Perspective 2020: Transform Business, Transform India

February 11, 2009

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PERSPECTIVE 2020: KEY MESSAGES

The decade in review

Transforming business, transforming India

Shifting customer needs and delivery

An agenda for action

PERSPECTIVE 2020: KEY MESSAGES

The decade in review

An unparalleled impact on Indian economy in the last ten years Significant returns to all stakeholders A large unfinished agenda remains

Transforming business, transforming India

Shifting customer needs and delivery

An agenda for action

Global economic crisis will have a far-reaching and as yet uncertain impact

THE TECHNOLOGY AND BUSINESS SERVICES INDUSTRY HAS HAD AN UNPARALLELED IMPACT ON THE INDIAN ECONOMY
Growth of Indian technology and business services exports US$ billion 47

Actual

Aspiration

50

18 2 1998 8 2002 2005 Mar Dec 2009 2008 4 16**

Share of GDP* Per cent

Share of exports*** Per cent
* ** *** Source:

<1 4

Total export revenues as a percentage of nominal GDP Based on FY08 performance Technology and business service exports as a percentage of total exports (merchandise exports and service exports) RBI Annual reports 1998 to 2008; WMM (Global Insight)

THE INDUSTRY HAS HAD A RESONATING IMPACT IN THE BROADER SOCIETY

Incremental jobs created Million; FY 1994-2005 Share of total urban jobs* Other areas of impact

Contribution to education:
6-7x fold increase in tertiary education capacity in states that account for 90% of exports

8.7

45%

Diversity and global exposure:

4.0 2.9** 1.1 Indirect Direct

33% 12%

proportion of women in the workforce estimated to be 30% in 2008 and increasing; around 30% of delivery outside India

Offset oil imports: Industry

Total organized urban jobs Technology/ business services
exports offset close to 65 per cent of Indias cumulative net oil imports over past decade, strengthening foreign reserves

* Total urban jobs in FY 1994 amounted to 81.8 million and 90.5 million in FY 2005 ** High multiplier effect; for every direct job created 2.6 additional jobs created in indirect employment Source: Institute of Applied Manpower Research; The Rising Tide Employment and Output Linkages of IT-ITES; February 2007; Indian IT/ITES Industry: Impacting Economy and Society 2007-08

THE GLOBAL ECONOMIC CRISIS WILL HAVE A FAR-REACHING AND AS YET UNCERTAIN IMPACT ON THE INDUSTRY
Historic data indicates a moderate impact IT spend as per cent of GDP 4.2 3.6 3.0 2.4 IT intensity peaked in 2000 But

US EXAMPLE

Customer
feedback is polarised

Severity of
the downturn is far greater

1.8
1.2 0.6 0 1970 1980 Trend at 2.9% YoY increase in IT intensity 1990

Current IT intensity is much less than at peak levels 2000 2007

Political and
regulatory pressures are escalating

Source: BEA; McKinsey analysis

PERSPECTIVE 2020: KEY MESSAGES

Demographic shifts will fuel the growth of new sectors, markets and service lines The promise of technology to create new opportunities needs to be balanced by the risk of erosion in core markets India can become a global innovation hub and own business systems in at least three areas ICT-enabled solutions can drive socio-economic inclusion of 30 million citizens each year

The decade in review

Transforming business, transforming India

Shifting customer needs and delivery

An agenda for action

ASIA (INCLUDING JAPAN) WILL BYPASS EUROPE IN THE GLOBAL ECONOMY BY 2020
Regional share of global GDP Per cent
Share of global GDP* 1990 100 Middle East & Africa Latin America 80 5% 5% 8% 18% 31% 2020 7% 5% 20% 10% 25%

Asia (except Japan)

Japan Europe

60

40

20 0 1990 95

North America

33%

33%

00

05

10

15

20 2025
7

* Estimates ** Brazil, Russia, India, China Source: McKinsey Global Forces research

WORK FORCES WILL DECLINE AND AGEING POPULATIONS INCREASE IN SELECT DEVELOPED COUNTRIES
Increase in retiree (60+ years) population: United States Decrease in working age (15-60 years) population: Japan

Millions of people

Millions of people
83
54

75

38

16

2008

2020

2008

2020

Current offshore base in India 1.6 million

Source: UN population prospects, 2004; McKinsey Global Forces research 8

TODAYS CORE SERVICE LINES ARE AT RISK OF SHRINKAGE

Service line Traditional IT AD Technology services AM SI IT Consulting Total Rule based decision making Basic voice Business services Basic data High-end offshoring* Total
* Includes specialised voice Source: NASSCOM data; McKinsey analysis; expert interviews

Highest risk of erosion

Industry revenue US$ billion, 2008 3 14

Automation of
4
1 1 23 basic services (e.g., testing, level 1 AM)

Productivity gains Increasing

standardisation

3
5

Interactive voice
recognition techniques 2
1 11

New technologies
such as optical character reading to automate data entry

THE INDUSTRY CAN TRANSFORM INDIA BY HARNESSING TECHNOLOGY TO ENABLE INCLUSIVE GROWTH
Areas Potential of ICT solutions 50% of Indians do not have access to primary healthcare technology can provide it at half the cost 80% of Indian households are unbanked technology can enable access for 200 million families India faces a 3-fold shortage in teachers technology can address this through remote solutions

Healthcare

Financial services

Education

Public services

India suffers from a leakage of 40-50% in public food distribution - technology can ensure transparency
10

Source: Expert interviews; McKinsey analysis

PERSPECTIVE 2020: KEY MESSAGES

The decade in review

The industry landscape will be fundamentally altered

Transforming business, transforming India

There are several new business models for providers to consider

Shifting customer needs and delivery

A majority of incremental growth will be driven by opportunities that are untapped today
An agenda for action

11

2020 WILL PRESENT A DRAMATICALLY ALTERED LANDSCAPE (1/2)

Past decade 2020

Demand

Concentrated footprint
1 Market 75% with Fortune 500 80% from US/UK 75% from BFSI, Telco, Manufacturing 60% from IT services

Significant opportunity outside

todays core markets SMB BRIC, GCC, Japan, ROW Public sector and Healthcare

Predominantly private
sector

Public sector, Government

owned or influenced companies

Managing for cost,

2 Customers productivity and quality

Innovation, end-to-end
transformation, risk & compliance

Labour arbitrage
dominant value driver

Access to talent and expertise Global delivery

12

Onshore/offshore mindset

2020 WILL PRESENT A DRAMATICALLY ALTERED LANDSCAPE (2/2)

Past decade 2020

Supply

India accounting for more

than 50% of the low cost workforce 3
Talent

Global people supply chain with

globalised recruiting and talent practices
globalised expertise

Delivery centric management Multiple management tracks, Recruiting and training as

key differentiators

Emphasis on learning, knowledge

management, research spending

Trainable talent pool

Deployable talent pools

13

THERE ARE MULTIPLE STEP-OUT BUSINESS MODELS FOR PROVIDERS TO CONSIDER

How to compete (competitive advantage) Multi-client services/ products Domain expertise 4 Solution approach Saas enabled 3 Domain approach Vertical specialist 2 Customer-centric approach Full-service provider 1 Delivery approach

Players today

Step-out plays NOT EXHAUSTIVE

Low cost product

Customer intimacy

Delivery excellence

Low-cost Large enterprises SMBs (Fortune 1000) Developed markets

BRIC specialist

Large SMBs enterprises New geographies (BRIC)

Where to compete (customer segments)

* Independent verification and validation Source: McKinsey analysis 14

PERSPECTIVE 2020: KEY MESSAGES

Success will rely on concerted action by industry stakeholders (companies, NASSCOM, government) anchored on a fivefold vision Catalysing growth beyond todays core markets Establishing India as a trusted global hub for professional services Harnessing ICT for inclusive growth Developing a high caliber talent pool of over 4 million people

The decade in review

Transforming business, transforming India

Shifting customer needs and delivery

An agenda for action

Building India as a preeminent

innovation hub

15

COMPANIES CAN EMERGE AS WINNERS THROUGH 4 ACTIONS

Target transformative acquisitions

Ring fence talent and knowledge investments

Consider strategic alliances for scale Develop isolutions for domestic endcustomers
Make strategic investments

Deepen end to end capabilities in select areas Target recession resilient sectors (Healthcare, BRIC, climate change)

Rebalance customer/ services portfolio

Fundamentally transform existing cost structure 20 to 30% lower

Strengthen operations/ delivery

Segment customer base for resiliency

Adapt offering/sales approach

Create a portfolio of downturn services Invest in transformative big bets

Balance delivery foot-print to hedge against concentration and forex risk

Source: McKinsey analysis

16

AN AGENDA FOR ACTION ANCHORED ON A 5-FOLD VISION

Intellectual property framework (especially enforcement) Centers of Excellence
Entrepreneurship
Building India as a preeminent innovation hub 5 Developing a high caliber talent pool of over 4 million people Five themes Catalysing growth beyond todays core markets 1

Winning through the downturn Reinvented business models

New verticals, geographies and customer segments

Primary and tertiary education quality and scale up Curriculum and faculty development

3
Harnessing ICT for inclusive growth

Establishing India as a trusted global hub for professional services

Improved infrastructure (e.g., satellite townships) Corporate governance National security Robust domestic demand Global branding

ICT solutions for healthcare, education, financial services, public services Connectivity and access (e.g., broadband rollout) Soft infrastructure (e.g., IT literacy)

17

PERSPECTIVE 2020 PAINTS THE WAY TO TRANSFORM BUSINESS, TRANSFORM INDIA

What has lead to the success of the industry thus far?

What will be the altered landscape of 2020, including growth engines and industry revenue potential? How can the Indian industry lead the way in innovation-led transformation of global business and technology-led inclusive growth of the nation? What are internal and external threats to Indias leadership and how can it sustain and improve its competitiveness in 2020? What is the industry vision for 2020, and resulting imperatives and actions for industry stakeholders (companies, NASSCOM, the government)?

Report release in March

18

BACKUPS

19

Social and environmental trends

THERE IS AN INCREASING NEED TO ADDRESS CLIMATE CHANGE AND ICT IS EMERGING AS A KEY ENABLER
ICT can play a role in abatement of a potentially dramatic rise in global greenhouse emissions by 2020 Greenhouse gas emissions GtCO2e ICT enables at least 35% of global abatement potential

BACKUP ESTIMATES
Select ICTenabled abatements

52 12 40

30

22

22

Emissions in 2002

Incremental Emissions emissions in 2020E

Potential abatement

Emissions in 2020 with abatement

20

Source: McKinsey analysis

Energy efficiency/climate change

OPPORTUNITIES EXIST ACROSS A BROAD SET OF APPLICATIONS AND ARE NOT LIMITED TO THOSE TRADITIONALLY ASSIGNED TO ICT
Abatement potential, GtCO2e
Industrial motor optimisation Industrial process automation
0.68 0.29 Industrial processes efficiency 1.52 0.50

NOT EXHAUSTIVE BACKUP

Efficient logistics and supply chain Private transport optimisation

0.25 Dematerialization* 0.16 Efficient vehicles 0.10 Traffic flow monitoring, planning simulation

Efficient buildings

ICT efficiency

Efficient transport

Smart buildings Telecommuting

1.68 0.26 Efficient power generation

2.03 0.40

Smart grid Combined heat and power (CHP)

* Excluding telecommuting Source: McKinsey analysis

21