kpmg morning keynote
DESCRIPTION
Virtual Trade Mission: Exploring Opportunities in India May 7, 2009TRANSCRIPT
Virtual Trade Mission to India: OpportunitiesMay 2009
ADVISORY
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Looking back, we can see some of the triggers:
Downturn in the U.S. housing market (“U.S. housing bubble”) and excessive speculation in housing market
Risky lending and flawed borrowing practices
Excessive individual and corporate debt levels
Poor securitization practices and hedging practices
Excessive underwriting of high-risk mortgages
Insufficient regulatory oversight of regulatory processes
The economy – It’s been tough!
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Source: NASSCOM Strategic Review 2007, 2008 & 2009. Businessworld BPO Report and KPMG Analysis
The economy… and outsourcing have changed
• Global credit crunch
• Reset stock markets
• Record unemployment
• Slowing consumer spending
• Crisis of U.S. auto and financial industries
Now
• Impact of slowdown, and on outsourcing, varies by industry
• Going back to the basics: Companies look for cost optimization and innovation for sustainability
• Merger and acquisition activity is being postponed
• Interestingly, Small to Medium Business (SMB) market for outsourcing business is rising
• Companies are seeking newer destinations to lower costs and get added benefits
Then
Economy Outsourcing
• Growth expectations very high
• Investment funds were easily available
• Market capitalizations were high
• Housing, employment and credit boom
• Outsourcing was growing rapidly, new business, new geographies and new services were being continually added.
• Service providers were growing organically and inorganically, marketing and business development spends were high
• Companies were willing to invest in the outsourcing relationship in favor of longer term benefits
• Outsourcing billing rates were at a premium and service providers had an equal position at the bargaining table
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At the same time… sourcing is becoming increasingly global
Increasing knowledge and maturity is leading to a search for newer locations.
CalgaryWinnipeg
Boise
Indianapolis
QueretaroGuadalajara
Curitiba
Campinas
Buenos Aires
Santiago
Port Louis
Cairo
Tunis
Belfast Gdansk
Rostov-on-Don
Cluj-Napoca
Lviv
Sofia
ZagrebBelgrade
Nagpur
Jaipur
Ahmedabad
Penang
Ho Chi Minh City
Davao City
Iloilo City
Brisbane
Hangzhou
Changsha
Source: KPMG, Exploring Global Frontiers, February 2009
5© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
… and developing economies have shown double digit growth in IT spending through 2008
Source: IDC, NASSCOM Strategic Review 2009
LATIN AMERICA
• 3% of the global IT services spend
• 10% growth in 2008
NORTH AMERICA
• 39% of the global IT services spend
• 4.2% growth in 2008
WESTERN EUROPE
• 37% of the global IT services spend
• 5% growth in 2008
CENTRAL EUROPE, ME, AFRICA
• 4.7% of the global IT services spend
• 14.7% growth in 2008
ASIA PACIFIC
• 15% of the global IT services spend
• 6.8% growth in 2008, over 10% in developing economies (excl. Japan)
The total spend on IT Services in 2008 was estimated at over $557 USD Billion.
Global sourcing market has increased threefold since 2004.
6© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
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
Other global trends in outsourcing
7© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
Back to basics (parallels)
Reaction to global recession:
• Housing speculation Ownership mentality
• Risky lending Credit worthiness
• High debt levels Debt reduction
• Flawed oversight Increased regulation
• Weak credit rating Improved processes and governance
Sourcing reaction to issues:
• “Lift and drop” Retain ownership of overall process
• Fire-walled relationship Transparent operations
• Turn-key operations Sustainable process
• Focus on transition Focus on operations
• Limited security concern Increased due diligence and audit
8© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
Back to basics – Five key questions
• 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
• What services and functions should we consider to meet those goals? Across the enterprise, what services or processes are candidates for a sourcing review?
• Who can best perform or deliver these services to meet those goals? Should the job be performed in-house or outsourced to external resources?
• How should the work be done? Do we want a customized or standard service/process?
• Where should the work be done? Will this work be performed domestically/onshore or non-domestically/offshore?
9© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
Back to basics - Potential outsourcing concerns
Strategic RisksRisks associated with adverse business decisions or failure to
implement decisions
Regulatory RisksRisks caused by violation of laws, rules, regulations, prescribed
practices and ethical standards
Operational RisksRisks attributable to operational problems with service or product
delivery or inability of an entity to recover fully and timely from unforeseen events
Financial RisksRisks attributable to interest rate movements or movement in
foreign exchange rates that impact cross-border contracts and operating activities
Credit and Liquidity Risks
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
Reputation RiskRisk of negative publicity regarding business practices associated
with the outsourced operation
Technology RiskRisks 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
10© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
Back to basics – Build a strong sourcing framework
Bui
ldD
eliver
Service Management
Governance
RelationshipManagement
Planning Transition OperationsDesign
11© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
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
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 presence24 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
IndiaJohnson & 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.”
Source : KPMG Analysis, various media articles
12© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
Enhance agility
Policy approach has aided growth in the sector, creating an enabling environment
Targeted policy actions and progressive reform (Special Economic Zones, etc.)
Established methodologies and processes Well defined, quantifiable quality and
process metrics Global quality certifications a must to
operate
Wide scope – low to high value skills, across value chain – IT, BPO, R&D and analytics
Focus on new issues – Green IT, innovation
Large, qualified and young workforce India has the largest share of the global
offshore talent pool (28%)
30% to 40% cost advantage Additional benefits through low cost
process improvement, consolidation and automation.
Why offshore to India?
Growth-new
markets
Extractvalue
Releasecapital
Reducerisk
Reducecurrentcosts
Focus oncore
business
Government
Cost
Scale
Scope
Quality/ Information Security
Sources: NASSCOM Strategic Review 2009
The private sector providing quality business infrastructure (office space, telecommunication network)
Private Sector
Business benefits
13© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
General profileLocation: South Asia World’s 7th largest country
by area (3,827,263 sq kms) World’s 2nd largest country
by population Population: 1.15 billion No of dominant languages:
18 No of English Speakers: 100
million - 2nd largest English-speaking nation in the world
Securities market Leading stock exchanges:
National Stock Exchange (NSE) and Bombay Stock exchange (BSE)
No. of listed companies: 6,217 on BSE and NSE
Market capitalization (BSE): USD 1.1 trillion (2008)
Source: World Federation of Exchanges, RBI, World Statesmen.org
India: The Tiger Economy
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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
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)
Students graduating in 2005-06 (estimates)
Total number of Engineers
454,000
Total Number of Arts, Commerce, Science Graduates
2,440,0
00
Other professionals
CAs 130,000
MBAs (2002) 65,000
PhDs (Science & Engineering)
7,000Source: Ministry of HRD, Govt. of India; NASSCOM# Members as April 1, 2006 Source: NASSCOM Strategic review 2006
28%
11%
10%8%
7%5%
4%4%4%3%
16%
India
China
Russia
Philippines
Turkey
Thailand
Poland
Brazil
Mexico
Indonesia
18 other low wagecountries
Total suitable talent pool for offshore IT & BPO
India: Talent pool advantage
15© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
Moving to higher value added services
Data Entry
Call CentersCollections
Customer Service
F&A Processing Reporting
Technology Help DeskResearch
Analyticsand otherservices
Investment Banking,Equity Research,
High-end Analytics
Cost Arbitrage & Labour
Productivity
ProcessImprovement
ValueCreation
Phase 1 Phase 2 Phase 3
16© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
Infrastructure
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.
Rising Costs
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.
Attrition
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.
Security Threats
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.
Key concerns when offshoring to India
17© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
In summary…
• Economic crisis has demanded reexamination of
business needs… and opportunities
• Opportunities should be examined via “back to basics”
criteria
• In sourcing, India is still a leader… for several reasons
(talent pool, government, economy, cost, etc.)
• Understand risks and develop mitigating strategies
(eyes wide open!)
• Embrace opportunity!!!
18© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
Contact Information
Ronald Clanton
Partner, KPMG Sourcing Advisory Services
(919) 664-7247All 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.