Global Sourcing of Services

Achieving Sustainable and Inclusive Growth Through Global Sourcing of Services World Bank, PREM Conference 2008 April 16, 2008 This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.

TOPICS The transformational role of the IT/BPO industry Concluding remarks Perspectives on the IT/BPO offshore industry

PERSPECTIVES ON THE IT/BPO OFFSHORING INDUSTRY 1 Significant latent demand for offshore IT/BPO; less than 15% of the US$ 450 billion plus addressable market penetrated Adoption of offshore IT/BPO expected to accelerate given high client satisfaction, strong business case for offshoring 2 While many specialist destinations emerging, India continues to lead the offshore IT/BPO industry given superior supply of suitable talent 3

SIGNIFICANT “HEAD-ROOM” FOR GROWTH OF OFFSHORE IT, BPO AND R&D SERVICES * Includes Philippines, China, Russia, Eastern Europe, Ireland, Mexico; ** Includes addressable markets in currently offshoring industries *** Financial year Source: McKinsey Outsourcing & Offshoring practice; McKinsey Global Institute; Gartner 2005 database; IDC; NASSCOM Strategic Review 2007 ESTIMATES Others* India 1 12.4 Potential market for offshore IT, BPO and R&D services is at least US $450 billion Global offshore IT exports, FY*** 2007 US$ billion Current size ~190-220 Addressable market 27.0 8x Global BPO exports**, FY 2007 US$ billion Current size ~150 18.0 8x Addressable market R&D/engg services exports, FY 2007 US$ billion 5.4-10.4 Current size ~115-135 Addressable market 10-15 10x

SIGNIFICANT INCREASE EXPECTED IN ADOPTION OF OFFSHORE IT SERVICES 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 IT infrastructure services are offshore? 2007 CIO survey Today Per cent of respondents Per cent of IT infra structure offshored Per cent of respondents 34 2 3 76-100 51-75 26-50 1-25 0 Average In 3 years Per cent of IT infra structure offshored Per cent of respondents

CLIENTS SATISFACTION WITH OFFSHORE IT/BPO SERVICES IS HIGH… Source: P360  benchmarking, High performing IT O&O contracts survey 100 2 Application development 82 18 Not satisfied Satisfied IT units 80 20 Application maintenance 80 20 Package implementa- tion support Client satisfaction ( Average satisfaction level on a scale of 1 to 100) Basic voice 85 15 Basic data 85 15 Rules-based decisioning 78 22 Specialised voice 74 26 Not satisfied Satisfied BPO units . . . AND RISING Client satisfaction ( Average satisfaction level on a scale of 1 to 100) Change in satisfied clients in 2007 vs 2006 Basic voice 85 15 Basic data 85 15 Rules-based decisioning 78 22 Specialised voice 74 26 Not satisfied Satisfied BPO units

QUALITY IS LARGELY BEING MAINTAINED FOR OFFSHORE SERVICES-BPO EXAMPLE Source: McKinsey P360º Benchmarking Phase II (Jan 2007 till date) SLA compliance (quarter before last) Per cent SLA compliance (last quarter) Per cent 97.2 96.9 93.9 91.7 96.3 Basic data 96.2 Rules-based decisioning 93.9 Basic voice 93.6 Specialised voice 2

RATIONALE FOR OFFSHORING WILL REMAIN STRONG US$/FTE/Hour 2.3 82.0 Other direct costs Direct people costs 9.9 72.1 2.3 89.0 12.5 76.5 India-based unit (100% offshore) US-based unit (100% onsite) 2007 2010 India-based unit US-based unit Key assumptions

Offshore salary costs at each level increase based on historical growth rates

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

Other costs include all physical infrastructure costs

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

14.0 Source: Watson Wyatt; NASSCOM-Hewitt Compensation Benchmarking; Project360 metrics database for offshore units; team analysis 2

INDIA HAS INCREASED ITS SHARE IN THE GLOBAL OFFSHORE IT AND BPO INDUSTRIES… IT * Includes Philippines, China, Russia, Eastern Europe, Ireland, Mexico Source: NASSCOM Strategic Review 2007; McKinsey Global Institute 2005; neoIT; press articles Share in global offshore industry BPO Share in global offshore industry Per cent Per cent US$8.5 bn 2001 35 65 US$27 bn 2007 Others* India 100% = 55 45 US$18 bn 2007 100% = Others* India 2001 US$2.3 bn 3 46

… DRIVEN BY IT’S SUPERIOR SUPPLY OF SUITABLE LOW-WAGE TALENT * 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 Aggregate suitable* graduate talent pool for offshore IT and BPO industries Thousand 18 other Low- wage countries 3% Brazil 308 Thailand** 232 4 % 100% 324 4% 26% 15% Indonesia Total supply of suitable low-wage talent (28 countries) 4 % 6% China 13% Mexico Russia 355 Phili- ppines 13% Turkey** Poland 5% India*** 408 7% 8,043 3

OFFSHORE IT/BPO INDUSTRY HAS THE POTENTIAL TO TRANSFORM INDIA OVER THE NEXT 10 YEARS What the IT/BPO industry can do for India Economic growth engines Potential size of India’s offshore IT/BPO industry (2015) 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 Contri-bution to GDP Per cent 12-15 17 45 US$ billion

THE OFFSHORE IT/BPO INDUSTRY IS ON TRACK TO ACHIEVING IT’S MEDIUM TERM ASPIRATIONS US$ billion in export revenues IT/BPO exports expected to continue strong growth 1.5 FY 2002 17.2 FY 2005 60.0 FY 2010 E BPO IT 7.3 8x The IT/BPO industry expected to have significant impact on India’s economy GDP growth Source: NASSCOM McKinsey 2005 Report 35.0 Estimated 17% of India’s incremental GDP growth over the five year period (2005-2010) 17% Over 80% of the growth in exports will be between 2005 to 2010 Export growth Estimated 10 million total employment by 2010 Employment creation

OFFSHORE IT/BPO INDUSTRY IS A MAJOR EMPLOYMENT–CREATION ENGINE 8 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 >2.8x 2.3 Total employment generated >9 >6.5 Indirect and induced employment Direct employment Net impact on employment in India Million jobs, 2010

THE IT/BPO INDUSTRY IS TRANSFORMING THE QUALITY OF TALENT IN INDIA Increase capacity of higher education system Encourage people to join the offshore IT and BPO industries Improve suitability of graduates for IT/BPO jobs BPO awareness building initiatives 1 6 5 4 3 2 “ Industry-owned” integrated skill development program self regulating associations of private higher education institutes Output-based ranking of colleges Develop scalable e-learning programs Faculty quality and coverage improvement initiatives

THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA’S COMMERCIAL REAL ESTATE From . . . . . . to From . . . 75-80% of additional Class A office space demand in India comes from the IT/ BPO industry . . . to

THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA’S WORK ENVIRONMENT From . . . . . . to Improved work environment with modern facilities From . . . . . . to

THE IT/BPO INDUSTRY HAS RAISED INDIA’S DISPOSABLE INCOMES From . . . . . . to Starting salaries at IT and BPO units (>US$ 300 per month) exceed the retirement salaries of the previous generation From . . . . . . to

THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA’S CIVIC SERVICES From . . . . . . to Improved citizen services (e.g., registrations, payments) through e-governance From . . . . . . to

CONCLUDING REMARKS 1 We are only at the start, and not at a mature state, of the offshore industry evolution 2 The pace, breadth, and depth of offshore services is rising 3 Global demand will exceed near-term suitable talent supply in every country 4 It is not “India or” but “India and” 5 The IT/BPO industry has the potential to transform a nation 6 Can trigger fundamental changes in basic areas (e.g., education, infrastructure, capabilities of players) 7 Powerful engine to drive sustainable and inclusive growth