a perspective on indian it industry

Global Software Industry – Indian Context Bangalore, Nov’16

National IT Industry Promotion AgencyGovt. of South Korea

Presented byMadan Kumar

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Disclaimer

This presentation was delivered by Madan Kumar in an individual capacity at the invitation of the South Korean trade body. He is in no way representing any company (incl. the one he works for) or participating in this event with the motive of promoting any specific motive or organization. This activity was also not for profit.

The content used to shape the point of view presented has been retrieved from publically available sources identified in the Appendix

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The MNC IT Captive Situation

IT Outsourcing Service Providers

Opportunities & Challenges

Overview & Evolution of Indian IT industry

Agenda


Why IT sector matters to India

GDP contribution

Largest private sector employer

Largest global sourcing destination of IT & ITES services

Export incoming offsets ~ half of India’s oil import bill

Promoting balanced regional growth - new employment Tier II & III cities

Highest attractor of PE & VC Funding (32% of all inward PE into India)

BrandINDIA

Largest private sector woman employer with 34% diversity

M&As driving India’s globalization story> 60

7%

3.8million

55%

45%

44%

$ 5.4billion

> 1 million

Source – NASSCOM, 2015 & other govt. agenciesData above includes IT & ITES

Growth, Drivers & Evolution of the Indian IT industry

• IBM thrown out of India• Tata-Burroughs experiment• Skill shortages in the west• Body shopping revolution• Early Indian-American IT

leaders

• 1st gen IT entrepreneurship• Maturing talent pool• NASSCOM• IPOs & market support• Indian govt. policy push• Commoditization of IT services• Employee wealth creation via

ESOPs• Stable delivery processes

• Internet boom• Business transformation• MNCs - Global Delivery Model• Product & Engineering

Services• Brand building• Globalization. Opening up of

EU & APAC markets

• IT Consulting• PE & VC funding• Startup economy• Post depression wave• Digital technologies

The Drivers

The IndiaStory

• Certifications (CMMI, ISO)

• English speaking graduates

• Flexible, quick learning, disciplined workforce

• Labour arbitrage• Support from Indian

US & UK diaspora

Less Regulation Market Driven Real Estate Active Promotion

The Indian govt. contribution towards the growth of Indian IT industry

DoT policy liberalization (thru ‘90s)Remove monopoly of ISPs – ‘98, Liberalization of long distance – ‘02

Outsourcing by exampleGovt. agencies were amongst the early adopters of outsourcing IT work to professional agencies. E.g. Railways

HRD ministry opens up of technical education sector (since ‘80s)Quick clearances of engineering college applications, innovative courses like the MCA, opening up accreditation of Universities, UGC reforms

STPI (‘90) – ~50 & SEZ (‘05) – ~370STPI - Exemptions from service tax, excise duty & rebate for payment of Central sales tax. 100% exemption from income tax of export profitsSEZ - Exemption from income tax over 15 yrs. 100% exemption of export profits from income tax for the first 5 yrs, 50% for the next 5 years and 50% for next 5 years subject to transfer of profits to special reserves. Single window clearances related to govt. Exemption on capital goods, service tax for input services procured and consumed & service tax on export of taxable services exported out of India

Relaxation of taxation on Overseas OfficesTo build delivery centres outside India, Indian providers are allowed to make outbound investments to the tune of 200% of their net worthOverseas offices of Indian IT companies are not allowed to create liabilities for their Indian HODepreciation of 100% can be availed over 5 years for computer and peripherals in EOUs, SEZ, EHTOPs

Digital IndiaPolicy being shaped by present govt. towards enhancing digital infrastructure, delivery of services digitally, digital literacy

Key

Pol

icy

Ref

orm

s

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Agenda

The MNC captive in India – a global sourcing success story

Source – PWC, NASSCON, 2014

Maintaining Relevance to Parent Firm

Maintaining Cost Competitiveness

Nurturing Leadership & Talent

Risk - Do outside suppliers have security track record, robust processes to execute?

Control – Is the direct control of business processes & IT still relevant?

Supplier Maturity – Does increasing maturity & competence of outside firms provide confidence?

Mgmt. Attitude - Value Proposition – Can addl value cost competitiveness be brought in?

Regulatory – Do possibilities to work around data privacy

Monetize Go Hybrid Evolve Relocate

Ways the MNC captive can continue to stay relevant & add value 1/2

Source – TPI 2014 Source – TPI 2014 Source – Deloitte / NASSCOM 2014

Service provider Mix of services, vendor management and program management. Focus on becoming business partners.

Engagement Model

• Transactional services • Solutions specific to business unit,

geography, and function • Point solutions

• Capabilities beyond back office • Standard solutions for business units,

geography, and function • End to end solution - focus on end customer

needs and value creation

Capability

Cost centre Run it like a businessP&L impact

Create a talent pool Uplift the skill set for value added workTalent

Focus on maintaining business as usual Focus on service levels, continuous improvement, automation and innovation

Operations

Mostly in a single established offshoring locations

Expanding into multiple and/or low cost locations Location

With high acumen on operations and people management

High on entrepreneurial skills and commercial acumen

Leadership

Captives – Previous Generation Captives – Next Generation

Ways the MNC captive can continue to stay relevant & add value – 2/2





Agenda

Journey of Indian Pure Plays (IPPs) towards strong execution, maturity & competence

Source – PWC,2014

• Relationships primarily in IT & not within the client’s business

• Weak strategy skills, industry depth, and local onshore presence needed for complex transformational projects.

• Investing in digital, but capabilities are still immature.

• Traditionally, not innovators, prefer to copy and optimize delivery.

• Close alignment to time & materials or fixed price models. New to outcome based pricing

• Demand diminishing for traditional application services … leading to greater competitive pressure.– Several Offshore Competitors (i.e., Wipro, Infosys, HCL) reported declines in their application-

related segments.• IPPs are responding by investing in automation to improve productivity and remain cost competitive.

– Several highlighted specific technology advancements on their earnings call (i.e., Infosys, Wipro, TCS, Cognizant).

• Price erosion has resulted in traditional service areas, especially with renewal contracts.– TCS, Wipro, Infosys have been dropping outsourcing contract prices to retain clients as the

companies look to consolidate vendors to reduce costs.– TCS and Infosys CEOs were reported to be actively involved in deals, making aggressive pitches

to win deals.• Discretionary spending is increasing on higher value services, especially digital and security.

– Improved demand for digital consulting and security consulting led Gartner to up its 2015 consulting services forecast in July and call for a 6.4% year-on-year increase compared to a 5.6% increase estimated in Q1CY15.

• Talent management challenges remain, including high attrition amongst the Offshore Competitors, leading to re-skilling enmasse and workforce re-balancing.

– TCS is training 100,000 on digital; Wipro is training 20,000 on open source; Infosys has trained 50,000 on design thinking.

– Peer Group competitors are increasing their offshore mix while HCL is expanding onshore (possibly signaling a new trend).

Gaps Context

Indian Technology Service Providers: Gaps & Context





Agenda

Indian technology services are expected to move business outcome based services delivered with agility and speed through innovation. As well as more integrated / transformation services with deeper business skills.

Outcome based models Outcome based services with business KPI as

Service Levels

Agile & Speed of DeliveryAgile application management for multi-speed IT environment; reduced implementation timelines for large / complex implementations

As-a-Service

Digital

Application & Infra Modernization

Continuous Improvement

Automation & AI

Analytics

Strong capabilities to automate business processes (e.g. RPA) & IT functions. Capabilities in self-learning & cognitive systems

For the business leveraging analytics and other innovative platforms including cloud based solutions

Predictive analytics solutions embedded into service delivery Application Management As-a-Service built on

usage based models (dynamic staff sizing)

Be seen as capable of digitizing client’s IT & business. Tech - DevOps, Agile, Cloud, SAAS, Business

– Transformation capability & domain skills

Modernize legacy applications thru regeneration (upgrade, replace) & rationalization (reduce, consolidate)

Client expectations from Indian technology service providers are changing rapidly

FutureReady

Branding & MarketingWipro & ChelseaInfosys & the ATP

IP creation• Patenting drive• Assets that augment products• Differentiating products

Mergers & Acquisitions• Cognizant buys Trizetto• Infosys buys Panaya

Integration of Tech & BPO services

Strategies to stay relevant

Challenges facing the Indian IT industry – 1/2

Managing profitability Outsourcing price erosionLower client OpEx spendOffshore cost escalation

Indian service providers are exploring various cost control strategies to maintain the profitability: • Setting up the delivery networks in Tier II/III cities • Offset wage inflation through operational gains • Productivity improvement• Automation

Contract structures are also evolving with the time through firming up the relationship between customer and service provider. Service providers have started to offer outcome-based pricing models to client in which pricings are linked to service performance.

The IT-BPO industry has moved from IT service centric delivery to provider of services in the new areas to keep the growth momentum. Some of new services are detailed below: • IT consulting services • Big data analytics • Social media analytics • Cloud services • Enterprise mobility (Smartphone/Tab based solutions)

Service mix

Commercial pressuresContract structure

Indian IT industry has enjoyed the benefit of labour cost arbitrage. Today the efforts are being made to further extend this cost advantage. The employee pyramid is being widened through the mix of employee skill base and expansion to Tier II/III citiesWays to provide jobs to the inflow of fresh graduates is challenging industry leaders as growth in the IT market is slowing

Rationalizing employee pyramid

Source - Livemint

Source – HRD Ministry

FOREX management Constant fluctuation in the exchange rate of US Dollar, Euro and Pound vs the Indian Rupee in the last 4 years. The volatility has been area of concern for Indian IT firms such as TCS, Wipro etc who earn most of their revenues in USD. Indian IT companies such as TCS hedged its exposure to the US Dollar through Options. The strategy was then adopted by other IT firms to handle the volatility of the currency. In the short term weak rupee helps Indian IT companies as more rupee is realized though this uncertainty is not preferred by the Industry leaders.

Political climate in Western Europe & emerging thought process in the US is challenging the growth of outsourcing. Leaders in some developed nations are looking to curb outsourcing as a lever to encourage protectionism i.e. boost the local labour market. Changes in these policies are impacting the availability of visas and work permits. In the US, H1B fee has recently been doubled & there is an existing proposal of five fold visa fee hike. Recent language of US policy makers during the US elections throws further uncertainty on

Emerging protectionist culture in the West

Challenges facing the Indian IT industry – 2/2

Industry Maturity Cost Benefit Quick Scaling Talent Pool

Key inherent strength despite these challenges…

Appendix

Sources

• NASSCOM – various data points related to the Indian IT industry• HRD Ministry, RBI & reports published by other Indian govt. agencies• Livemint• The Hindu• ISG & TPI Research – data points on captives• Yahoo Finance – Forex trends USD vs INR• Infosys Research• PWC Consulting – study on sourcing by Soumen Mukherji• World Bank – GDP & global financial data• Venture Intelligence• IIM Ahmedabad – study on Indian IT Industry by Subhash Bhatnagar et al.• Deloitte• Gartner• Horses for Sources

• Image sources - UKIP, Donald Trump, Twitter & The Independent

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