Software Product Companies and Globalization Opportunities
Software Product Companies and Globalization Opportunities Sunnyvale Beijing Bangalore Hyderabad Pune GurgaonThis report is solely for the use of Zinnov client and Zinnov personnel. No part of it may be circulated, quoted, orreproduced for distribution outside the client organization without prior written approval from Zinnov
R&D Globalization Council R&D Optimization Many companies still have significant room for growth to achieve their optimal globalization levels Optimal Level = 35 percent Small Characteristics: Multiple product lines, (Less than USD 200 Million Revenue) significant revenues from developed markets, and renewed focus on emerging market Optimal Level = 55 percent Medium opportunities (Less than USD 1 Billion Revenue) Risks: Reduced innovation capabilities across Characteristics: Monolithic product, fresh multiple products, business continuity, time- focus on emerging markets, and significant Big to-market, and lack of proximity to customers pressure on bottom line due to steady (More than USD 1 Billion Revenue) growth of revenues Risks: Productivity, quality and innovation, lack of good understanding of product Optimal Level= 80 percent architecture and technologies Characteristics: VC funded, pressure to keep burn-rate low, single product offering, sales and marketing office in HQ, sr. executives in remote location ILLUSTRATIVE Optimal Propensity to Offshore R&D (at one location)0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Note: Source: Zinnov Analysis based on historic trends for the last 7 years and primary interviews with key stakeholder of MNC R&D subsidiaries 1
R&D Globalization Council R&D OptimizationOur recent research shows that companies are not yet leveraging the full potential ofglobalization Global Software Product Market USD 300-320 Billion Total R&D Spend (15%) Others (85%) USD 45-48 Billion USD 272-285 Billion A B C D Concept (8%) United States (73%) Mature Products (75%) Total In-House (95%) USD 3.6 – 3.8 Billion USD 32.9 – 35.0 Billion USD 33.8 – 36.0 Billion USD 42.8 – 45.6 Billion Development (37%) *Other Developed (12%) New Products (25%) Total Outsourced (5%) USD 16.7 – 17.8 Billion USD 5.4 – 5.8 Billion USD 11.3 – 12.0 Billion USD 2.3 – 2.4 Billion Note: 1. In-house includes offshoring to ca ptive centers QA/ Testing (31%) **Emerging Geo (15%) 2. Outs ourced is only to thi rd party USD 14.0 – 14.9 Billion USD 6.8 – 7.2 Billion s ervi ce providers Support/ Sustenance (23%) India = USD 3.8 - 4.2 Billion USD 10.4 – 11.0 Billion China = USD 2.0 - 2.4 BillionNote:*Western European countries and Canada; **India, China, South East Asia, Central and Eastern European Countries (Ukraine, Poland, Bul garia etc.), Russia and othersSource: Interviews with key executives (of software product companies) in the US, India, China, Ukraine and Russia; Qualitative insights from company annual reports; Zinnov Analysis 2
R&D Globalization Council R&D Optimization Increasing talent pool and stabilizing costs are making emerging countries such as India, China and Eastern Europe attractive for growth Organization Pyramid for MNC R&D Growth of MNC R&D Talent Pool in India Subsidiaries in India, 2009* (Current and Projected) Team Structure/ Size Engineering QAIndia R&D MNC Talent Pool (in Thousands) 1% 1% India MNC R&D Talent Pool Growth Rate Senior Level 1% 3% (8+ Yr) 6% 7% Middle Level India R&D* Center Operating Cost – 13% 13% (3-8 Yr) Relative Comparison YOY Growth 19% -6% -5% 14% 36% 34% 19% Junior Level (0-3 Yr) 44% 42% Note: *For all verticals including software Source: Zinnov annual survey on R&D operations cost, 2008 3
R&D Globalization Council R&D Optimization Increase in focus and investments into global centers of industry leaders has added significant value to their bottom and top lines Operational Operational Strategic Global Strategic Support Independence Independence Partnership Company ICenters’ Value Preposition Company H Company G Company F Company E Company C Company D Company A Company B Centers’ Capability and Initiatives Note: Source: Zinnov Analysis 4
R&D Globalization Council SG &A OptimizationAs R&D activities mature, product companies are looking at shared services globalization foroptimizing their internal operations Globalization Adoption Curve for Technology Product Companies HIGH Internal IT Product Services Development Customer Offshoring Rate Support Professional F&A Services Human Sales & Inside Resources Marketing Sales LOW Emerging Rapidly Growing Mature MaturityNote: Adoption curve is the representation of majority of the companies. Exceptions of companies which grow by acquisitions as excludedSource: Zinnov Analysis 5
R&D Globalization Council SG &A Optimization IMS and F&A related activities are fast gaining momentum in emerging geographies (1/2) Percentage of FTEs that can be Cost of Outsourcing IMS to a Indian Outsourced for IMS Vendor Vs. US Vendor IT Help Desk End User Support 60,000 Indian Vendor Cumulative Cost (USD ‘000) Internal Help desk 50,000 US Vendor 40,000 AMS Minimum Potential Savings Potential USD 30,000 27 MMHardware support Mainframe Additional Potential 20,000 Services Servers 10,000 Network Services 0 25 40 55 70 85 100 0% 20% 40% 60% 80% Number of employees Level-I Level-II Level-III Level-IV • IT Help Desk • System Administration • Higher-end technical Support such as High • Defect Break/Fix, Application Patch Mgmt • Scheduled Tasks • OS Upgrade and Patch Roll outs Availability Clustering and Fail-over Setups IT Desk Services • Password/ID creation/Reset • Security Administration • System performance & Capacity Planning • IT Security Compliance • Onsite Selective Staffing • Data backup and Recovery • Packaged Application Implementations Application • End User Support • Application Migrations Management Services • Scheduled Batch Support • OS Upgrade and Patch Roll outs • Application Monitoring • Defect Break/Fix, Application Patch Mgmt • Asset Management • Work/Job Scheduling • Application Management (AMS) • Scheduled Tasks • Application Administration • IT Audits • IT Security Compliance • Application Support • Onsite Selective Staffing • Higher-end technical Support such as High • End-User Support • Server Management Availability Clustering and Fail-over Setups Hardware Support • Asset Management • Work/Job Scheduling • Storage Optimization • IT Security Compliance Services • Scheduled Tasks • Data back up and Recovery • System performance & Capacity Planning • Onsite Selective Staffing • Incident Management • Architecture/Design High Capability Moderate Capability Low Capability 6
R&D Globalization Council SG &A Optimization IMS and F&A related activities are fast gaining momentum in emerging geographies (2/2) Propensity to Offshore F&A Outsourcing to India Low High Financial Procure to General Closing & Treasury & Order to Cash Planning/ Compliance Pay Accounting Reporting Tax Analysis Requisition Credi t & Order Revenue, Expense Cl os e Ba nking Pl a nning and Internal Audit Ma teri al Ma na gement Accruals Ma na gement Opera tions Support Purcha sing / Bi l ling/Invoice Fi xed Assets Sta tutory/GAAP Ca pi tal Planning Ba s e Cost SOX Project Procurement Ma na gement Accounti ng Adjus tments & Al l ocation Reporting Ma na gement Deduction/ Inventory Accounti ng and Ca s h Flow Regulatory T&E Accounting Cons olidation Di s pute Mgmt Accounti ng Reporting Ana l ysis Compl iance Invoi ce Data Ca s h Appls. & Account Tri a l Balance Ri s k Bus iness/Sales Control Self Ca pture Col l ections Reconciliation Ana l ysis Ma na gement Ana l ysis As s essment Di s pute Reporting & Inter Company Internal Ta x Accounting Res olution Reconciliation Accounti ng Reporting Pa yment Accrua l s and Financial Portfol io Analysis Ta x Returns Proces sing Res erves Statements Analysis Externa l AP Hel pdesk Journal Entries Tra ns fer Pri cing Reporting Account Tra nsaction Tax Reconciliation Vendor Ma na gement Es cheatment / 1099 Increasing Order of ComplexityNote: The list is not exhaustiveSource: Primary interviews with key stakeholders among the leading F&A outsourcing service providers ; Zinnov Ananalysis 7
R&D Globalization Council Cost of Service OptimizationIncrease in customer awareness on GDM and competition from Indian service providers willforce companies to grow services teams in emerging locations Revenue Structure of Leading Software Product Companies Q1’09 Q1’08 % Change Competition New license revenues New License $1,513 $1,612 -6.1% continue to decrease for • Local players are growing their most of the companies capabilities across product lines thus License Updates and Support $2,968 $2,647 12.1% eating into products firms’ services Oracle business Consulting $754 $837 -9.9% Training $78 $101 -22.8% Demands For Lower Price On Demand $191 $174 9.8% Companies are forced to • Product customers demand lower adopt a global delivery prices knowing the Indian vendors’ Q2’09 Q2’08 % Change price points thus forcing product firms model for servicesSymantec to adopt a global services model Content, Subscription & Maintenance $1,209 $1,291 -6.4% License $223 $359 -37.9% Deal Structure Focus on Services Q2’09 Q2’08 % Change (Illustrative) • Product firms are consciously focusing Adobe Product $660 $841 -21.5% on services business in order increase customer wallet share and to Services and Support $45 $46 -2.2% smoothen revenue flows Q2’09 Q2’08 % Change Technology Advancement Software License € 543 € 898 -39.5% • Remote client application environment Support € 1,337 € 1,099 21.7% data gathering and analysis is now SAP possible Consulting € 517 € 628 -17.7% • Bulk of the application configuration Training € 70 € 114 -38.6% and customization can now be done remotely Professional Services € 610 € 768 -20.6% Mature Partner Ecosystem H1’09 H1’08 % Change • Indian vendors have product specific License, Training, Professional Services, Business COEs and groups Sage € 271 € 309 -12.3% Forms, Hardware • Local SI capability in training resources quickly on different hardware and Combined Software/ Support Contracts, Maintenance software products € 477 € 462 3.2% Increased Margins • Partners for providing low cost support and Support, Transaction Revenues, Hosted Products on routine implementation tasks Additional DealsNote:Source: Company annual reports ; Zinnov Analysis 8
R&D Globalization Council Cost of Service OptimizationWe are already starting to see this happen at a global level with many MNCs acquiring servicesbusinesses Major Acquisitions by Global Companies MNC Acquired Company Acquisition Objective Deal Size – 3.9 USD Billion Dell Perot Systems Dell, which has slowly been building its services business over the past few years, saw Perot Systems as a way to rapidly increase its services capabilities Deal Size – 6.4 USD Billion Xerox ACS For Xerox, ACS offers important BPO capabilities that will enable Xeroxs growing services business to compete with the likes of HP and Dell Deal Size – 13.9 USD Billion HP, with the EDS acquisition, is looking to create a services Hewlett-Packard EDS unit that can rival that of IBM. Earlier in 2006 EDS acquired MphasiS for USD 380 million to further expand its services portfolioNote:Source: Company websites and press releases 9
R&D Globalization Council Cost of Service OptimizationTechnical support including premium support will be delivered out of the India center due toproximity with both services and R&D organizations Company A Headcount for Technical Support (Including Premium Support) in India • Probl em resolution support • Support assistance • Information s ervices Clients: Lehman 100% • Preventi on and resolution servi ces Bros, Citigroup • Works hops • Support account management Talent pool for product support on multiple Asian & European languages is 75% available in the industry Company B • Gl obal s upport i nfrastructure 50% • Proa cti ve, automated s upport • Li fetime support Clients: GSI, KPMG • Ecos ys tem support • Product enhancements a nd updates Low cost per head (CPH) 25% in India average: Premium Support Engineer: USD 37,000 – USD 40,000 Company C 0% Average Company Company Company A B C • Mi s sion cri tical partnership Clients: British • Cri tica l services Telecom, HSBC Technical Support Premium Support • Proa ctive 24 s ervices 10
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