAL OFFSHORE BPO INDUSTRY & HAS A 50% OVERALL SHARE

* Includes Philippines, China, Russia, Eastern Europe, Ireland, Mexico

Source: NASSCOM Strategic Review 2008; McKinsey Global Institute 2005; neoIT; press articles

Share of global offshore industry

BPO

Share of global offshore industry

Per cent Per cent

62

38

US$8.5 bn

2001

46

54

US$55 bn

2008

Others*

India

100% =

39

61

US$2.3 bn

2001

54

46

US$24 bn

2008

Others*

India

100% =

33

10

* Graduates with skills for direct employment (does not consider willingness and accessibility of talent)

** Number derived via extrapolation

*** As of 2007

Source: HR interviews; country labour and graduation statistics; McKinsey Global Institute

DRIVEN BY ITS SUPERIOR SUPPLY OF SUITABLE LOW WAGE TALENT

DRIVEN BY ITS SUPERIOR SUPPLY OF SUITABLE LOW WAGE TALENT

2,078

1,084

1,020

586473

1,175

8,043

5%

Poland

3554% 324

4%

Thailand**

308

China

26%

India***

13%

Russia

4%

13%

7%

Philippines

6%

Turkey**

408

Mexico

2323%

IndonesiaBrazil

18 other Low-wage countries

100

Total supply of suitable low-wage talent (28 countries)

15%

33

Aggregate suitable* graduate talent pool for offshore IT and BPO industries

11

TOPICSTOPICS

Concluding remarks

Perspectives on the IT/BPO Offshore industry

The transformational role of the IT/BPO industry

12

OFFSHORE IT AND BPO INDUSTRIES HAVE THE POTENTIAL TO TRANSFORM INDIA OVER THE NEXT 10 YEARS

OFFSHORE IT AND BPO INDUSTRIES HAVE THE POTENTIAL TO TRANSFORM INDIA OVER THE NEXT 10 YEARS

What IT/BPO industry can do for India

Economic growth engines

Potential size of India’ offshore IT and BPO industries

Taiwan’s engineering and electronics industry (2004)

Saudi Arabia’s Oil (2004)

Source: SAMA; EIU Viewswire; CMIE; Goldman Sachs; global Insights; Deutsche Bank; World Bank; Energy Information Administration (EIA)

120-180

53

116

Contribution to GDP

Per centUS$ billion

12-1512-15

1717

4545

13

THE IT/BPO INDUSTRY IS ON TRACK TO ACHIEVE IT’S MEDIUM TERM ASPIRATIONS

THE IT/BPO INDUSTRY IS ON TRACK TO ACHIEVE IT’S MEDIUM TERM ASPIRATIONS

US$ billion in export revenues

IT/BPO exports expected to continue strong growth

12.0

35.05.2

25.0

5.81.5

FY 2002

17.2

FY 2005

60.0

FY 2010 E

BPO

IT

7.3

8x

IT/BPO industry expected to have significant impact

on India’s economy

Estimated 17% of India’s incremental GDP growth over the five year period (2005-2010)

17%

GDP growth

Source: NASSCOM McKinsey 2005 Report

Over 80% of the growth in exports between 2005 to 2010

Export growth

Estimated 10 million total employment by 2010, equaling planned employment creation from all special programs in the 10th plan of Planning Commission

Employment creation

14

Net impact on employment in India

OFFSHORE IT AND BPO INDUSTRIES IS A PRIME EMPLOYMENT CREATION ENGINE

OFFSHORE IT AND BPO INDUSTRIES IS A PRIME EMPLOYMENT CREATION ENGINE

ESTIMATES

Source: Monthly Review of Indian Economy (Centre for Monitoring Indian Economy (CMIE)); National Council of Applied Economic Research (NCAER), National Sample Survey Organization, McKinsey Global Institute

Million jobs, 2010

>2.8x

2.3

Total employment generated

>9>6.5

Indirect and induced employment

Direct employment

15

UNPARALLELED IMPACT ON INDIA’S ECONOMY: SIGNIFICANT CAPACITY BUILDING IN HIGHER EDUCATION AND URBAN EMPLOYMENT GENERATION

UNPARALLELED IMPACT ON INDIA’S ECONOMY: SIGNIFICANT CAPACITY BUILDING IN HIGHER EDUCATION AND URBAN EMPLOYMENT GENERATION

* Total urban jobs in 1993-94 was 81.8 million and in 2004-05 was 90.5 million

** High multiplier effect; for every direct job created 2.5-4 additional jobs created in indirect employment

Source: Institute of applied manpower research; CRISIL–NASSCOM report Employment and Output Linkages, 2007

Impact on higher education in top 6 states that dominate technology/ business services exports Employment impact of different growth engines

Incremental exports share (1998-2007)

No. of institutions added(1998-2007)

US$ billions # of institutions per state

110

16-18

6x

Top 6 states (Karnataka, AP, NCR, TN, Maharashtra)

500

90-100

5x

Engineering education

Others(21 states + 6 UTs)

Top 6 states (Karnataka, AP, NCR, TN, Maharashtra)

Others(21 states + 6 UTs)

Non-engineering education

~15

~1

~6

~0.3

Incremental jobs in million created during 1994-2005

1.1

8.7*

Total urban jobs

2.5**-4.4**

3.6-5.5

Technology/business services

Indirect

Direct

% of totalurban jobs

42-63

Per cent

30-51

12

Technology/business services industry has contributed to 42-63% of incremental urban jobs between 1994 and 2005 through direct and indirect employment

16

Increase capacity of higher education system*

Improve willingness to join the offshore IT and BPO industries

Improve suitability of graduates for IT/BPO jobs

Develop a three pronged approach to improve willingness to join the BPO industry

1

6

5

43

2

Pilot and roll-out “industry-owned”integrated skill development program

Encourage creation of self regulating associations of private higher education institutes

Introduce an output-based ranking of colleges to raise performance standards in the highereducation system Develop

scalable e-learning programs for IT/BPO skill development

Implement faculty quality and coverage improvement initiatives through four specific programs

THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-IMPROVED QUALITY OF TALENT

THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-IMPROVED QUALITY OF TALENT

* Not a priority to sustain leadership

17

From . . .. . . to From . . .

75-80% of total Class A office space demand in India is from the IT/BPO

industry

. . . to

THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-QUALITY COMMERCIAL REAL ESTATE DEVELOPMENT

THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-QUALITY COMMERCIAL REAL ESTATE DEVELOPMENT

18

From . . .. . . to

Improved work environment with all modern facilities

From . . . . . . to

THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-WORK ENVIRONMENT

THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-WORK ENVIRONMENT

19

From . . .. . . to

Starting salaries at IT/BPO units (>US$ 300 per month) exceeds retiring salaries of

the previous generation

From . . . . . . to

THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-HIGHER CONSUMPTION WITH RISING DISPOSABLE INCOME

THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-HIGHER CONSUMPTION WITH RISING DISPOSABLE INCOME

20

From . . .. . . to

Improved citizen services (e.g., registrations,

payments etc.) through e-governance

From . . . . . . to

THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-CITIZEN SERVICES

THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-CITIZEN SERVICES

21

From . . .. . . to

Airports at major cities (Mumbai, Delhi, Hyderabad,

Bangalore) being modernized

From . . . . . . to

THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-QUALITY INFRASTRUCTURE

THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-QUALITY INFRASTRUCTURE

22

TOPICSTOPICS

Concluding remarks

Perspectives on the IT/BPO Offshore industry

The transformational role of the IT/BPO industry

23

PERSPECTIVES ON THE IT/BPO OFFSHORING OUTSOURCING INDUSTRY

PERSPECTIVES ON THE IT/BPO OFFSHORING OUTSOURCING INDUSTRY

We are only at the start, and not at a mature state, of the offshore industry evolution

The pace, breadth and depth of offshore services is rising

Global demand will exceed near-term suitable talent supply in every country

It is not “India or” but “India and”

The IT/BPO industry has the potential to transform a nation

Can trigger fundamental changes in basic areas (e.g. education, infrastructure, capabilities of players)

Powerful engine to drive sustainable and inclusive growth