INFORMATION TECHNOLOGY (IT) INDUSTRY IN INDIA

Transcription

1 Chapter 4 INFORMATION TECHNOLOGY (IT) INDUSTRY IN INDIA 4.1 Introduction India is one of the fastest growing economy of the world. India s GDP at current market prices is projected at Rs.46,93,602 Crore in by the Central Statistical Organization (C.S.O.) in its advance estimates (AE) of gross domestic product. Thus in the current fiscal year the size of the Indian economy will cross US$1 trillion. At the nominal exchange rate (Average of April December 2007) GDP is projected to be US $1.16 trillion in Per capita income at normal exchange rate is estimated at US$ India s GDP at Purchasing Power Parity (PPP) is estimated at US $5.16 trillion or US $ 3.19 trillion depending upon whether the old or new conversion factor is used. In the former case India is the third largest economy in the world after the United State and China, while in the later it is the fifth largest (behind Japan and Germany) In , the performance of the information technology enabled services business process outsourcing (ITES BPO) industry was marked by double digit revenue growth, steady expansion into newer service lines an increased geographic penetration and an unprecedented rise in investment by multinational corporation (MNCS). Total export revenue of IT- ITES industry have grown from US $ 23.6 billion in to US $ 31.3 billion in , a growth of 32.6 percent. A total of 90 Indian IT companies were certified at SEI CMM level 5 by December Majority of the fortune 500 and Global 2000 corporations are sourcing IT ITES from India. Over the last two three years, a number of reputed companies in electronic / IT / Telecom hardware manufacturing like Nokia, Motorola, Foxconn, Flextronics, Aspocomp, Samsung, LG, Ekoteq, Ericsson, Alcatel, Tessolve and Dell have either setup their units or are in the process of investing in the country. India is rapidly becoming an R & D hub. All the top 10 global fables design companies have operations in India and 17 of the top 25 semiconductor Companies worldwide have a strong presence in India. The total number of professionals employed 230

2 in the IT ITES sector grew from an estimated 12,87,000 in to 16,21,000 in In addition IT- ITES is estimated to helped create an additional 60 lakhs job opportunities through direct and induced employment in telecom, power, construction facility management, IT transportation, catering and other services. Table 4.1 Growth of production and exports in electronic industry Items Electronic Production (Rs. Crores) * Consumer electronics 13,800 15,200 16,800 18,000 20,000 Industrial electronic 5,550 6,100 8,300 8,800 10,400 Computers 4,250 6,800 8,800 10,800 12,800 Communication & broadcasting equipments 4,800 5,350 4,800 7,000 9,500 Strategic electronics 2,500 2,750 3,000 3,200 4,500 Components 6,600 7,600 8,800 8,800 8,800 Sub Total 37,500 43,800 50,500 56,600 66,000 Software for exports 46,100 58,240 80,180 1,04,100 1,41,800 Domestic software 13,400 16,250 21,740 29,600 37,800 Total 97,000 1,18,290 1,52,420 1,90,300 2,45,600 Electronic exports in crore Electronic hardware 5,600 7,700 8,000 9,625 11,500 Computer Software 46,100 58,240 80,180 1,04,100 1,41,800 Total 51,700 65,940 88,180 1,13,725 1,53,300 Source: Ministry of Communications & Information Technology, Government of India * Estimated Policy developments and new initiatives in information Technology The Special Incentive Package Scheme (SIPS) to encourage investments for setting up semiconductor fabrication and other micro and nano technology manufacturing industries was announced in March The incentives admissible would be 20 percent of the capital expenditure during the first

3 years for units located in Special Economic Zones (SEZs) and 25 percent for units located outside SEZs. A Task Force has been constituted to promote the growth of electronics IT hardware manufacturing industry. The Department of Information Technology has unveiled various components of the National e-governance Plan (NeGP) covering 27 Mission Mode Projects (MMP) and eight support components to be implemented at Central, State and Local Government levels, at an estimated cost of Rs. 23,000 crore over the next five years. The Government has approved the approach, strategy, key components and implementation framework for NeGP with the vision: "Make all Government services accessible to the common man in his locality through common service delivery outlets and ensure efficiency, transparency and reliability of such services at affordable costs to realize the basic needs of the common man." The Government has approved a scheme for facilitating establishment of 1 lakh broadband Internet enabled Common Service Centres in the rural areas in the public-private partnership mode. The Government has approved a scheme for establishing the State Wide Area Networks (SWANs) across the country in 29 States / 6 UTs with a total outlay of Rs. 3,334 crore with Central assistance component of Rs. 2,005 crore over a period of five years. The scheme envisage to provide Central assistance to Sates / UTs for establishing SWANs for States / UTs headquarters up to the block level with a minimum bandwidth capacity of 2 Mbps. The Department of Information Technology is setting up Nano Electronic Centres at the Indian Institute of Technology, Mumbai and the Indian Institute of Science, Bangalore with an outlay of about Rs. 100 crore to carry out R&D activities in nano-electronics devices and materials. 232

4 The software tools and fonts for 10 Indian languages, namely Hindi, Tamil, Telugu, Assamese, Kannada, Malayalam, Marathi, Oriya, Punjabi and Urdu, have been released in the public domain. The Information Technology Amendment Bill, introduced in the Parliament in December 2006, was referred to the Parliament Standing Committee which has presented its report to both Houses of Parliament. Table 4.2 Sector attracting highest FDI flows Sector Amount of FDI Inflows Cumulative infolws (Apr - Mar.) (Apr - Mar.) (Apr - Mar.) (Apr - Mar.) (April 2000 to Nov 2007) Share of infolws (%) (Apr - 05 (Apr Mar.) - Mar.) Service sector a 1,986 2,399 21,047 9,121 38, Computer Software & hardware 2,441 6,172 11,786 4,217 30, Telecommunication b 570 2,776 2,155 3,963 15, Construction c ,424 3,593 9, Automobile Industry ,254 1,191 8, Power , Chemical fertilizers except Housing & Real estate Drugs pharmaceuticals Metallurgical industries & 909 1, , ,121 5,161 7, , , ,909 4, Source: Department of Industrial Policy & Promotion, Government of India. a - financial & non-financial services. b - radio paging, cellular mobile, basic telephone services. c - construction Including roads & highways. 233

5 4.1.1 Information Technology (IT) Industry in India Over the past decade, the Information Technology (IT) industry has become one of the fastest growing industries in India, propelled by exports (the industry accounted for more than a quarter of India's services exports in ). The key segments that have contributed significantly (96 percent of total) to the industry's exports include - Software and services (IT services) and ITenabled services (ITeS) i.e. business services. Over a period of time, India has established itself as a preferred global sourcing base in these segments and they are expected to continue to fuel growth in the future. Exports contribute significantly to the Indian IT industry's revenues with key segments being IT services and software and ITES- BPO Even assuming a conservative growth rate of 20 percent, Indian IT-ITeS exports could reach US$ 42bn by These segments have been evolving over the years into a sophisticated model of operations. Indian IT and ITES companies have created global delivery models (onsite, near shore, offshore), entered into long term engagements with customers, expanded their portfolio of services offerings, built scale, extended service propositions beyond cost savings to quality and innovation, evolved their pricing models and have tried to find sustainable solutions to various issues such as risk management, human capital attraction and retention and cost management. Demand dynamics A key demand driver for the Indian IT services and ITeS industry has been the changing global business landscape which has exerted performance pressures on multinational enterprises. While companies initially sourced from the Indian IT and ITeS industry for cost, quality and enhanced competitiveness have induced them to continue and expand. Some companies have also viewed sourcing differently (beyond cost and quality) and achieved non-traditional benefits of sourcing from India. 234

6 Range of service offerings The range of services offered by the Indian IT services and ITeS industry to these global corporations range from simple tasks to increasingly complex activities and span across the entire value chain of a typical organisation Figure 4.1 :- Range of Service offering What gets sourced Information Technology Business process outsourcing IT services Customer interaction services R & D and software products Data entry and transaction process Content development Knowledge Service & engineering design Data mixing Performance Analysis Financial Modeling Research Design Talent Internal audit Management Traders Internal consultants People Projects Processes Products Source : India brand equity foundation (2006), Information Technology, pp.3 Sourcing models A wide range of sourcing models have evolved for sourcing IT and ITeS services from India based on the required capabilities as well as risk profiles. 235

7 India LOCATION Home country Figure 4.2 : Sourcing Models Onshore e.g. via work permit Onshore e.g. via work permit Co-source BOT strategic stakes Offshore e.g. outsourcing Offshore e.g. outsourcing In house OWNERSHIP Outsourced Source : ibid, pp. 4 There is an increasing trend towards a global delivery model (higher proportion of offshore in the onsite - near shore - offshore mix) as well as a preference for captives and co-sourcing arrangements, though mature captives are gradually tending towards becoming third party service providers The India advantage Various country comparison studies have established the attractiveness of the Indian IT services and ITeS industry. The key attributes that have enabled India to establish itself as a preferred sourcing base include: Vast Access to skill base Large pool of resources for IT and ITeS operations - 14 million graduates, 1 million technical resources, one of the largest English speaking manpower in the world. Availability of quality delivery management talent from international banks and consulting firms. 236

8 In the future, while the increasing demand for resources may put pressure on the resource base, initiatives are currently underway to enhance the supply of quality human capital in the country. Strong quality orientation ISO9001, COPC. 6 sigma are some of the established quality initiatives. 90 out of the world's 117 SEI CMM Level 5 companies are from India. Availability of high quality infrastructure Concerted efforts to provide dedicated, international quality, cost effective real estate at software parks, Special Economic Zones (SEZ) and knowledge sector industrial estates. Availability of high quality international and national dedicated telecom infrastructure with high level of redundancies insulating centres from Public Switched Telephone Network (PSTN) quality. Availability of multiple levels of backups providing insulation from public system issues, if any. Cost advantage The cost impact of sourcing from the Indian IT and ITeS industry can be significant due to the lower wages and lower cost of living. While the increasing demand for resources is gradually adding pressure on labour costs, companies within the industry are attempting to sustain cost, competitiveness through appropriate location choices and revamped human resource management practices. Enabling policy environment The Government of India is taking proactive measures to encourage investments in this sector. Significant measures and incentives include a liberalized FDI regime, single-window clearance facility, income tax holiday and customs duty exemptions. State governments too are demonstrating a 237

9 proactive approach towards attracting and facilitating investments and are providing support for the development of specialized infrastructure, focusing on development of a larger base of cities/towns to meet the needs of the industry and undertaking measures to continually enhance the supply and quality of manpower. Mature industry eco-system The support infrastructure for the Indian IT and ITeS industry which includes specialized firms for functions such as recruitment, training, property management, security, fleet management. book-keeping and payroll as well as industry associations has evolved over the years. Availability of private equity Presence of a mature private equity industry to support local entrepreneurs (organizations such as Warburg Pincus, General Atlantic, CDC). Commitment to address security concerns Indian companies as well as the government have been active in adhering to international security standards such as ISO 17799, BS7799, COBIT and ITSM. The required legal framework has been laid down by the government and a revamp of the country's Information Technology Act, 2000 is expected in the near future. The revised legal framework is likely to include provisions against a new range of computer crimes to cover areas like privacy, information protection and harming computer systems through viruses. A majority of IT / ITeS activity in India is concentrated in seven cities / clusters in India. With concerted development efforts of a wider base of cities / towns, the geographical spread of IT / ITeS activity is gradually expanding to cover cities such as Ahmadabad, Jaipur, Coimbatore, Kochi, Trivandrum, Chandigarh, Mysore, Mangalore, Madurai and Bhubhaneswar. Various companies have chosen to locate their operations in one or more of these seven clusters based on parameters such as: Leveraging local experience and assets 238

10 Spreading to reach right skills at right costs Business continuity requirements. Information Technology Clusters City / Cluster Mumbai / Navi Mumbai / Thane (Gurgaon / New Delhi / Noida) Bangalore Chennai Hyderabad/ Secunderabad Pune Kolkata Key companies in the location (Illustrative and not exhaustive) ABN Amro, Morgan Stanley, Citigroup, Accenture, Tata Consultancy Services, World Network Services (WNS) Genpact (formerly GE Capital International Services), Sapient, HCL Technologies, American Express, McKinsey research centre, E-Funds Corporation JP Morgan, Goldman Sachs, Siemens, Infosys, Wipro, Tata Consultancy Services, Cognizant Technology Services, Genpact (formerly GE Capital International Services) Citigroup, Standard Chartered (Scope International), World Bank, Ford, Hewlett Packard, AIG, Infosys, Tata Consultancy Services, Cognizant Technology Services HSBC, Microsoft, Franklin Templeton, Infosys, Wipro, Tata consultancy services. Cognizant Technology Services, Genpact (formerly GE Capital International Services) World Network Services, Cognizant Technology Services, HSBC, Veritas, Sybase, AXA, Mellon Financial HSBC, Genpact (formerly GE Capital International Services), IBM, Infosys, Tata consultancy services, Cognizant Technology Services Source: ibid, pp Key Opportunities Opportunities in the Indian IT services and ITeS industry The opportunities in the Indian IT services and ITeS industry can be classified along the following broad categories: 239

11 IT services The range and depth of capabilities have enabled the Indian IT services industry to gain a respectable position in the global IT services market (Indian industry expected to achieve market share of almost 30 percent by 2008 in key segments such as application development and application outsourcing as per NASSCOM-McKinsey estimates). The key factors that have enabled the industry's success are end-to-end solutions capability, focus on stringent processes and quality of execution, global delivery model (combination of onshore and offshore with an increasing offshore component), high-end, mission critical service capabilities and strong project management methodologies and expertise. Table 4.3 Opportunity segments with IT services Project oriented services IT outsourcing Support and training. IT consulting IS outsourcing IT training and education Systems integration Application outsourcing Hardware support and Custom application Network Infrastructure installation development & management Packaged software maintenance support and installation Network consulting and integration Source : ibid, pp.9 Some multinational corporations who have leveraged the India advantage for IT services (either through a captive unit or through outsourcing include Siemens, Citigroup, Microsoft, Cisco, Hewlett Packard, Nortel, Boeing, Airbus. R&D services and software Indian R&D services and software product exports, though at a nascent stage, is expected to grow rapidly (growth forecasts are US$ 8-11 bn by : Source - NASSCOM). The key opportunity areas within R&D services and 240

12 software products include embedded software and systems and offshore product development. A number of large multinational corporations source a part of their embedded system requirements from India either through captive design centres or through vendors. Some of these companies include Samsung, Texas Instruments, Delphi, STMicroelectronics, Motorola, Intel, Analog Devices and National Semiconductor (Illustrative and not exhaustive; Source NASSCOM). Apart from multinational corporations sourcing requirements from India. there are over a 100 Indian companies operating in the embedded software solutions domain. Also, in addition to the export of products developed by the offshore units on behalf of MNCs a few Indian vendors (e.g. Infosys, I-Flex Solutions) have successfully expanded their revenue streams to include their own software products. Customer interaction services Customer interaction services is one of the largest segments within the Indian ITeS industry contributing almost 30 percent to the total revenues in The predominance of customer interaction services is gradually decreasing due to pricing pressures as well as increasing depth of sourcing relationships which have include a new range of service offerings. However, while the share in the total pie may be decreasing, the outlook for this segment is still favorable due to strong demand from customers who have not sourced customer interaction services in the past as well as expansion of the customer care service offering to include more complex activities such as higher-end technical support. Select multinational corporations who have leveraged the Indian advantage for business process outsourcing services include Citigroup, American Express, General Electric and Hewlett Packard. (Illustrative and not exhaustive; Source-News reports). 241

13 Transaction processing Cost advantage, access to an abundant skill pool and commitment to quality of delivery have enabled the rapid growth of this segment. The range of capabilities sourced from India in business process outsourcing has been illustrated below: Range of capabilities sourced from India Low end High end Data entry / conversion Source documents received via digital imaging or voice form. Data entry/ transcription at offshore location into application packages Rule set processing Problem solving Full process outsourcing Processing of transactions as per predefined set of rules. Rule definition considers various exception situations and tasks to be executed for every such situation. Includes Report preparation, statementing. This involves some decision making. Includes troubleshooting and determination of solutions for identified problems. May require domain expertise. Service providers becomes owner of process from end to end. Requires domain and industry expertise. Source : ibid, pp.11 Select multinational corporations who have leveraged the Indian advantage for business process outsourcing services include General Electric, Citigroup, Standard Chartered Bank, ABN Amro, Bank of America, American Express, British Airways and IBM. Content development The Indian ITeS industry offers a range of services to various multinational organisations catering to their digital content development needs of website management, production and delivery of multimedia over new media, including CDs, DVDs and Internet TVs, movie production and gaming. Key players offering / sourcing content development services from India include 242

14 Walt Disney, Laserwords and Techbooks (Illustrative and not exhaustive; Source-News reports). Knowledge services (Non- IT) Recent years have witnessed a spurt in sourcing of knowledge based services as the industry has moved up the value-chain and built high-end capabilities. While this trend is particularly evident in financial services sourcing of knowledge services has also gained ground in industries such as pharmaceuticals and biotechnology, entertainment and aerospace. The key opportunity areas and their market potential have been illustrated below: Opportunity 2003 (US $ Bn) 2010 (US $ Bn) CAGR (%) Basic data search, integration and management % Market research, competitive intelligence % Equity research, actuarial analytics and data modeling NA Animation and simulation % Remote education, publishing NA Medical content and services NA R&D (other non-it areas % Biotech and pharmaceuticals % Source: ibid pp.12 Select multinational corporations who have leveraged the India advantage for knowledge services include General Electric. J P Morgan, Citigroup. American, Express, McKinsey, Pfizer, and A C Nielson. Engineering design A significant emerging opportunity for the Indian ITeS industry is in the realm of engineering design which is expected to grow to US$ 4 bn by 2010 (Source: Evalueserve). While the scope of engineering design covers a broad spectrum of complexity levels, different players have emerged across the spectrum by building the requisite capabilities. 243

15 Key players offering / sourcing engineering design services from India include Bechtel, Ford Motor Company, General Electric,. General Motors and Datamatics Key emerging trends impacting the Indian IT services and ITeS industry While the Indian IT services and ITeS industry is poised for rapid growth over the next few years, there are emerging trends which are likely to impact their operating models and the industry players would have to appropriately adjust their operations to capitalize upon / manage these trends. Some key emerging trends include: Demand related Offshoring is now mainstream and increasingly an integrated approach is being adopted across service types. Also with more experience with the concept, offshoring projects are moving beyond pilots and there is better and coordinated planning, execution and monitoring of offshoring projects. Transaction processing is growing faster than customer interaction services and is likely to dominate future growth. Key segments which have contributed to this growth include finance and HR processing. Demand for offshoring has extended beyond the banking and financial services industry and other key verticals that are likely to be demand drivers in the future include telecom, healthcare and entertainment media. While a range of sourcing models exist and continue to evolve, the preferred models are captives and hybrid options. 244

16 There is likely to be greater focus on risk, compliance and information security issues and therefore risk management is likely to be the dominant theme (both offshore and on-shore). Supply related Evolving market structure with consolidations, IPOs and other transactions. Emergence of other competing countries and need to appropriately manage people, telecommunications and infrastructure costs to ward off competition from the same as cost arbitrage is still a significant driver for offshoring. Possible demand-supply gap for trained manpower in the medium to long term and therefore need to invest in enhancing supply of trained manpower. Development of a larger base of locations for IT and ITeS with supporting ecosystems The Indian IT services and ITeS industry - The road ahead The Indian IT services and ITeS industry is poised for rapid growth over the next few years by offering a wider services portfolio, catering to a larger set of industry verticals and evolving adapting to suit the service delivery preferences of global customers. Key challenges that the industry faces include the need to sustain competitiveness in the face of alternative emerging locations and enhancing supply of quality human capital to cater to increasing demand. Efforts in this direction are already underway and continuous emphasis on the same is imperative to ensure that the industry's future growth is undeterred. 245

17 IT for development The contribution of IT in the development of the rural areas is critical and efforts are underway to enhance the awareness and penetration of IT in rural areas. Attempts to increase the depth of IT services in rural areas range from small initiatives like single computer information kiosks to the "Wired Village Project", where dozens of villages are provided high speed internet connectivity. The government as well as the private sector has been actively involved in the dispersion of IT and IT based services to rural India. Some models include: ITC Limited has set up an initiative called "e-chaupal" which aims at facilitating productivity enhancement by offering services and information on subjects like weather, market prices, scientific farm practices etc. The venture has proved to be successful and the number of e-chaupals have risen to 2,700 which cover a population of 1.2 million in five states. ITC plans to expand to 20,000 e-chaupals in the next few years. TARAhaat Information and Marketing Services Development Alternatives (Technology Action for Rural Advancements), a well-known Indian NGO, is focused on using technology for providing sustainable livelihood in villages. The strategy deployed is to evolve a commercially viable IT-based enterprise and to deliver public benefits by satisfying private needs. The services provided are education, E-governance, insurance, mini-credit financing, rolling out development packages made by NGOs and e-communications. A private Indian IT company, Aksh Broadband, has executed the Gramdoot programme in Jaipur district (in the state of Rajasthan) in western India. The model is based on fibre optic technology laid through the district to carry voice, data and graphics. The optic fibre cable runs for 3000 kms and benefits a population of 6 million people. All government records are online - from land records to revenue collected - and health and education services are provided real time in Jaipur district. It is in fact the first time anywhere in the world that land deeds are offered to the villager in real time. To help sustain this model 246

18 commercially, a small charge is administered for the services provided. The model is cost effective, has rapid deployability, and has demonstrated ease of operation and maintenance. The "Param" project by Ogilvy and Mather aims to improve rural connectivity in backward areas. "Drishtee" has focussed on provision of e-governance facilities and information services to the rural community. Attempts to impart IT education to students from rural areas are pursued by Microsoft and the Azim Premji foundation. Some players in the Indian IT and ITeS industry have also included rural India in their capability sourcing models. Select examples include: Lason India an end to end outsourcing company is promoting village BPO's where functions like data entry and data processing are carried out from rural areas. Datamation group is a Public Private Partnership where NGO's train individuals from under-privileged sections of the society and employ them in BPO's owned and run by them. 4.2 INDIAN IT INDUSTRY: NASSCOM ANALYSIS FY witnessed a revalidation of the Indian Information Technology - Business Process Outsourcing (IT-BPO) growth story, driven by a maturing appreciation of India's role and growing importance in global services trade. Industry performance was marked by sustained double-digit revenue growth 247

19 The sector closed the year at record levels, with the revenue aggregate growing by nearly ten times over the past ten years Positive market indicators include large unaddressed white-spaces and the unbundling of IT-BPO mega-deals with increasing shares of global delivery Strong optimism of the industry to achieve its aspired target of USD 60 billion in exports by 2010 Figure 4.3 : Industry Performance over the Last Ten Years IT Industry-Sector-wise break-up USD billion FY 2006 FY 2007 FY 2008 P IT Services Exports Domestic Eng Services and R&D, SIW Prods Exports Domestic ITES-BPO Exports Domestic

20 USD billion FY 2006 FY 2007 FY 2008 P Total Software and Services Revenues Of which, exports are Domestic Hardware Total IT Industry (including Hardware) Source : Indian IT Industry NASSCOM, Analysis, 2007 (Total may not match due to rounding off *NASSCOM estimates have been reclassified to provide greater granularity Historical values for a few segments have changed due to availability of updated information) Growth in Revenues Revenue from the Indian IT software and services sector (including the domestic and exports segments and excluding hardware) touched nearly USD 40 billion during FY 07 and is expected to grow by nearly 27 percent to clock USD billion in FY08. Contribution to GDP in FY 07 was 5.2% up from 4.8% last year. Service and software exports remain the mainstay of the sector contributing USD 31.3 billion during FY 07, beating forecast to register a 33% growth. Increasing traction in offshore product development and engineering services is supplementing India's efforts in IP creation. This segment has grown by percent to report USD 4.9 billion in exports. MNC investments reach an unprecedented scale; over USD 10 billion announced in FY , to be invested over the next few years. 249

21 Airlines and transportation Healthcare Construction & Utilities Media, Publishing and Retail Manufacturing Hi- tech / Telecom BFSI Other Airlines and transportation Healthcare Construction & Utilities Retail Manufacturing Hi- tech / Telecom BFSI Other Global Markets While US and UK remain the dominant markets for IT-ITES exports, revenues from newer markets are growing rapidly Market FY04 FYOS FY06 America 69.40% 68.30% 67.18% Europe 22.60% 23.10% 25.13% Rest of the World 8.00% 8.60% 7.69% Growth Verticals BFSI, Telecom and Hi-Tech continue to account for approximately 60% of the market. Other verticals such manufacturing, retail, transportation, healthcare and utilities are also growing rapidly. Media, Publishing & Entertainment FY % 3.0% 4.0% 4.2% 7.6% 12.9% 19.8% 38.1% 8.4% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 250

22 Table 4.4 Employment figures Software and Services sector Sector FY 2006 FY 2007 IT Services 398, ,000 Engineering Services and R & D and Software Products 115, , , ,000 ITES-BPO 415, ,000 Domestic Market (including user organizations) 365, ,000 Total 1,293,000 1,621,000 *Figures do not include employees in the hardware sector Source : ibid Domestic Market Matures Complementing the continued growth in IT-ITES exports and for the first time ever in FY 2007 showed signs of breaking out of the hardware led growth and the trend of software and services gaining share is expected to continue The total size of the domestic market (including hardware) was USD 16.4 billion in FY 07. Traditionally, this segment has been led by MNCs. However, Indian firms are gradually gaining ground. Overtime this segment could become a larger SME play, as the mid-sized firms increase their levels of IT adoption Going forward For India to fully capitalize on the opportunity and sustain a disproportionate lead in the global IT-ITES space, stakeholders need to continue working towards timely and coherent execution of initiatives to address supply-side concerns across the following areas 251

23 Augmenting Talent Supply Creating world-class infrastructure Strengthening information security Enhancing operational excellence Providing regulatory support Catalyzing domestic market development Fostering an ecosystem for innovation INDUSTRY IS ON TRACK TO REACH THE TARGETED $60BN IN EXPORTS BY 2010 CAGR PERIOD DOMESTIC EXPORTS * TOTAL MARKET 10 YR TARGET FY % 31.2% 28.9% ACHIEVED FY % 34.4% 31.4% REQUIRED FY % 24.1% 23.2% Source : NASSCOM - McKinsey Study, NASSCOM STRATEGIC REVIEW 2007 & 2008 The year 2006 witnessed a revalidation of the Indian Information Technology - Business Process Outsourcing (IT-BPO) growth story, driven by a maturing appreciation of India's role and growing importance in global services trade. Industry performance was marked by sustained double-digit revenue growth, steady expansion into newer service-lines and increased geographic penetration, and an unprecedented rise in investments by Multinational Corporations (MNCs) - in spite of lingering concerns about gaps in talent and infrastructure impacting India's cost competitiveness. The sector looks set to close the year at record levels, with the revenue aggregate growing by nearly ten times over the past 10 years. The past few years have seen a gradual evolution of global perspectives about offshore outsourcing, from a mix of heightened exuberance and protectionist criticism - to a wider, more rational acknowledgement of the 252

24 economic imperatives, value drivers as well as possible risks of this phenomenon. Maturing socio-political attitudes and an appreciation of the proactive efforts by key stakeholders to further strengthen India's valueproposition are helping reinforce its position as the destination of choice. While alternate destinations are being explored to add multi-country delivery capability, India remains an integral part of any major global sourcing strategy. Positive market indicators including large unaddressed white-spaces and the unbundling of IT-BPO mega-deals with increasing shares of global delivery, strongly support the optimism of the industry in achieving its aspired target of USD 60 billion in exports by Yet, the size and scope of this opportunity, and the strategic advantages in realising its potential - are significantly larger. While India is uniquely advantaged to best address these opportunities, they are not lost to others. Timely, coherent and continued action is needed to ensure that India makes the most of these opportunities and maintains its lead Global Sourcing Trends in 2006 Worldwide technology and related services spending crossed USD 1.5 trillion in 2006, growing at 7.7 percent over Healthy tech-sector performance was sustained by above forecast GDP growth across the key economies of Europe and the US, as well as in emerging markets. Outsourcing continued to be the primary growth engine with global delivery forming an integral part of most sourcing strategies 1. After the early enthusiasm about alternate sourcing locations, firms are reaffirming their preference for India, reflecting a maturing appreciation of its unique value-proposition. India based delivery continues to grow, driven by local firms reporting steady growth in large contract wins and MNC investment on organic growth as well M & A activity reaching an unprecedented scale in Technology spending defined as per IDC classification of IT Services, software, hardware and BPO; worldwide R&D and engineering spending estimates amounting to USD 783 billion in 2006 have been excluded to avoid double counting. 253

25 4.3.2 India's IT-BPO Performance in 2006 The Indian IT-BPO sector (including the domestic and exports segments) is growing at an estimated 28 percent in FY Total revenue aggregate for the sector is expected to exceed USD 47.8 billion, nearly a ten-fold increase over the aggregate revenue of USD 4.8 billion, reported in FY1998, and direct employment is likely to cross 1.6 million. 3 As a proportion of national GDP, the revenue aggregate of the Indian technology sector has grown from 1.2 percent in FY1998 to an estimated 5.4 percent in FY2007. Net value-added by this sector, to the economy, is estimated at percent for FY Service and software exports remain the mainstay of the sector; FY07 export growth likely to beat forecasts and exceed 32 percent. 5 While the US and the UK remain the dominant markets, contributing to 67 percent and 15 percent of total exports respectively, firms are also keenly exploring new geographies for business development, and to strengthen their global delivery footprint. Banking, Financial Services and Insurance, and Technology (Hi-tech/ telecom) are the main verticals, accounting for nearly 60 percent of the total; Manufacturing, Retail, Media, Utilities, Healthcare and Transportation follow also growing rapidly. IT services exports, accounting for percent of total exports, are growing at an estimated 36 percent and are expected to reach USD 18.1 billion in FY2007. Newer areas of application and infrastructure management, testing, etc. are gaining traction, with their share in the business-mix growing steadily. BPO continues to grow in scale and scope, with firms increasingly adopting a vertical focused approach. Total exports for this segment are expected to exceed USD 8.3 billion in FY , growing by 32 percent over the 2 The fiscal year for the Indian economy follows a twelve month cycle spanning April - March. Hence all the figures reported for the current Indian fiscal year (FY2007) pertain to the industry's performance during April - December 2006 that have been used to arrive at the year end estimates. 3 Revenue figure includes the revenues from IT services, software, BPO, engineering services and hardware, earned in the domestic market as well as through exports either by Indian firms or by India-based centers of multinational firms. Employeebase figure does not include employment in the IT hardware sector. 4 Value added in the technology services sector is estimated at percent. 5 The earlier forecast for the expected growth in FY2007 was percent, released in June

26 previous year. Lastly, increasing traction in offshore product development and engineering services is supplementing India's efforts in own IP creation. This group is growing at percent and is expected to report USD 4.9 billion in exports, in FY Service-line expansion is aiding service providers to take on larger and more complex deals, and is driving up the average ticket size of contracts awarded to Indian firms. High offshore component of delivery and superior execution in multi-location delivery continue to be key differentiators. Broad-based industry structure; IT led by large Indian firms, BPO by a mix of Indian and MNC thirdparty providers and captives, reflects the depth of the supply-base. While the larger players continue to lead growth, gradually increasing their share in the industry aggregate; several high-performing SMEs also stand out. The domestic market is also picking-up, showing definite signs of breaking-out of the trend of hardware linked growth with the contribution of software and services exceeding that of hardware for the first time in FY The total size of the domestic market is expected to cross USD 15.9 billion in FY , a growth of 21 percent over FY Although this segment has been led by MNCs in the past few years, Indian firms are gradually gaining ground. Overtime this segment could become a larger SME play, as the mid-sized firms increase their levels of IT adoption India's Value Proposition India offers a unique combination of attributes that have established it as the preferred offshore destination for IT-BPO. Over FY , India's share in global sourcing is estimated to have grown from 62 percent to 65 percent for IT and 39 percent to 45 percent for BPO. The visibly higher preference for India is driven by its unmatched superiority when measured across a range of parameters that determine the attractiveness of a sourcing location. Abundant Talent: With over half the population of India aged less than 25 years, India's young demographic profile is a unique and an inherent advantage. This, complemented by a vast network of academic infrastructure 255

27 and the legacy effects of British colonization has contributed to an unmatched mix and scale of educated, English-speaking talent. Notwithstanding the strong fundamentals (of a disproportionately large talent pool), there has been growing concern about parts of the available pool being unsuitable for employment. The Indian IT-BPO sector has taken the lead in ensuring that requisite remedial actions are undertaken - well in time - to avoid any form of a talent crisis. Training has become a regular and significant component in the induction process of all IT-BPO firms. Several firms have also established dedicated facilities and teams, for employee skill enhancement initiatives. In addition to firm level efforts that are more focused on the immediate requirements, the industry is also driving a series of concerted efforts to structurally address the talent concerns. NASSCOM has, on behalf of the industry, led the development of a comprehensive skill assessment and certification programme for entry-level talent and executives (low, middle level management) and is organizing an image enhancement programme to build greater awareness about the career opportunities in the BPO segment. The industry is also working with the University Grants Commission and the All India Council for Technical Education, to encourage and facilitate greater industry interaction, thus helping them share relevant feedback, stay updated on developments in the industry and giving them an opportunity to incorporate positive changes to their curriculum and pedagogy. Further, it is proposed that a chain of 'finishing schools' be set-up, to supplement the graduate education attained by the next layer of candidates - considered unsuitable for direct employment in the IT sector. These initiatives are believed to be sufficient to address any potential supply gaps in the medium-term. However, a sustainable solution of the talent suitability issue requires a quantum increase in capacity and improvement in quality of the education system, and it is encouraging to note that this issue is being actively discussed at the highest levels of policy formulation in the country. 256

28 Cost Advantage: India has a strong track record of delivering a significant cost advantage, with clients' regularly reporting savings of percent over the original cost base. This cost advantage achievable from outsourcing to India is unlikely to go away - for a considerable period. There are several factors that support this. First, the absolute cost advantage, vis-a-vis other key markets is actually increasing. The percent wage inflation in India amounts to a lower dollar value increase in the wage bill, compared to the 3-4 percent average wage inflation in the developed countries. Secondly, there is still scope for further lowering infrastructure and overhead costs. In spite of the rapid decline in telecom costs in India, they are still not at internationally competitive levels. Finally, there is scope for further leveraging operational levers to drive efficiencies in the organization. A detailed industry benchmarking exercise, underway since 2005, has revealed that there is wide variation in the internal practices adopted across the industry, and suggests that the adoption of industry best-practices can further enhance operational excellence in Indian IT-BPO firms. This is also being evidenced in the performance of some of the best-in-class players. Contrary to concerns of rising wage inflation eroding the sustainability of India's cost-advantage, especially over the past two years, leading players have managed to grow at an above average rate - while sustaining their high levels of profitability. Emphasis on Quality and Information Security: Demonstrated process quality and expertise ill service delivery has been a key factor driving India's sustained leadership in global service delivery. Since the inception of the industry in India, players within the country have been focusing on quality initiatives, to align themselves with international standards. Over the years, the industry has built robust processes and procedures to offer world class IT software and technology related services. Today, India-based centres (both Indian firms as well as MNC-owned captives) constitute the largest number of quality certifications achieved by 257

29 any single country. As of December 2006, over 440 Indian companies had acquired quality certifications with 90 companies certified at SEI CMM Level 5 - higher than any other country in the world. The Indian IT-BPO sector is committed to extending its unmatched reputation in quality, to information security and is working on a four-pronged programme to achieve this objective. This comprises: a) engaging key stakeholders (policy makers, industry players, enforcement agencies, etc.) to build a common understanding of the key issues relating to information security in the context of global service delivery; b) educating industry constituents about developments in information security policies and practices; c) enactment of policy reform required to ensure compliance; and d) assisting in the effective enforcement of policy frameworks by encouraging the practice of periodic security audits and certification, developing and maintaining an incident response database and facilitating greater cooperation with enforcement agencies. These efforts have been endorsed by customer organizations and by representatives of independent regulatory bodies who have visited the operations of several IT-BPO firms and have found the information security environment in India to be matching and often exceeding the levels in their own home-countries. Notwithstanding the strong track record, Indian IT-BPO firms and the authorities are aware that vulnerability of information is a global problem and efforts towards minimizing these risks need to be continuous and constantly enhanced. The National Skills Registry and the Cyber-Iabs initiatives launched over the past months are now running successfully and the industry proposes to consolidate these efforts by establishing a Self- Regulatory - Organization that will identify a basic set of security and privacy standards, that member companies will be expected to adhere to. Rapid Growth in Key Business Infrastructure: 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 258

30 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. However, the impact of the telecom revolution on India's development is not restricted to providing international bandwidth / connectivity alone. In fact, the Indian telecom sector has emerged as an example of policy reform driving wide-reaching developmental gains in the country. 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 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 Yet, this is only a start. The low penetration levels and a growing consumer base are driving strong growth forecasts across all segments of telecom demand are likely to keep this sector in the spotlight for the foreseeable future. In addition to strong telecom links, cities across the country have witnessed steady growth in office facilities, hotels and other supporting business infrastructure matching global standards. 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. Deregulation of the aviation sector has provided a significant fillip to the availability and affordability of airline travel which in turn has also helped add a larger number to the list of delivery locations for potential expansion. The recent moves to privatize the development and maintenance of airports in key metros and to develop Greenfield airports in 35 other non-metros are expected to further improve access to domestic air travel. 259