Thank you! Today should be an interesting day for you You’ll be part of a “Virtual Trade Mission to India” via video connections to India You’ll hear from a lunch panel discussing “Sourcing Solutions” You’ll have an opportunity to work collaboratively after lunch on some case studies But first, I’d like to introduce the topic by surveying the current state of outsourcing… particularly as it pertains to India
KPMG Morning Keynote
Virtual Trade Mission to India: Opportunities May 2009 ADVISORY
<ul><li>Looking back, we can see some of the triggers: </li></ul><ul><ul><li>Downturn in the U.S. housing market (“U.S. housing bubble”) and excessive speculation in housing market </li></ul></ul><ul><ul><li>Risky lending and flawed borrowing practices </li></ul></ul><ul><ul><li>Excessive individual and corporate debt levels </li></ul></ul><ul><ul><li>Poor securitization practices and hedging practices </li></ul></ul><ul><ul><li>Excessive underwriting of high-risk mortgages </li></ul></ul><ul><ul><li>Insufficient regulatory oversight of regulatory processes </li></ul></ul>The economy – It’s been tough!
The economy… and outsourcing have changed Source: NASSCOM Strategic Review 2007, 2008 & 2009. Businessworld BPO Report and KPMG Analysis <ul><li>Global credit crunch </li></ul><ul><li>Reset stock markets </li></ul><ul><li>Record unemployment </li></ul><ul><li>Slowing consumer spending </li></ul><ul><li>Crisis of U.S. auto and financial industries </li></ul>Now <ul><li>Impact of slowdown, and on outsourcing, varies by industry </li></ul><ul><li>Going back to the basics: Companies look for cost optimization and innovation for sustainability </li></ul><ul><li>Merger and acquisition activity is being postponed </li></ul><ul><li>Interestingly, Small to Medium Business (SMB) market for outsourcing business is rising </li></ul><ul><li>Companies are seeking newer destinations to lower costs and get added benefits </li></ul>Then Economy Outsourcing <ul><li>Growth expectations very high </li></ul><ul><li>Investment funds were easily available </li></ul><ul><li>Market capitalizations were high </li></ul><ul><li>Housing, employment and credit boom </li></ul><ul><li>Outsourcing was growing rapidly, new business, new geographies and new services were being continually added. </li></ul><ul><li>Service providers were growing organically and inorganically, marketing and business development spends were high </li></ul><ul><li>Companies were willing to invest in the outsourcing relationship in favor of longer term benefits </li></ul><ul><li>Outsourcing billing rates were at a premium and service providers had an equal position at the bargaining table </li></ul>
At the same time… sourcing is becoming increasingly global Increasing knowledge and maturity is leading to a search for newer locations. Calgary Winnipeg Boise Indianapolis Queretaro Guadalajara Curitiba Campinas Buenos Aires Santiago Port Louis Cairo Tunis Belfast Gdansk Rostov-on-Don Cluj-Napoca Lviv Sofia Zagreb Belgrade Nagpur Jaipur Ahmedabad Penang Ho Chi Minh City Davao City Iloilo City Brisbane Hangzhou Changsha Source: KPMG, Exploring Global Frontiers, February 2009
… and developing economies have shown double digit growth in IT spending through 2008 Source: IDC, NASSCOM Strategic Review 2009 LATIN AMERICA <ul><li>3% of the global IT services spend </li></ul><ul><li>10% growth in 2008 </li></ul>NORTH AMERICA <ul><li>39% of the global IT services spend </li></ul><ul><li>4.2% growth in 2008 </li></ul>WESTERN EUROPE <ul><li>37% of the global IT services spend </li></ul><ul><li>5% growth in 2008 </li></ul>CENTRAL EUROPE, ME, AFRICA <ul><li>4.7% of the global IT services spend </li></ul><ul><li>14.7% growth in 2008 </li></ul>ASIA PACIFIC <ul><li>15% of the global IT services spend </li></ul><ul><li>6.8% growth in 2008, over 10% in developing economies (excl. Japan) </li></ul>The total spend on IT Services in 2008 was estimated at over $557 USD Billion. Global sourcing market has increased threefold since 2004.
Other global trends in outsourcing Service providers are investing and gaining deeper BPO and ITeS capabilities in specific domain areas… looking to provide higher value Companies increasing their exploration of Tier 2 and 3 locations, particularly within mature markets such as India and Eastern Europe Both customers and providers are considering a variety of sourcing models… ranging from captive, outsourcing, hybrids, joint ventures, etc. Cost savings are essential, but “partnering” is improving business agility and increasing access to capabilities
Back to basics (parallels) <ul><li>Reaction to global recession: </li></ul><ul><li>Housing speculation Ownership mentality </li></ul><ul><li>Risky lending Credit worthiness </li></ul><ul><li>High debt levels Debt reduction </li></ul><ul><li>Flawed oversight Increased regulation </li></ul><ul><li>Weak credit rating Improved processes and governance </li></ul><ul><li>Sourcing reaction to issues: </li></ul><ul><li>“ Lift and drop” Retain ownership of overall process </li></ul><ul><li>Fire-walled relationship Transparent operations </li></ul><ul><li>Turn-key operations Sustainable process </li></ul><ul><li>Focus on transition Focus on operations </li></ul><ul><li>Limited security concern Increased due diligence and audit </li></ul>
Back to basics – Five key questions <ul><li>Why are we outsourcing? Is the business goal to save money, improve operations or boost business performance? Efficiency focuses on cost improvement; Enhancement focuses on operational improvement; Transformation focuses on business performance improvement </li></ul><ul><li>What services and functions should we consider to meet those goals? Across the enterprise, what services or processes are candidates for a sourcing review? </li></ul><ul><li>Who can best perform or deliver these services to meet those goals? Should the job be performed in-house or outsourced to external resources? </li></ul><ul><li>How should the work be done? Do we want a customized or standard service/process? </li></ul><ul><li>Where should the work be done? Will this work be performed domestically/onshore or non-domestically/offshore? </li></ul>
Back to basics - Potential outsourcing concerns <ul><li>Risks relating to the failure of the outsourced entity’s IT environment to effectively process and deliver products to your customers on a fully secure basis </li></ul>Technology Risk <ul><li>Risk of negative publicity regarding business practices associated with the outsourced operation </li></ul>Reputation Risk <ul><li>Risks attributable to the failure of an obligor to meet the terms of a contract or the entity’s inability to meet payment obligations as and when they fall due </li></ul>Credit and Liquidity Risks <ul><li>Risks attributable to interest rate movements or movement in foreign exchange rates that impact cross-border contracts and operating activities </li></ul>Financial Risks <ul><li>Risks attributable to operational problems with service or product delivery or inability of an entity to recover fully and timely from unforeseen events </li></ul>Operational Risks <ul><li>Risks caused by violation of laws, rules, regulations, prescribed practices and ethical standards </li></ul>Regulatory Risks <ul><li>Risks associated with adverse business decisions or failure to implement decisions </li></ul>Strategic Risks
Back to basics – Build a strong sourcing framework Build Deliver Service Management Governance Relationship Management Planning Transition Operations Design
Clearly, India leads as a sourcing hub for IT and ITeS services, across virtually all verticals Two-thirds of Fortune 500 companies already source IT/ITeS services from India Source : KPMG Analysis, various media articles Illustrative HP, Unilever Sign USD 675 Million Outsourcing Deal Friday, February 15, 2008: India’s consulting, outsourcing and technology major, HP has signed a seven-year outsourcing contract worth $675 million with Unilever. HP will now manage Unilever’s technology infrastructure in the US, Asia, Africa, Turkey and the Middle East. Through this agreement, HP will provide management of Unilever’s IT processes and services, including corporate data centres, messaging and directory services, Internet and intranet systems hosting, disaster recovery services, and the outsourcing of 4,500 multi-vendor UNIX and Windows servers and storage environments HSBC ramps up Indian outsourcing presence 24 November 2006 17:10 GMT: HSBC is expanding its offshore outsourcing operations in India with a new BPO facility in Kolkata (formerly known as Calcutta) and a software development centre in Hyderabad. HSBC already has one wholly owned BPO subsidiary - HSBC Electronic Data Centre - in Kolkata, which has 2,000 employees working on back-office operations, and is now planning to set up another centre in the same city. HSBC's general manager and country head for India, Naina Lal Kidwai, said the second BPO facility in Kolkata will employ another 2,000 staff, according to reports in India Ford plans to raise its outsourcing bill from India February 09, 2006: More good news is coming in for the Indian outsourcing industry. Ford Motor Company (FMC), world’s third largest car maker, has decided to outsource services in the field of IT, engineering and components. The move has been made to cut costs. Sources in the industry are indicating that Ford is likely to increase its purchasing power of components from the domestic market by six times. Currently, the company purchases worth $80 million. Novartis to shift 100 jobs to India November 17, 2008: New Delhi: At a time when global pharmaceutical companies such as Merck and Pfizer are trimming their workforce to beat the economic blues, Novartis, the Swiss pharmaceutical major, has decided to shift 100 jobs to India. The company plans to make Hyderabad as its back office hub for data management in clinical research and financial service segments. Though Novartis’ global recruitments shows no increase in numbers, its Hyderabad office will see an addition of at least 100 people in the coming months, said Jurgen Brokatzky-Geiger, head (human resources), Novartis Johnson & Johnson eyes partnership models in India Johnson & Johnson Pharmaceutical Research & Development LLC (J&JPRD), the fifth largest pharmaceuticals company in the world, is set to sign a number of research collaborations and in-licensing deals with major pharmaceuticals companies soon. Says Paul Stoffels, chairman, worldwide R&D pharmaceuticals group, J&J, “We want to exploit the cost effective factor of the Indian pharmaceuticals R&D sector. The availability of skilled as well as cheap services makes India the preferable R&D outsourcing hub for J&J.”
Why offshore to India? Enhance agility <ul><li>Policy approach has aided growth in the sector, creating an enabling environment </li></ul><ul><li>Targeted policy actions and progressive reform (Special Economic Zones, etc.) </li></ul><ul><li>Established methodologies and processes </li></ul><ul><li>Well defined, quantifiable quality and process metrics </li></ul><ul><li>Global quality certifications a must to operate </li></ul><ul><li>Wide scope – low to high value skills, across value chain – IT, BPO, R&D and analytics </li></ul><ul><li>Focus on new issues – Green IT, innovation </li></ul><ul><li>Large, qualified and young workforce </li></ul><ul><li>India has the largest share of the global offshore talent pool (28%) </li></ul><ul><li>30% to 40% cost advantage </li></ul><ul><li>Additional benefits through low cost process improvement, consolidation and automation. </li></ul>Growth- new markets Extract value Release capital Reduce risk Reduce current costs Focus on core business Government Cost Scale Scope Quality/ Information Security Sources: NASSCOM Strategic Review 2009 <ul><li>The private sector providing quality business infrastructure (office space, telecommunication network) </li></ul>Private Sector Business benefits
India: The Tiger Economy <ul><li>General profile </li></ul><ul><li>Location: South Asia </li></ul><ul><li>World’s 7th largest country by area (3,827,263 sq kms) </li></ul><ul><li>World’s 2nd largest country by population </li></ul><ul><li>Population: 1.15 billion </li></ul><ul><li>No of dominant languages: 18 </li></ul><ul><li>No of English Speakers: 100 million - 2nd largest English-speaking nation in the world </li></ul><ul><li>Securities market </li></ul><ul><li>Leading stock exchanges: National Stock Exchange (NSE) and Bombay Stock exchange (BSE) </li></ul><ul><li>No. of listed companies: 6,217 on BSE and NSE </li></ul><ul><li>Market capitalization (BSE): USD 1.1 trillion (2008) </li></ul>Source: World Federation of Exchanges, RBI, World Statesmen.org
India: Talent pool advantage <ul><li>India is the one of the youngest countries in the world with about 53% of its population under the age of 25; resulting in a large and increasing base of skilled professionals </li></ul><ul><li>16,000 colleges at the end of March 2005 with English being a very widely accepted medium of instruction (Ministry of Human Resource Department, Government of India) </li></ul>Source: Ministry of HRD, Govt. of India; NASSCOM # Members as April 1, 2006 Source: NASSCOM Strategic review 2006 Total suitable talent pool for offshore IT & BPO <ul><ul><li>7,000 </li></ul></ul>PhDs (Science & Engineering) <ul><ul><li>65,000 </li></ul></ul>MBAs (2002) <ul><ul><li>130,000 </li></ul></ul>CAs Other professionals <ul><ul><li>2,440,000 </li></ul></ul>Total Number of Arts, Commerce, Science Graduates Students graduating in 2005-06 (estimates) <ul><ul><ul><li>454,000 </li></ul></ul></ul>Total number of Engineers 28% 11% 10% 8% 7% 5% 4% 4% 4% 3% 16% India China Russia Philippines Turkey Thailand Poland Brazil Mexico Indonesia 18 other low wage countries
Moving to higher value added services Data Entry Call Centers Collections Customer Service F&A Processing Reporting Technology Help Desk Research Analytics and other services Investment Banking, Equity Research, High-end Analytics Cost Arbitrage & Labour Productivity Process Improvement Value Creation Phase 1 Phase 2 Phase 3
Key concerns when offshoring to India The recent terror attacks have unfortunately come in the wake of an economic decline and thus the IT-ITES industry has been affected in the short-term. Vendors, buyers and the India government are now making proactive efforts towards improved security, governance and business continuity plans. Security Threats Higher levels of attrition is a problem being faced by the IT-BPO industry in India today. However, India still has a large talent pool available even in the Tier II and Tier III cities. Attrition Labor costs are rising at approximately 10% year on year basis, however India seems to be maintaining lead to other major destinations. Indian service providers looking to Tier 2 and 3 cities to improve cost profile. Rising Costs Physical infrastructure in the country is improving… but still needs considerable investment. Connectivity of roads, airports, power availability definitely needs to be improved to sustain the growth currently seen in the country. Infrastructure
In summary… <ul><li>Economic crisis has demanded reexamination of business needs… and opportunities </li></ul><ul><li>Opportunities should be examined via “back to basics” criteria </li></ul><ul><li>In sourcing, India is still a leader… for several reasons (talent pool, government, economy, cost, etc.) </li></ul><ul><li>Understand risks and develop mitigating strategies (eyes wide open!) </li></ul><ul><li>Embrace opportunity!!! </li></ul>
Contact Information Ronald Clanton Partner, KPMG Sourcing Advisory Services [email_address] (919) 664-7247 All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.