Offshoring And Outsourcing In India The Global Business Debate

Offshoring and Outsourcing in India: The Global Business Debate Poonam Barua Director PAMASIA Global Corporate Advisory New Delhi email: pamasia@vsnl.com

Economic Indicators
Largest democracy: 1.1 billion population
1991: Wide-ranging reforms to open and deregulate the economy
GDP growth over 8% in 2005-6 – fastest growing economies in the world, with compounded growth at 5.7%
Gross GDP - $3 trillion – fourth largest economy in the world – after USA, Japan and China
Annual per capital income is $2,880 – one of the lowest in the world
Indian’s remit about $18.3 b. back to India annually – one of the highest in the world
In 2003: total of 9, 500 listed companies on the BSE and NSE (23 registered stock exchanges)
Total market capitalization is 22 –25 % of GDP
Top 100 BSE companies represent almost 86% of market cap
State-owned enterprises account for nearly 32 % of BSE market cap

India’s Market
India’s economy is expected to grow over 6% - faster than any other country in the world ( Duetshe Bank Research)
India is one of the fastest growing markets in the BPO space
India is the world’s fourth largest economy- adjusted for purchasing power parity (PPP) – next only to U.S, China, Japan
There is a large potential in the SMB, and mid-market space, and for solutions enabling the (offshore) services industry

Goldman Sachs Report of 1 October, 2003 – "Dreaming with BRICs: The path to 2050“
India’s GDP will reach $ 1 trillion by 2011,
$ 2 trillion by 2020, $ 3 trillion by 2025,
$ 6 trillion by 2032, $ 10 trillion by 2038, and
$ 27 trillion by 2050, becoming the 3rd largest economy after USA and China.
In terms of GDP:
India will overtake Italy by the year 2016
France by 2019, UK by 2022, Germany by 2023, and Japan by 2032.

India Corporate Profile …
Market Cap No. of Companies
(April 2006)
> $ 20 billion: 3
> $ 10 billion: 9
> $ 5 billion 18
> $ 1 billion 62
> $ 500 m 74
** Growing over 100 Global Indian mnc’s that will be above $1 billion –
** 50% of the over $1 billion companies are currently in public sector
No. of listed companies on BSE 10,000
No. of companies on Nasdaq
No. of companies on NYSE

IT –led sectors
McKinsey and Nasscom: India's revenues from IT industry will reach $87 billion by 2008
Profile of IT-led Sector:
Tier 1 companies – ie. Top 5 firms
Account for 32 % of total software export
Tier 2 companies –ie. Revenues Rs. 1 billion - Rs. 10 million
Account for 24 % of the industry
MNC – back-ends
Account for about 26 % of the industry
Focused companies – domain/ service line/ products/
Account for about 3-4 % of revenues
Small companies – ie. less than Rs. 1 billion revenues,
Account for 12-14 % of the market
Driving Global Leadership…

New emerging areas
bio-informatics, bio-technology, genomics, clinical research and trials – Ranbaxy, Cipla, Piramal, Reliance Lifesciences, Biocon
Worldclass Manufacturing
Bharat Forge has the world's largest single-location forging facility, its clients include Honda, Toyota and Volvo amongst others.
Hero Honda with 1.7m motorcycles a year is now the largest motorcycle manufacturer in the world.
India is the 2nd largest tractor manufacturer in the world.
India is the 5th largest commercial vehicle manufacturer in the world.
Ford has just presented its Gold World Excellence Award to India's Cooper Tyres.

Worldclass Manufacturing – ctd.
Hyundai India will become global small car hub for Korean giant -- supplying half a million cars to Hyundai Korea, HMI and Ford – by 2010
Aston Martin latest luxury sports car, AM V8 Vantage, is being prototyped by an Indian-based designer.
80 of the World’s 117 SEI CMM Level-5 companies are based in India.
5 Indian companies recently received the globally acclaimed Deming (TQM) prize.
Retail Sector: Late Riser
Largest retail density worldwide: about 15 million retail outlets
Retail trade will be 10-11% of GDP
Growing at 158 % between 2003-5 – compared to 40 % in other emerging markets
Valued at $19 billion currently compared to China’s $50 million

Business Acquisitions: 2005-6
Tata Tea: acquires Energy Brand USA- $677 m.
Wipro: cqired mpower, Cmangao, and Quantech USA- $58 m.
ONGC: takes over Ominex, Columbia -- $45 m.
Tata Steel: $8 billion bid for Corus Steel
Aban Llyod: buys Norwegian firm Sinvest for $425 m.
Dr. Reddys: acquires Betapharm Germany for 571 m.
Mahindra & Mahindra: takes over Jeco Holding in Germany for Euro 140 m.
Sulzon Energy: Buys Hanson Transmission in Belgium for $565 m.
Ranbaxy Labs: Takes over Terapia in Rumania for $324 m.

Videocon India: takes over Daweoo Electronics in South Korea for $648 m.; buys CPT Thomson, France, for Euro 240 m.
What are they buying:
Oil and Gas
Pharma and Healthcare
IT & IT enabled services
Food and Beverage
Manufacturing
Others

Global BPO and process-engineering
Geneva-based STMicroelectronics is one of the largest semiconductor companies to develop integrated circuits and software in India.
Texas Instruments was the first to open operations in Bangalore, followed by Motorola, Intel, Cadence Design Systems and others.

Market Dynamics…
Mobile phones are growing by about 1.5 Million a month. Long distance rates are down by two-thirds in five years and by 80% for data transmission.
Wal-Mart sources $1 billion worth of goods from India - half its apparel. Wal-Mart expects this to increase to $10 Billion in the next couple of years.
GAP sources about $600 million and Hilfiger $100 million worth of apparel from India.
There are about 200 call centres in India with a turnover of $2 billion and a workforce of 150,000.
100 of the Fortune 500 are now present in India compared to 33 in China.

Talent Dynamics…
Top 5 American employers in India:
General Electric: : 17,800 employees Hewlett-Packard : 11,000 employees IBM : 6,000 employees American Express : 4,000 employees Dell : 3,800 employees
Top 5 Indian employers:
Infosys: 40,000
Wipro: 35,000
TCS: 100,000
Reliance: 120,000
Satyam: 35,000

India’s Talent Advantage
India has the world’s largest pool of English-speaking software engineers, permitting fast and large-scale project ramp-ups
Flexibility, eagerness to learn, and technical proficiency are key characteristics
More than 700,000 software professionals
250,000 of them in top-tier companies
Access to talent from top universities available in the country
at low cost
With more than 250 universities, 1,500 research institutions and 10,428 higher-education institutes, India produces 200,000 engineering graduates and another 300,000 technically trained graduates every year. 2 million additional graduates qualify annually.
The Indian Institute of Technology (IIT) is among the top three universities from which McKinsey & Company, hires most.

Advantage India.. Global Outsourcing Trends: IT-enabled Services – BPO’s & KPO’s

Key drivers for Global offshore/ outsourcing as a strategic alternative
Increasing global competitiveness
Access to global talent
Economies of scale
Process engineering and enhancements
Wage arbitrage
Increased profit margins
Improvements in quality

India holds 55% of the global Offshore BPO Industry More than ½ of Fortune 500 companies have outsourced to India India BPO Services grew by about 49% in 2004 Indian BPO is growing at 7 times the domestic GDP Indian outsourcing is moving up the value-chain LOB’s developing: HR and Finance Indian KPO (knowledge process outsourcing) to grow from $1.2 billion to $15.5 billion in 2010 (ie. 75% of the global KP market) Advantage India..

The real economics of offshoring * Estimate based on historical U.S. reemployment trends Source: McKinsey Global Institute
. . . and makes the global pie that much bigger
. . . creates new value from reemploying U.S. labor* . . .
$1 previously spent in U.S., now offshored to India . . .
0.33
Taxes ($0.04)
Revenues ($0.20)
Local suppliers ($0.09)
. . . delivers value to India . . .
0.67
Cost savings ($0.58)
Goods/ services sold ($0.05)
Profits from Indian ventures ($0.04)
. . . brings savings and returns to U.S. . . .
1.45-1.47 0.45-0.47 $1.00

India’s Value Proposition for ITES-BPO Industry: PQRS – Productivity, Quality, Rate, Scalability factor
Abililty of Indian vendors to ramp-up operations rapidly
Widening breadth of services
Shift towards high-value services
Sustained cost advantage – nearly 40-50 % cost savings in India offshore operations
Delivery process enhancement and improvement
Access to an abundant skill pool : India has the largest english speaking IT talent pool in the world, over 120,000 trained IT professionals and about 3 million other graduates added each year.
Global quality credentials –ISO,TQM, 6 SIGMA

Key markets:
U.S : 2/3rds of total market
Western Europe, mainly U.K. : 20 % approx.
Market profiles:
Customer Care: 35 % of the sectors employee base at 122,000 employees, and 1/3 of revenues
Finance: 25% of revenues
Administration: 16 % of revenue
Content Development: 13 % of revenue

Ecosystem:
View from SAP Labs- Offshoring India Center
Bangalore is one of the world’s top IT clusters
System Integrators can be enabled to implement SAP NetWeaver and the Business Process Platform for customers
Independent Software Vendors (ISV) can provide platform-based composite solutions

Cost Factor
India is the one of the most cost-efficient locations for many mnc’s from Europe and U.S.
Mckinsey Study:
and will be below 50% cost of Germany at least for the next 5 years (--SAP Labs)
“ Context” can be outsourced to a large spectrum of service providers

Offshoring Engagement Models
Outsourcing: contracting a single supplier to perform full range of Application Development and Maintenance
Selective Sourcing: contracting a vendor to perform a portion of Application Development and Maintenance
Co-Sourcing: a partnership that is developed on a shared management arrangement to cooperatively build applications or systems
Out-Tasking: engaging suppliers to perform a specific task whilst the organization maintains control of the strategy and integration
Skills Infusion: integrating experts into the team of impart & build expertise within
Resource services: hiring of delivery staff to manage performance bottlenecks
Advisory Services: ad-hoc services to fulfill gaps &/or specialist advice

Phobias of Outsourcing : … view from IBM

The Seven Phobias of Offshoring

People

Geo-Political

Service Provider

Fear Of Unknown

What Executives are asking about India?
Will economic reforms continue…India’s noisy democracy perplexes many MNC Executives
Are the multinationals really welcome?
Isn’t China the richer opportunity?
How do successful multinationals approach India?
Is offshoring in India worth the political risk?
Will infrastructure be a problem?
Will India protect intellectual property?

China Vs India
Average Wage costs:
China > India
HR Managers: China $16,600; India $ 7,900
Financial Experts: China $ 6,900; India $ 4,400
Rate of Wage Increase: India 11.5%; China 7.5%
Employment Culture: China.. Driven by personal accomplishment, fair pay and benefits; India.. Driven by confidence in senior management and organizational reputation

Poonam Barua
Director
PAMASIA
Global Corporate Advisory
New Delhi
email: pamasia@vsnl.com

Offshoring And Outsourcing In India The Global Business Debate

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