Fuente India Advantage

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Advantage of Outsourcing to india

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Fuente India Advantage

  1. 1. New Beginnings Advantage India -Syed Nazir Razik www.fuentesystems.com
  2. 2. Exports contribute nearly 65 % of IT sector revenue <ul><li>IT services and ITES-BPO revenue largely export driven </li></ul><ul><ul><li>Exports contributed 75% of IT services and 87% of ITES-BPO revenue </li></ul></ul><ul><li>Share of services in domestic market increasing </li></ul><ul><ul><li>Revenue from services up from 43% to 47 % in the last 3 years </li></ul></ul>Segment wise revenue trend Source: NASSCOM Market Overview 100% = USD 21.7 bn Year 2004 100% = USD 28.5 bn Year 2005 100% = USD 36.4 bn Year 2006 (E) IT services ITES- BPO Engg Services, R&D and products Hardware
  3. 3. <ul><li>Revenues ~ USD 36 billion (2006 Est.) </li></ul><ul><ul><li>CAGR (FY 2004-06) - 30 % </li></ul></ul><ul><ul><li>Contribution to GDP up from 2% in 2000 to 5% in 2006 </li></ul></ul><ul><li>Exports ~ USD 23.5 billion (2006 Est.) </li></ul><ul><ul><li>CAGR (FY 2004-06) - 35 % </li></ul></ul><ul><ul><li>Has nearly doubled in last three years </li></ul></ul><ul><li>Domestic Market - USD 13 billion (2006 Est.) </li></ul><ul><ul><li>CAGR (FY 2004-06) - 22% </li></ul></ul><ul><ul><li>Buoyed by an economy growing at nearly 8% per annum over the last 3 years </li></ul></ul>IT-ITES one of the fastest growing sectors in India Market Overview Source: NASSCOM CAGR - 30% CAGR - 35%
  4. 4. India’s IT industry structure is vibrant and competitive Source: NASSCOM Market Overview < USD 100 million (IT) < USD 10 million (BPO) <ul><li>10-15% of IT Services </li></ul><ul><li>5% of BPO </li></ul>>3000 Emerging players USD 25 million-USD 150 million (top 10 units) <ul><li>50% of BPO </li></ul>150 Captive BPO USD 10 million-USD 200 million (Excl. leader - USD 500 million) <ul><li>20% of BPO </li></ul>40-50 Pure play BPO USD 10 million-USD 500 million <ul><li>10-15% of IT Services </li></ul><ul><li>10-15% of BPO </li></ul>20-30 Offshore operations of Global IT majors USD 100 million-USD 1 billion <ul><li>25% of IT Services </li></ul><ul><li>4-5% of BPO </li></ul>7-10 Tier II > than USD 1 billion <ul><li>45% of IT Services </li></ul><ul><li>4-5% of BPO </li></ul>3-4 Tier I Revenue Performance Share of export revenue No. of players Category
  5. 5. India’s cost and talent pool advantage is well established <ul><li>India with 28% has the largest share of the global talent pool </li></ul><ul><li>While China with around 11% stands next, the use of English as the official business language gives India a significant edge </li></ul><ul><li>India also continues to hold a significant labor advantage over developed countries thus offering significant cost saving opportunties by off shoring </li></ul><ul><li>India lead among potential outsourcing destinations as per the A T. Kearney Global Services Location Index 2005 </li></ul>Source: McKinsey Report, The Emerging Labour Market, June 2005 Advantage India and business opportunities
  6. 6. Source: NASSCOM CAGR 178.6% Rising FDI and PE are indicative of India’s advantage and global interest Advantage India and business opportunities S e c t o r N u m b e r o f D e a l s V a l u e ( I N R B n ) I T - I T E S 3 3 1 9 . 9 M a n u f a c t u r i n g 2 3 1 5 . 4 H e a l t h c a r e a n d L i f e S c i e n c e s 1 3 9 B F S I 6 6 . 6 T e x t i l e s 1 2 6 . 5 FDI in IT-ITES Private Equity in IT -ITES
  7. 7. Venture Backed IT Service co. Intl Majors Captive Indian Houses <ul><li>24x7 </li></ul><ul><li>Daksh (sold to IBM) </li></ul><ul><li>iSeva </li></ul><ul><li>Cross Domain </li></ul><ul><li>Talisma </li></ul><ul><li>Vcustomer </li></ul><ul><li>Tracmail </li></ul><ul><li>India Life </li></ul><ul><li>ICICI – one source </li></ul><ul><li>Msource </li></ul><ul><li>Intelenet </li></ul><ul><li>Global Tele </li></ul><ul><li>eServe – HCL </li></ul><ul><li>Satyam </li></ul><ul><li>Wipro Spectramind eServices </li></ul><ul><li>Progeon </li></ul><ul><li>Reliance Infocom </li></ul><ul><li>Zenta - Hiranandani </li></ul><ul><li>Intellecon - Jindal </li></ul><ul><li>Transworks </li></ul><ul><li>Air Infotech –RBG </li></ul><ul><li>DSS eContact/Icon </li></ul><ul><li>Hero ITServe </li></ul><ul><li>iEnergizer – Pheonix </li></ul><ul><li>Epicenter – Kalyani </li></ul><ul><li>CallNet - Ansals </li></ul><ul><li>Convergys </li></ul><ul><li>Stream </li></ul><ul><li>Sitel </li></ul><ul><li>ITO </li></ul><ul><li>Teletech </li></ul><ul><li>Vertex </li></ul><ul><li>GE (sold to PE funds) </li></ul><ul><li>Swiss Air </li></ul><ul><li>British Airways </li></ul><ul><li>American Exp </li></ul><ul><li>Dell </li></ul><ul><li>World Bank </li></ul><ul><li>eServe – Citibank </li></ul><ul><li>Mc Kinsey </li></ul><ul><li>HP </li></ul><ul><li>Deloitte – Hyd </li></ul><ul><li>PwC </li></ul><ul><li>Ernst & Young </li></ul><ul><li>Venture </li></ul><ul><li>Backed </li></ul><ul><li>IT Services </li></ul><ul><li>Companies </li></ul><ul><li>Indian </li></ul><ul><li>Houses </li></ul><ul><li>International </li></ul><ul><li>Majors </li></ul><ul><li>Captive </li></ul><ul><li>Units </li></ul>The players can be classified based on ownership profile Success Stories
  8. 8. <ul><li>Captives will keep on coming …. </li></ul><ul><li>More consolidation in Third Party and Captives players </li></ul><ul><li>Very high valuations for first few pure play ITES companies making an Initial Public Offer </li></ul><ul><li>Maturity in valuations and stability in business to reduce valuation </li></ul><ul><li>Mean valuation estimates of all ITES companies over the next few years would be as follows </li></ul><ul><ul><li>Revenue multiple of 1.40 to 1.50 times of projected 12 months revenues </li></ul></ul><ul><ul><li>EBIDTA multiple of 7 – 8 times projected EBIDTA </li></ul></ul><ul><ul><li>PE multiple of 10 – 12 </li></ul></ul><ul><li>Market to also differentiate amongst the various players – Tier I, Tier II and Tier III based on variety of factors </li></ul><ul><ul><li>Valuations of Tier I companies normally exceeds the mean or median valuations in any industry by atleast 30% </li></ul></ul>Future Trends….
  9. 9. <ul><li>Quantitative factors </li></ul><ul><ul><li>Revenues growth and margin improvements </li></ul></ul><ul><ul><li>Size of company and visibility of revenues - Period of existing contracts and their ramp-up </li></ul></ul><ul><ul><li>Quality of revenues and contribution analysis – Rate per hour, recovery per employee, in-bound vis-à-vis out-bound, voice-data, etc </li></ul></ul><ul><ul><li>Return on Assets </li></ul></ul><ul><li>Qualitative factors </li></ul><ul><ul><li>Strong “USP” </li></ul></ul><ul><ul><li>Experience and quality of management team </li></ul></ul><ul><ul><li>Sales team – Experience and ability to win large contracts </li></ul></ul><ul><ul><li>Concentration risk in revenues (ie, single customer vs diversified client base) </li></ul></ul><ul><ul><li>Ability to raise large capital for growth (both organic and inorganic) </li></ul></ul>However, companies with the following quantitative and qualitative factors with continue to enjoy higher valuations relative to the market Critical Success Factors
  10. 10. Potential Challenges …… <ul><li>Attrition </li></ul><ul><li>Managing rate pressure along with salary increases via unabated competitive pressure </li></ul><ul><li>Scale vs. Value chain – Third party service providers models are also driven by market valuations </li></ul><ul><li>SLA expectations of clients </li></ul><ul><li>Domain expertise </li></ul><ul><li>Middle level management in short supply </li></ul><ul><li>Good stable business especially in the processing space elusive </li></ul><ul><li>Employee attrition levels high </li></ul><ul><li>While offshore perceptions improve, third party service providers still face a stiff challenge of convincing clients to move 10,000 miles </li></ul><ul><li>Legislation issues in the US market creating impediments while others like DNC add to business pressure </li></ul><ul><li>Telecom infrastructure though significantly better – not on par with developed countries </li></ul>
  11. 11. Indian IT Export Industry Software Export Revenues accounts for 80% of total revenues of IT industry in India. This sector accounts for almost 5% of total GDP currently and is expected to account for nearly 10% by 2008 $ Million Break-up by Sector 2004 -05 32% 30% 15%
  12. 12. Indian IT Export Industry <ul><li>While Indian exports of Project oriented services grew by almost 18% in 2004 the worldwide market grew by 4.5% </li></ul><ul><li>Indian companies currently export software services and products to 112 countries around the world </li></ul><ul><li>69% of the total IT export revenue from USA. </li></ul><ul><li>185 of The Fortune 500 companies outsource IT services from India </li></ul><ul><li>Emerging markets for IT Exports include Japan, Singapore and Australia, Latin America, Eastern Europe </li></ul>
  13. 13. The Data <ul><li>A new way to leverage skills and markets </li></ul><ul><li>Win-win situation: for DCs and ICs: productivity, competitiveness, higher employment, faster economic growth </li></ul><ul><ul><li>every dollar of outsourcing creates $1-41-1-43 of value of which the US captures $1.12-1.15 while India gets only 33 cents </li></ul></ul><ul><li>Outsourcing ‘industry’: to exceed $1 trillion by 2006 </li></ul><ul><li>Total savings from global outsourcing: </li></ul><ul><ul><li>to grow from $6.7 bn (2003) to $20.9 bn (2008) </li></ul></ul><ul><li>Developing countries’ gains: $60 billion in ITES by 2008 </li></ul>
  14. 14. The Data <ul><li>Outsourcing: North-South issue? Hardly… </li></ul><ul><ul><li>More North-North trade-68% of trade </li></ul></ul><ul><ul><ul><li>North America, largest market: 60% of total </li></ul></ul></ul><ul><ul><ul><li>Canada, largest exporter of private services to US </li></ul></ul></ul><ul><li>Job displacement, unfounded: </li></ul><ul><ul><li>Net creation of 22 million new jobs in the US (from 2000-2010); shortage of 10 million in 2010 </li></ul></ul><ul><ul><li>Estimates for outsourcing: job creation: 317,000 net new jobs by 2008 in the US </li></ul></ul><ul><ul><li>2003: 98% of total contract value for outsourced business process service delivery in the US is done domestically (only 2% off-shored) </li></ul></ul><ul><ul><li>India accounted for only 1% of total US imports of private services (of which, 2% - business services) </li></ul></ul>
  15. 15. Worldwide ITES-BPO Spending by region 2002-2006 8.6 1.079.054 773,657 Worldwide 13 194,228 117,622 Asia/Pacific 8.5 237,390 171,303 EMEA 7.5 647,427 484,732 Americas 2002-2006 (CAGR %) 2006 2002 Region
  16. 16. Gains for Outsourcing Companies <ul><li>Strategic decision / competitive necessity </li></ul><ul><li>Lower labor costs </li></ul><ul><li>Economies of scale </li></ul><ul><li>Round the clock operations / time zone </li></ul><ul><li>Access to skills (including language skills) </li></ul><ul><li>Legal and regulatory framework </li></ul><ul><li>Quality </li></ul><ul><li>Structure of existing corporate network </li></ul><ul><li>Global R&D teams working in tandem </li></ul>
  17. 17. Developing Country Beneficiaries <ul><li>India: a wide known success story </li></ul><ul><ul><li>18 percent share of the global market </li></ul></ul><ul><ul><li>Growth rate: 54% in 2003-04 </li></ul></ul><ul><ul><li>Total export revenues to touch US$ 57 bn by 2008; US$ 148 bn by 2012 </li></ul></ul><ul><ul><li>Employment to rise from 110,000 (2003) to 2.7 mn by 2012 </li></ul></ul><ul><li>Philippines, China, Malaysia, Vietnam, Bangladesh, S.Africa, Ghana, Senegal, Kenya, Jamaica, Mauritius, Nicaragua, Barbados, Mexico, Brazil. </li></ul><ul><li>Others: </li></ul><ul><ul><li>Hungary, Czech Rep. </li></ul></ul>
  18. 18. Knowledge Worker’s Wages (Average Wage/year (US$000)
  19. 19. Summary <ul><li>Competitive cost </li></ul><ul><li>Language, education, skills </li></ul><ul><ul><li>also enables moving up the value chain </li></ul></ul><ul><li>Ability to develop global networks </li></ul><ul><li>Adequate and reliable infrastructure </li></ul><ul><li>Government role: infrastructure, education, various incentives, marketing, political stability, regulatory framework (e.g., security of data and IPR protection) </li></ul><ul><ul><li>relates to long-term prospects of doing business </li></ul></ul><ul><li>Role of diaspora population </li></ul><ul><li>Cultural and relational proximity and trust </li></ul>
  20. 20. <ul><li>Abolition of industrial licensing, except in few ‘strategic’ sectors </li></ul><ul><li>Foreign Direct Investment up to 100% allowed in most sectors under the ‘Automatic Route’ </li></ul><ul><li>Rationalization of both indirect and direct tax structure </li></ul><ul><li>Portfolio investments by foreign institutional investors allowed in both equity and debt markets </li></ul><ul><li>Rupee made fully convertible on trade account </li></ul><ul><li>Removal of quantitative restrictions on imports </li></ul><ul><li>Financial sector reforms and decontrol of interest rates </li></ul><ul><li>The Fiscal Responsibility and Budget Management (FRBM) Act enacted in 2003 </li></ul>Economic Reforms- Some Milestones
  21. 22. Investing in India – Entry Routes
  22. 23. <ul><li>Original investment, profits and dividends can be freely repatriated </li></ul><ul><li>Investors can acquire immovable property to the extent of their business needs </li></ul><ul><li>Capitalization of royalty payable, and External Commercial Borrowings (ECB’s) allowed </li></ul><ul><li>Outward investment policies also liberalized </li></ul><ul><li>Indian Corporate can invest in entities abroad up to 100% of their net worth </li></ul><ul><li>Outward investment US$ 3 billion in last two years </li></ul><ul><li>Bilateral Investment Promotion and Protection Agreement with 57 countries. </li></ul><ul><li>Double taxation Avoidance Agreement with 63 countries </li></ul>Other Policies on Investment
  23. 25. Growth story built on strong fundamentals… • Access to a large, growing pool of highly qualified talent • A high degree of quality orientation and demonstrated service delivery expertise • Keen emphasis on information security reflected in the comprehensive legal framework and elaborate security practices supplemented by enabling intervention • World class telecommunication infrastructure • Enabling (and progressively improving) business environment through strong government support; incentives, favorable regulations and policy … delivered at a sustained and compelling cost-value proposition
  24. 26. … that is also reflected in the rapid evolution of the Indian IT-ITES service portfolio
  25. 27. IT services exports lead, growing at 32-33%; range of services offered has expanded significantly ITES-BPO exports grew by 37% last year, to reach USD 6.3bn; growth driven by scale and scope expansion
  26. 28. Recent trends and market indicators indicate a positive outlook for the sector • Large unaddressed market potential in offshore IT-BPO sustaining demand led growth – Evolution of global delivery expanding adoption of new services delivered from offshore • Unbundling of IT outsourcing mega-deals with increasing share of India based delivery – $100bn in contract value up for renewal over next two years – Increased participation of Indian vendors in these bids – MNCs also looking at significant ramp-up in India based delivery • Strength in client wins, cross-border M&A trends, stable pricing with marginal upward bias, and a gradual (favorable) shift in the outsourcing debate
  27. 29. Significant headroom for growth, less than 10% of the global addressable market captured till date
  28. 30. • Strengthening the global delivery model and addressing impediments to greater globalization of services • Building on India’s core value proposition – Enhancing the skill pool advantage – Strengthening business infrastructure – Reaffirming the philosophy of operational excellence • Effecting equitable distribution of gains from ICT – Catalyzing domestic market development – Decentralizing industry growth – Ensuring that ICT benefits reach the ‘bottom-of-the-pyramid’ ‘ Managing growth’ is the key challenge

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