CONFIDENTIAL

Extending Indias Leadership of the Global IT and BPO Industries

NASSCOM-McKinsey Report 2005

MUM-INO510(NASSCOM)(Extending India's Lead of G-IT&BPO)-20051209-(SK)-(df)

Key findings
Only 10% of the addressable market has been captured in
offshore IT and BPO

Indias offshore IT & BPO industries on track to achieve US$

60 billion in exports revenue by 2010

Offshore IT & BPO industries have the power to drive Indias

economic future

Immediate action is required to develop suitable talent, buildout urban infrastructure, and achieve operational excellence

Five winning approaches are likely to emerge for companies

MUM-INO510(NASSCOM)(Extending India's Lead of G-IT&BPO)-20051209-(SK)-(df)

Only 10% of the addressable market has been captured in offshore IT and BPO
Addressable markets of at least US$ 300 billion Global offshore IT industry, FY*2005 Key drivers Offshoring of Large white spaces in major industries More complex and high-risk services Fragmented and high-interaction processes 18.4 Others*** India 6.4 12.0 Current size
* ** *** Source:

ESTIMATES

Global BPO industry**, FY 2005 US$ billion 12x 120-150

US$ billion 9x

150-180

11.4 Others*** India Addressable market 6.2 5.2 Current size Addressable market

Financial year April 1 2004 to March 31 2005 Includes Philippines, China, Russia, Eastern Europe, Ireland, Mexico Includes addressable markets in currently offshoring industries McKinsey Outsourcing & Offshoring practice; McKinsey Global Institute; Gartner 2005 database; IDC; NASSCOM Strategic Review 2005

MUM-INO510(NASSCOM)(Extending India's Lead of G-IT&BPO)-20051209-(SK)-(df)

Innovation can further expand the addressable market

US$ million
Potential through global resourcing for major pharma company* Avoid slippage Increase capacity Enhance analytics 300-500 Increase monitoring and control Examples

PHARMACEUTICALS EXAMPLE

Improve quality of trial data and

compliance

Develop products below

US$1 billion NPV offshore

Labour cost savings

300-500

Expand analyst support to include

smaller geographies and brands

Benefits beyond cost

Reduce unnecessary payments to

CROs through offshore monitoring Follow up with patients to ensure compliance (chronic, high-priced therapies) to identify emerging trends faster

Total benefits

600-1,000

Improve decision making

Add offshore MIS/analytical support

* Estimate based on typical US$10 billion pharma company Source: McKinsey Outsourcing & Offshoring practice

MUM-INO510(NASSCOM)(Extending India's Lead of G-IT&BPO)-20051209-(SK)-(df)

Indias offshore IT and BPO industries can achieve US$ 60 billion by 2010
Potential for Indias offshore IT and BPO industries, 2010 US$ billion Projected CAGR Projected CAGR 28% 50.0 25.0 20.0 17.2 5.2 12.0 FY 2005 2008 (Dec) FY 2010 30.0 35.0 >37 ~60.0 Per cent

BPO Offshore IT

>25

* Includes R&D and technical services Source: NASSCOM McKinsey Report 2002; NASSCOM Strategic Review 2005; McKinsey Global Offshore Market Evolution and Market Share Models

MUM-INO510(NASSCOM)(Extending India's Lead of G-IT&BPO)-20051209-(SK)-(df)

Significant growth will come from nascent drivers

Offshore IT revenues BPO revenues CAGR Per cent ~35
6.6 0.7 4.8

US$ billion

US$ billion

CAGR Per cent

25 ~25 16 30 35
2.5 0.9 1.7 2 1.3

37 33 38 35 35 55 37

Others (0.6) R&D Services Consulting Services (0.2) System Integration Traditional IT outsourcing Application Development & Maintenance
3.1 1.1 1.0 6.6 13.7 10.8

60

Pharma (0.2) Telecom (0.4)

7.6

12.1

Manufacturing (0.5) Travel and hospitality (0.2) 16 Banking Insurance Horizontals 5.2
4.8

42

0.8 1

4.5

34

2005

2010

2005

2010
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MUM-INO510(NASSCOM)(Extending India's Lead of G-IT&BPO)-20051209-(SK)-(df)

Offshore IT & BPO industries have the power to drive Indias economic future
Indias offshore IT and BPO industries can:

! add 1% to Indias GDP growth per annum ! account for over 44% of export growth
over the next 5 years

! create 2.3 million direct jobs and over 6.5 million

indirect jobs by 2010

Assuming a 6.5% growth rate in GDP Includes merchandise trade and services (travel, transportation, insurance, GNIE, and miscellaneous). Does not include transfers and income accounts 3 assuming exports grow at historical growth rates 4 Includes impact of direct and indirect employment created 5 Assumes 6.5% growth in GDP and successful implementation of employment creation initiatives outlined in the 10th plan for Planning Commission Source: Centre for Monitoring Indian Economy (CMIE); Planning Commission; interviews; press articles; Directorate General of Commercial Intelligence and Statistics (DGCI&S)
1 2

MUM-INO510(NASSCOM)(Extending India's Lead of G-IT&BPO)-20051209-(SK)-(df)

An additional 500,000 suitable graduates beyond projected supply are needed in the next five years
Thousand graduates 500 150 350 2,300
850

ESTIMATES

1,100
350

Indias offshore IT employment Indias BPO employment

700
350 350

750 1,450

Current aggregate employment (2005)

Cumulative incremental talent available in next 5 years based on current supply trends

Additional talent Projected talent required to requirements sustain leadership for Indias offshore IT and BPO industries in 2010
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Source: McKinsey global offshoring model; interviews

MUM-INO510(NASSCOM)(Extending India's Lead of G-IT&BPO)-20051209-(SK)-(df)

Massive urban infrastructure build-outs are imperative

Distribution of employment in Indias offshore IT and BPO industries* Millions of people Creation of 5 Gurgaon plus satellite townships** ~1.0 Development of 5-7 Pune-plus Tier II cities*** ~0.6 ~2.3 ~0.7

ESTIMATES

Tier II cities

0.1

0.7 0.6

~1.6

Tier I cities

Employment, 2005

Additional employment in 5 Tier I cities**

Additional employment in 5-7 Tier II cities***

Employment, 2010 (projected)

* Assuming that India retains current share of the offshore market in 2010 ** Expansion in Tier I cities (New Delhi, Bangalore, Hyderabad, Bangalore, Chennai and Kolkata) occurs through creation of a Gurgaon-plus township; 16 million sq ft of class A space added in each new Gurgaon-plus over 5 years *** 5-7 tier II cities expand to the extent of Punes expansion; 9 million sq ft of class A space added in each new Pune-plus over 5 years Source: Interviews with State Governments, IT and BPO companies, real estate developers and consultants; Knight Frank India Commercial Property Review Q3 2004; 8

MUM-INO510(NASSCOM)(Extending India's Lead of G-IT&BPO)-20051209-(SK)-(df)

Customer expectations are evolving

Weight-age assigned to key operating areas, per cent
Innovation & productivity Speed and flexibility Risk
30 5 5 20 20 22 25 10 20 5 15 28

Additional value

Quality

Cost

40

35 20

Basic requirements

Offshore timeframe

<1 year
I am currently most concerned about achieving the highest levels of quality at the lowest cost - UK banking customer

2-3 years
I would like BPO providers to focus on delivering higher levels of productivity every year US cards customer

3-5 years
I would like to have more focus on innovation and productivity as soon as the basic offering is solid - US mortgage customer

Source: Benchmarking exercise; interviews

MUM-INO510(NASSCOM)(Extending India's Lead of G-IT&BPO)-20051209-(SK)-(df)

Significant head room for offshore units to improve performance

Metric Cost Fully loaded cost in a standard operating environment (US$/hour/FTE) SLA adherence (per cent critical SLAs met) last year SLA adherence (per cent critical SLAs met) year before last 60-90 90-180 0-5 < 60 <90 >10 Industry average 10-12 Industry best <7

Quality

90-95

>98

Speed & Flexibility Innovation& productivity

Average time required to achieve stable operations (days) Average time required to double current capacity (days) Volume fluctuations handling capacity over forecasts (per cent over forecasts) Workforce in offshore only product/services (per cent total FTEs) Productivity improvement (per cent improvement in transaction productivity per annum) Data privacy breaches in last one year (number of breaches)

2-5 <1

6-10 <7

Risk

1-5

0
10

* Full time equivalents; ** Service level agreements; *** Include all critical to quality metrics agreed upon with customer Source: Process360 benchmarking exercise

MUM-INO510(NASSCOM)(Extending India's Lead of G-IT&BPO)-20051209-(SK)-(df)

Action agenda: five key initiatives are needed to sustain Indias leadership
Talent
Set up focused-Education-Zones to improve quality of higher
education Decentralise higher education in stages and shift to a largely demand based funding system Pilot industry owned and government facilitated integrated skill development and certification programme for BPO

Infrastructure
Develop 10-12 integrated townships with associated urban
infrastructure including international airports, roads and land development

Trade development
Accelerate efforts to ensure free trade in services through
the Mode 4 negotiations at the WTO and through trade agreements with select countries
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MUM-INO510(NASSCOM)(Extending India's Lead of G-IT&BPO)-20051209-(SK)-(df)

Five winning approaches are likely to emerge for companies

Process 1 Global Champion 4b Process Re-engineering BPO 5 Vertical Contractor

Industry specific application

2a Vertical IT Specialist 4a Platform BPO

3 2b Horizontal IT Specialist ADM Factory

Horizontal Infrastructure specialized application

Consult
Source: Interviews

Build and integrate

Install and maintain

Operate
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MUM-INO510(NASSCOM)(Extending India's Lead of G-IT&BPO)-20051209-(SK)-(df)

THANK YOU

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