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Achieving sustainable growth_IT

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    Achieving sustainable growth_IT Achieving sustainable growth_IT Presentation Transcript

    • CONFIDENTIAL Achieving Sustainable and Inclusive Growth Through Global Sourcing of Services Barnik Chitran Maitra McKinsey and CompanyThis report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distributionoutside 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 Perspectives on the IT/BPO Offshore industry The transformational role of the IT/BPO industry Concluding remarks 1
    • PERSPECTIVES ON THE IT/BPO OFFSHORING OUTSOURCINGINDUSTRY Significant latent demand for BPO&O; less than 15% of the $450 billion plus addressable market penetrated yet Adoption of offshore IT/BPO expected to accelerate given high client satisfaction, strong business case for offshoring While many specialist destinations emerging, India continues to lead with around 65% and 46% shares in IT and BPO respectively 2
    • SIGNIFICANT “HEAD-ROOM” FOR FURTHER GROWTH ESTIMATES1 OF THE OFFSHORE IT/BPO/R&D SERVICES INDUSTRY Others* Addressable markets for offshore IT/BPO/R&D India exports is at least US $450 billion Global offshore IT & Engg exports, Global BPO exports**, FY 2008*** FY 2008*** US$ billion US$ billion ~220-250 ~160-190 4-5x 7-8x 55 24 25.5 13 29.5 11 Current size Addressable Current size Addressable market market * Includes Philippines, China, Russia, Eastern Europe, Ireland, Mexico ** Includes addressable markets in currently offshoring industries; *** India revenues indicated refer to estimates for FY2008. Global numbers indicate 2007 year-end estimatesSource: McKinsey Outsourcing & Offshoring practice; McKinsey Global Institute; Gartner 2005 database; IDC; NASSCOM Strategic Review 2008 3
    • SIGNIFICANT INCREASE IN ADOPTION EXPECTED IN2 OFFSHORE SERVICES-INFRASTRUCTURE IT SERVICESCIO response to question - What fraction of your infrastructure is offshored?Per cent of respondents2006 CIO survey 2007 CIO surveyToday In 3 years Today In 3 yearsPer cent of Per cent of Per cent of Per cent of Per cent of Per cent of Per cent of Per cent ofinfrastructure respondents infrastructure respondents infrastructure respondents infrastructure respondentsoffshored offshored offshored offshored76-100 0 76-100 0 76-100 2 76-100 1051-75 1 51-75 7 51-75 10 51-75 326-50 11 26-50 13 26-50 15 26-50 231-25 17 1-25 19 1-25 37 1-25 290 40 0 25 0 5 0 3Average* 10 Average* 19 Average 27 Average 34 * Estimated Weighted average of budget offshoredSource: McKinsey CIO survey 2006 and 2007; McKinsey Analysis 4
    • BPO AND IT SERVICES INDUSTRY CONTINUES TO DELIVER2 STRONG PERFORMANCECLIENT SATISFACTION LEVELS WITHPercent Back office operations Offshore IT operations 85 86 73 81 Application Basic data development 78 81 70 80 Rules-based Application data maintenance 85 85 74 83 Package Basic voice software 2007 2008 implementation 2007 2008 Source: McKinsey P3600 benchmarking 5
    • PERFORMANCE ON BASIC METRICS CONTINUES TO BE2 STRONGCOMPLIANCE ON CONTRACTUAL OBLIGATIONSPercent SLA Compliance Delivery compliance Proportion of time SLAs are met Proportion of project completed on schedule 94 95 80 83 Application Basic data development 91 93 79 84 Rules-based Application data maintenance 86 88 76 87 Package software Basic voice 2007 2008 implementation 2007 2008 Source: McKinsey P3600 benchmarking 6
    • 2 RATIONALE FOR OFFSHORING WILL REMAIN STRONGUS$/FTE/Hour Other direct costs Direct people costs 89.0 Key assumptions 6.0 • Offshore salary costs at 84.0 each level increases based 6.0 on historical growth rates • No changes in delivery pyramid (ratio between 76.5 developer, analysts, PL, 73.2 PMs) 83.0 • Other costs include all 78.0 physical infrastructure costs (e.g., facilities, equipment) • No increase in G&A costs 12.5 10.8 for both India and US based 2.3 2.3 units 8.5 10.2 India based US based India based US based unit unit unit unit 2008 2010 Source: Watson Wyatt; NASSCOM-Hewitt Compensation Benchmarking; Project360 metrics database for offshore units; team analysis 7
    • LABOR COST ARBITRAGE WILL CONTINUE FOR SEVERAL2 YEARS, EVEN WITH OFFSHORE INFLATIONARY PRESSUREReal wage cost for skilled workforce in India vs. US - CAGR Indexed wage US India differential • Despite wage • Despite wage inflation, leading inflation, leading Indian BPO Indian BPO 2005 100 14 86 providers have providers have 20*% actually lowered actually lowered operating costs operating costs 2010 110 46 65 7 to 11% (2006 - 7 to 11% (2006 - 2007) 2007) 2% • 5% wage • 5% wage 2015 122 74 10**% 39 inflation "lock- inflation "lock- in" not un- in" not un- common in common in 2020 135 120 11 vendor contracts vendor contracts * Assumes aggregate inflation of 20% from 2005-2010 based on local skilled worker wage inflation and historic rupee inflation *** Assumes future wage inflation of 10% based on Oxford Economics forecast Source: McKinsey Outsourcing and Offshoring Practice, Oxford Economics 8
    • INDIA HAS INCREASED IT’S SHARE OF THE GLOBAL3 OFFSHORE BPO INDUSTRY & HAS A 50% OVERALL SHARE ITES BPOShare of global offshore industry Share of global offshore industryPer cent Per cent 100% = US$8.5 bn US$55 bn 100% = US$2.3 bn US$24 bn Others* 38 46 Others* 61 54 India 62 54 India 39 46 2001 2008 2001 2008 * Includes Philippines, China, Russia, Eastern Europe, Ireland, MexicoSource: NASSCOM Strategic Review 2008; McKinsey Global Institute 2005; neoIT; press articles 9
    • DRIVEN BY ITS SUPERIOR SUPPLY OF SUITABLE LOW3 WAGE TALENTAggregate suitable* graduate talent pool for offshore IT and BPO industries 15% 100 3% 1,175 4% 4% 232 4% 308 5% 324 355 6% 408 7% 473 13% 586 8,043 13% 1,020 1,084 26% 2,078 18 other Total Low-wage supply of India*** Russia China Philippines Turkey** Poland Brazil Thailand** Mexico Indonesia countries suitable low-wage talent (28 countries) * Graduates with skills for direct employment (does not consider willingness and accessibility of talent) ** Number derived via extrapolation *** As of 2007 Source: HR interviews; country labour and graduation statistics; McKinsey Global Institute 10
    • TOPICS Perspectives on the IT/BPO Offshore industry The transformational role of the IT/BPO industry Concluding remarks 11
    • OFFSHORE IT AND BPO INDUSTRIES HAVE THE POTENTIAL TOTRANSFORM INDIA OVER THE NEXT 10 YEARS What IT/BPO industry can do for India Contribution Economic growth engines to GDP US$ billion Per cent Potential size of India’ offshore IT and 120-180 12-15 12-15 BPO industries Taiwan’s engineering and electronics 53 17 17 industry (2004) Saudi Arabia’s Oil 116 45 45 (2004)Source: SAMA; EIU Viewswire; CMIE; Goldman Sachs; global Insights; Deutsche Bank; World Bank; Energy Information Administration (EIA) 12
    • THE IT/BPO INDUSTRY IS ON TRACK TO ACHIEVE IT’S MEDIUMTERM ASPIRATIONSUS$ billion in export revenues IT/BPO industry expected to have significant impact on India’s economy IT/BPO exports expected to GDP growth continue strong growth Estimated 17% of India’s 17% incremental GDP growth over 60.0 the five year period (2005- 2010) 25.0 Export growth 8x Over 80% of the growth in exports between 2005 to 2010 17.2 35.0 5.2BPO 7.3 Employment creation 1.5 12.0 Estimated 10 million totalIT 5.8 employment by 2010, equaling FY 2002 FY 2005 FY 2010 E planned employment creation from all special programs in the 10th plan of Planning Commission Source: NASSCOM McKinsey 2005 Report 13
    • OFFSHORE IT AND BPO INDUSTRIES IS A PRIME ESTIMATESEMPLOYMENT CREATION ENGINE Net impact on employment in India Million jobs, 2010 >6.5 >9 >2.8x 2.3 Direct Indirect and Total employment induced employment employment generatedSource: 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 14
    • UNPARALLELED IMPACT ON INDIA’S ECONOMY: SIGNIFICANTCAPACITY BUILDING IN HIGHER EDUCATION AND URBANEMPLOYMENT GENERATIONImpact on higher education in top 6 states that dominatetechnology/ business services exports Employment impact of different growth engines Incremental No. of institutions Incremental jobs in million created during 1994-2005 exports share added % of total (1998-2007) (1998-2007) 8.7* urban jobs US$ billions # of institutions per Per cent state Top 6 states 42-63 3.6-5.5 (Karnataka, ~15 110 AP, NCR, TN,Engineering Maharashtra)education 2.5**-4.4** Indirect 30-51 Others (21 states + ~1 16-18 6 UTs) 6x 1.1 Direct 12 Total urban Technology/ Top 6 states jobs business (Karnataka, ~6 500 servicesNon- AP, NCR, TN,engineering Maharashtra) Technology/business services industryeducation Others has contributed to 42-63% of incremental (21 states + ~0.3 90-100 urban jobs between 1994 and 2005 6 UTs) 5x through direct and indirect employment * Total urban jobs in 1993-94 was 81.8 million and in 2004-05 was 90.5 million ** High multiplier effect; for every direct job created 2.5-4 additional jobs created in indirect employmentSource: Institute of applied manpower research; CRISIL–NASSCOM report Employment and Output Linkages, 2007 15
    • THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-IMPROVEDQUALITY OF TALENT Increase capacity of higher education system* Develop a three Improve pronged approach willingness to to improve join the offshore willingness to join the BPO industry IT and BPO Encourage creation industries of self regulating associations of 1 private higher education institutes Pilot and roll-out 6 “industry-owned” 2 integrated skill development program Introduce an output- 5 based ranking of 3 colleges to raise 4 performance standards Implement faculty in the higher quality and coverage education system improvement Develop initiatives through scalable e- four specific learning programs programs for IT/BPO skill development Improve suitability of graduates for IT/BPO jobs * Not a priority to sustain leadership 16
    • THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-QUALITYCOMMERCIAL REAL ESTATE DEVELOPMENT From . . . Fromto. . ... . . . . to 75-80% of total Class A office space demand in India is from the IT/BPO industry 17
    • THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-WORKENVIRONMENT From . . . Fromto. . ... . . . . to Improved work environment with all modern facilities 18
    • THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-HIGHERCONSUMPTION WITH RISING DISPOSABLE INCOME From . . . Fromto. . ... . . . . to Starting salaries at IT/BPO units (>US$ 300 per month) exceeds retiring salaries of the previous generation 19
    • THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-CITIZENSERVICES From . . . Fromto . . ... . . . . to Improved citizen services (e.g., registrations, payments etc.) through e-governance 20
    • THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-QUALITYINFRASTRUCTURE From . . . Fromto. . ... . . . . to Airports at major cities (Mumbai, Delhi, Hyderabad, Bangalore) being modernized 21
    • TOPICS Perspectives on the IT/BPO Offshore industry The transformational role of the IT/BPO industry Concluding remarks 22
    • PERSPECTIVES ON THE IT/BPO OFFSHORING OUTSOURCINGINDUSTRY We are only at the start, and not at a mature state, of the offshore industry evolution The pace, breadth and depth of offshore services is rising Global demand will exceed near-term suitable talent supply in every country It is not “India or” but “India and” The IT/BPO industry has the potential to transform a nation Can trigger fundamental changes in basic areas (e.g. education, infrastructure, capabilities of players) Powerful engine to drive sustainable and inclusive growth 23