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Achieving Sustainable
and Inclusive Growth
Through Global
Sourcing of Services
Achieving Sustainable
and Inclusive Growth
Through Global
Sourcing of Services
Barnik Chitran Maitra McKinsey and Company
Barnik Chitran Maitra McKinsey and Company
1
TOPICSTOPICS
The transformational role of the IT/BPO industry
Concluding remarks
Perspectives on the IT/BPO Offshore industry
2
PERSPECTIVES ON THE IT/BPO OFFSHORING OUTSOURCING INDUSTRY
PERSPECTIVES ON THE IT/BPO OFFSHORING OUTSOURCING INDUSTRY
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
3
* 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
Addressable markets for offshore IT/BPO/R&D exports is at least US $450 billion
ESTIMATES
US$ billion US$ billion
55
25.5
29.5
Current size
~220-250
Addressable market
Others*
India
4-5x
11
Current size
~160-190
24
13
Addressable market
7-8x
SIGNIFICANT “HEAD-ROOM” FOR FURTHER GROWTH OF THE OFFSHORE IT/BPO/R&D SERVICES INDUSTRY
SIGNIFICANT “HEAD-ROOM” FOR FURTHER GROWTH OF THE OFFSHORE IT/BPO/R&D SERVICES INDUSTRY11
Global offshore IT & Engg exports, FY 2008***
Global BPO exports**, FY 2008***
4
SIGNIFICANT INCREASE IN ADOPTION EXPECTED IN OFFSHORE SERVICES-INFRASTRUCTURE IT SERVICES
SIGNIFICANT INCREASE IN ADOPTION EXPECTED IN OFFSHORE SERVICES-INFRASTRUCTURE IT SERVICES
76-100
51-75
26-50
1-25
0
Average*
76-100
51-75
26-50
1-25
0
Average*
76-100
51-75
26-50
1-25
0
Average
76-100
51-75
26-50
1-25
0
Average
* Estimated Weighted average of budget offshored
Source: McKinsey CIO survey 2006 and 2007; McKinsey Analysis
CIO response to question - What fraction of your infrastructure is offshored?
Today In 3 years Today In 3 years
Per cent of respondents
Per cent of infrastructure offshored
Per cent of respondents
Per cent of infrastructure offshored
Per cent of respondents
Per cent of infrastructure offshored
Per cent of respondents
Per cent of infrastructure offshored
Per cent of respondents
22
2006 CIO survey 2007 CIO survey
1
0
17
11
40
10
7
0
19
19
25
13
5
2
10
15
37
27
3
3
10
29
23
34
5
BPO AND IT SERVICES INDUSTRY CONTINUES TO DELIVER STRONG PERFORMANCE
BPO AND IT SERVICES INDUSTRY CONTINUES TO DELIVER STRONG PERFORMANCE
Basic data
Rules-baseddata
Basic voice
CLIENT SATISFACTION LEVELS WITHPercent
Back office operations Offshore IT operations
22
8685
8178
8585
20082007
Source: McKinsey P3600 benchmarking
Applicationdevelopment
Applicationmaintenance
8173
8070
8374
20082007
Packagesoftwareimplementation
6
PERFORMANCE ON BASIC METRICS CONTINUES TO BE STRONG
PERFORMANCE ON BASIC METRICS CONTINUES TO BE STRONG
Proportion of time SLAs are met Proportion of project completed on schedule
22
COMPLIANCE ON CONTRACTUAL OBLIGATIONSPercent
SLA Compliance Delivery compliance
9594
9391
8886
20082007
Source: McKinsey P3600 benchmarking
Applicationmaintenance
8479
8776
2007 2008
8380
Basic data
Rules-baseddata
Basic voice
Applicationdevelopment
Packagesoftwareimplementation
7
RATIONALE FOR OFFSHORING WILL REMAIN STRONGRATIONALE FOR OFFSHORING WILL REMAIN STRONG
8.5
78.0
6.0
Other direct costs
Direct people costs
2.3
84.0
10.8
73.2
10.2
83.0
6.0
2.3
89.0
12.5
76.5
2008 2010
India basedunit
US basedunit
Key assumptions
• Offshore salary costs at each level increases based on historical growth rates
• No changes in delivery pyramid (ratio between developer, analysts, PL, PMs)
• Other costs include all physical infrastructure costs (e.g., facilities, equipment)
• No increase in G&A costs for both India and US based units
22
India basedunit
US basedunit
Source: Watson Wyatt; NASSCOM-Hewitt Compensation Benchmarking; Project360 metrics database for offshore units; team analysis
US$/FTE/Hour
8
Indexed wage differential
India
LABOR COST ARBITRAGE WILL CONTINUE FOR SEVERAL YEARS, EVEN WITH OFFSHORE INFLATIONARY PRESSURE
LABOR COST ARBITRAGE WILL CONTINUE FOR SEVERAL YEARS, EVEN WITH OFFSHORE INFLATIONARY PRESSURE
1002005
1102010
1222015
1352020
- CAGR
14
46
74
120
86
65
39
11
* 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
• Despite wage inflation, leading Indian BPO providers have actually lowered operating costs 7 to 11% (2006 -2007)
• 5% wage inflation "lock-in" not un-common in vendor contracts
• Despite wage inflation, leading Indian BPO providers have actually lowered operating costs 7 to 11% (2006 -2007)
• 5% wage inflation "lock-in" not un-common in vendor contracts
2%
20*%
10**%
22
Real wage cost for skilled workforce in India vs. US
US
9
ITES
INDIA HAS INCREASED IT’S SHARE OF THE GLOBAL OFFSHORE BPO INDUSTRY & HAS A 50% OVERALL SHARE
INDIA HAS INCREASED IT’S SHARE OF THE GLOBAL OFFSHORE BPO INDUSTRY & HAS A 50% OVERALL SHARE
* Includes Philippines, China, Russia, Eastern Europe, Ireland, Mexico
Source: NASSCOM Strategic Review 2008; McKinsey Global Institute 2005; neoIT; press articles
Share of global offshore industry
BPO
Share of global offshore industry
Per cent Per cent
62
38
US$8.5 bn
2001
46
54
US$55 bn
2008
Others*
India
100% =
39
61
US$2.3 bn
2001
54
46
US$24 bn
2008
Others*
India
100% =
33
10
* Graduates with skills for direct employment (does not consider willingness and accessibility of talent)
** Number derived via extrapolation
*** As of 2007
Source: HR interviews; country labour and graduation statistics; McKinsey Global Institute
DRIVEN BY ITS SUPERIOR SUPPLY OF SUITABLE LOW WAGE TALENT
DRIVEN BY ITS SUPERIOR SUPPLY OF SUITABLE LOW WAGE TALENT
2,078
1,084
1,020
586473
1,175
8,043
5%
Poland
3554% 324
4%
Thailand**
308
China
26%
India***
13%
Russia
4%
13%
7%
Philippines
6%
Turkey**
408
Mexico
2323%
IndonesiaBrazil
18 other Low-wage countries
100
Total supply of suitable low-wage talent (28 countries)
15%
33
Aggregate suitable* graduate talent pool for offshore IT and BPO industries
11
TOPICSTOPICS
Concluding remarks
Perspectives on the IT/BPO Offshore industry
The transformational role of the IT/BPO industry
12
OFFSHORE IT AND BPO INDUSTRIES HAVE THE POTENTIAL TO TRANSFORM INDIA OVER THE NEXT 10 YEARS
OFFSHORE IT AND BPO INDUSTRIES HAVE THE POTENTIAL TO TRANSFORM INDIA OVER THE NEXT 10 YEARS
What IT/BPO industry can do for India
Economic growth engines
Potential size of India’ offshore IT and BPO industries
Taiwan’s engineering and electronics industry (2004)
Saudi Arabia’s Oil (2004)
Source: SAMA; EIU Viewswire; CMIE; Goldman Sachs; global Insights; Deutsche Bank; World Bank; Energy Information Administration (EIA)
120-180
53
116
Contribution to GDP
Per centUS$ billion
12-1512-15
1717
4545
13
THE IT/BPO INDUSTRY IS ON TRACK TO ACHIEVE IT’S MEDIUM TERM ASPIRATIONS
THE IT/BPO INDUSTRY IS ON TRACK TO ACHIEVE IT’S MEDIUM TERM ASPIRATIONS
US$ billion in export revenues
IT/BPO exports expected to continue strong growth
12.0
35.05.2
25.0
5.81.5
FY 2002
17.2
FY 2005
60.0
FY 2010 E
BPO
IT
7.3
8x
IT/BPO industry expected to have significant impact
on India’s economy
Estimated 17% of India’s incremental GDP growth over the five year period (2005-2010)
17%
GDP growth
Source: NASSCOM McKinsey 2005 Report
Over 80% of the growth in exports between 2005 to 2010
Export growth
Estimated 10 million total employment by 2010, equaling planned employment creation from all special programs in the 10th plan of Planning Commission
Employment creation
14
Net impact on employment in India
OFFSHORE IT AND BPO INDUSTRIES IS A PRIME EMPLOYMENT CREATION ENGINE
OFFSHORE IT AND BPO INDUSTRIES IS A PRIME EMPLOYMENT CREATION ENGINE
ESTIMATES
Source: 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
Million jobs, 2010
>2.8x
2.3
Total employment generated
>9>6.5
Indirect and induced employment
Direct employment
15
UNPARALLELED IMPACT ON INDIA’S ECONOMY: SIGNIFICANT CAPACITY BUILDING IN HIGHER EDUCATION AND URBAN EMPLOYMENT GENERATION
UNPARALLELED IMPACT ON INDIA’S ECONOMY: SIGNIFICANT CAPACITY BUILDING IN HIGHER EDUCATION AND URBAN EMPLOYMENT GENERATION
* 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 employment
Source: Institute of applied manpower research; CRISIL–NASSCOM report Employment and Output Linkages, 2007
Impact on higher education in top 6 states that dominate technology/ business services exports Employment impact of different growth engines
Incremental exports share (1998-2007)
No. of institutions added(1998-2007)
US$ billions # of institutions per state
110
16-18
6x
Top 6 states (Karnataka, AP, NCR, TN, Maharashtra)
500
90-100
5x
Engineering education
Others(21 states + 6 UTs)
Top 6 states (Karnataka, AP, NCR, TN, Maharashtra)
Others(21 states + 6 UTs)
Non-engineering education
~15
~1
~6
~0.3
Incremental jobs in million created during 1994-2005
1.1
8.7*
Total urban jobs
2.5**-4.4**
3.6-5.5
Technology/business services
Indirect
Direct
% of totalurban jobs
42-63
Per cent
30-51
12
Technology/business services industry has contributed to 42-63% of incremental urban jobs between 1994 and 2005 through direct and indirect employment
16
Increase capacity of higher education system*
Improve willingness to join the offshore IT and BPO industries
Improve suitability of graduates for IT/BPO jobs
Develop a three pronged approach to improve willingness to join the BPO industry
1
6
5
43
2
Pilot and roll-out “industry-owned”integrated skill development program
Encourage creation of self regulating associations of private higher education institutes
Introduce an output-based ranking of colleges to raise performance standards in the highereducation system Develop
scalable e-learning programs for IT/BPO skill development
Implement faculty quality and coverage improvement initiatives through four specific programs
THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-IMPROVED QUALITY OF TALENT
THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-IMPROVED QUALITY OF TALENT
* Not a priority to sustain leadership
17
From . . .. . . to From . . .
75-80% of total Class A office space demand in India is from the IT/BPO
industry
. . . to
THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-QUALITY COMMERCIAL REAL ESTATE DEVELOPMENT
THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-QUALITY COMMERCIAL REAL ESTATE DEVELOPMENT
18
From . . .. . . to
Improved work environment with all modern facilities
From . . . . . . to
THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-WORK ENVIRONMENT
THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-WORK ENVIRONMENT
19
From . . .. . . to
Starting salaries at IT/BPO units (>US$ 300 per month) exceeds retiring salaries of
the previous generation
From . . . . . . to
THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-HIGHER CONSUMPTION WITH RISING DISPOSABLE INCOME
THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-HIGHER CONSUMPTION WITH RISING DISPOSABLE INCOME
20
From . . .. . . to
Improved citizen services (e.g., registrations,
payments etc.) through e-governance
From . . . . . . to
THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-CITIZEN SERVICES
THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-CITIZEN SERVICES
21
From . . .. . . to
Airports at major cities (Mumbai, Delhi, Hyderabad,
Bangalore) being modernized
From . . . . . . to
THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-QUALITY INFRASTRUCTURE
THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-QUALITY INFRASTRUCTURE
22
TOPICSTOPICS
Concluding remarks
Perspectives on the IT/BPO Offshore industry
The transformational role of the IT/BPO industry
23
PERSPECTIVES ON THE IT/BPO OFFSHORING OUTSOURCING INDUSTRY
PERSPECTIVES ON THE IT/BPO OFFSHORING OUTSOURCING INDUSTRY
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