Offshoring and Outsourcing in India: The Global Business Debate

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Offshoring and Outsourcing in India The Global
Business Debate
Poonam Barua Director PAMASIA Global Corporate
Advisory New Delhi email pamasia_at_vsnl.com
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Economic Indicators

• Largest democracy 1.1 billion population
• 1991 Wide-ranging reforms to open and deregulate
  the economy
• GDP growth over 8 in 2005-6 fastest growing
  economies in the world, with compounded growth at
  5.7
• Gross GDP - 3 trillion fourth largest economy
  in the world after USA, Japan and China
• Annual per capital income is 2,880 one of the
  lowest in the world
• Indians remit about 18.3 b. back to India
  annually one of the highest in the world
• In 2003 total of 9, 500 listed companies on the
  BSE and NSE (23 registered stock exchanges)
• Total market capitalization is 22 25 of GDP
• Top 100 BSE companies represent almost 86 of
  market cap
• State-owned enterprises account for nearly 32
  of BSE market cap

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• Indias Market
• Indias economy is expected to grow over 6 -
  faster than any other country in the world
  (Duetshe Bank Research)
• India is one of the fastest growing markets in
  the BPO space
• India is the worlds fourth largest economy-
  adjusted for purchasing power parity (PPP) next
  only to U.S, China, Japan
• There is a large potential in the SMB, and
  mid-market space, and for solutions enabling the
  (offshore) services industry

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• Goldman Sachs Report of 1 October, 2003
  "Dreaming with BRICs The path to 2050
• Indias GDP will reach 1 trillion by 2011,
• 2 trillion by 2020, 3 trillion by 2025,
  
• 6 trillion by 2032, 10 trillion by 2038,
  and
• 27 trillion by 2050, becoming the 3rd
  largest economy after USA and China.
• In terms of GDP
• India will overtake Italy by the year 2016
• France by 2019, UK by 2022, Germany by 2023,
  and Japan by 2032.

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India Corporate Profile

• Market Cap No. of Companies
• (April 2006)
• gt 20 billion 3
• gt 10 billion 9
• gt 5 billion 18
• gt 1 billion 62
• gt 500 m 74
• Growing over 100 Global Indian mncs that will
  be above 1 billion
• 50 of the over 1 billion companies are
  currently in public sector
• No. of listed companies on BSE 10,000
• No. of companies on Nasdaq
• No. of companies on NYSE

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Driving Global Leadership

• IT led sectors
• McKinsey and Nasscom India's revenues from IT
  industry will reach 87 billion by 2008
• Profile of IT-led Sector
• Tier 1 companies ie. Top 5 firms
• Account for 32 of total software export
• Tier 2 companies ie. Revenues Rs. 1 billion -
  Rs. 10 million
• Account for 24 of the industry
• MNC back-ends
• Account for about 26 of the industry
• Focused companies domain/ service line/
  products/
• Account for about 3-4 of revenues
• Small companies ie. less than Rs. 1 billion
  revenues,
• Account for 12-14 of the market

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• New emerging areas
• bio-informatics, bio-technology, genomics,
  clinical research and trials Ranbaxy, Cipla,
  Piramal, Reliance Lifesciences, Biocon
• Worldclass Manufacturing
• Bharat Forge has the world's largest
  single-location forging facility, its clients
  include Honda, Toyota and Volvo amongst others.
• Hero Honda with 1.7m motorcycles a year is now
  the largest motorcycle manufacturer in the world.
• India is the 2nd largest tractor manufacturer in
  the world.
• India is the 5th largest commercial vehicle
  manufacturer in the world.
• Ford has just presented its Gold World Excellence
  Award to India's Cooper Tyres.

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• Worldclass Manufacturing ctd.
• Hyundai India will become global small car hub
  for Korean giant -- supplying half a million cars
  to Hyundai Korea, HMI and Ford by 2010
• Aston Martin latest luxury sports car, AM V8
  Vantage, is being prototyped by an Indian-based
  designer.
• 80 of the Worlds 117 SEI CMM Level-5 companies
  are based in India.
• 5 Indian companies recently received the globally
  acclaimed Deming (TQM) prize.
• Retail Sector Late Riser
• Largest retail density worldwide about 15
  million retail outlets
• Retail trade will be 10-11 of GDP
• Growing at 158 between 2003-5 compared to 40
  in other emerging markets
• Valued at 19 billion currently compared to
  Chinas 50 million

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• Business Acquisitions 2005-6
• Tata Tea acquires Energy Brand USA- 677 m.
• Wipro cqired mpower, Cmangao, and Quantech USA-
  58 m.
• ONGC takes over Ominex, Columbia -- 45 m.
• Tata Steel 8 billion bid for Corus Steel
• Aban Llyod buys Norwegian firm Sinvest for 425
  m.
• Dr. Reddys acquires Betapharm Germany for 571 m.
• Mahindra Mahindra takes over Jeco Holding in
  Germany for Euro 140 m.
• Sulzon Energy Buys Hanson Transmission in
  Belgium for 565 m.
• Ranbaxy Labs Takes over Terapia in Rumania for
  324 m.

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• Videocon India takes over Daweoo Electronics in
  South Korea for 648 m. buys CPT Thomson,
  France, for Euro 240 m.
• What are they buying
• Oil and Gas
• Pharma and Healthcare
• IT IT enabled services
• Food and Beverage
• Manufacturing
• Others

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• Global BPO and process-engineering
• Geneva-based STMicroelectronics is one of the
  largest semiconductor companies to develop
  integrated circuits and software in India.
• Texas Instruments was the first to open
  operations in Bangalore, followed by Motorola,
  Intel, Cadence Design Systems and others.

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Market Dynamics

• Mobile phones are growing by about 1.5 Million a
  month. Long distance rates are down by two-thirds
  in five years and by 80 for data transmission.
• Wal-Mart sources 1 billion worth of goods from
  India - half its apparel. Wal-Mart expects this
  to increase to 10 Billion in the next couple of
  years.
• GAP sources about 600 million and Hilfiger 100
  million worth of apparel from India.
• There are about 200 call centres in India with a
  turnover of 2 billion and a workforce of
  150,000.
• 100 of the Fortune 500 are now present in India
  compared to 33 in China.

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Talent Dynamics

• Top 5 American employers in India
• General Electric 17,800 employeesHewlett-Pa
  ckard 11,000 employeesIBM 6,000
  employeesAmerican Express 4,000
  employeesDell 3,800 employees
• Top 5 Indian employers
• Infosys 40,000
• Wipro 35,000
• TCS 100,000
• Reliance 120,000
• Satyam 35,000

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• Indias Talent Advantage
• India has the worlds largest pool of
  English-speaking software engineers, permitting
  fast and large-scale project ramp-ups
• Flexibility, eagerness to learn, and technical
  proficiency are key characteristics
• More than 700,000 software professionals
• 250,000 of them in top-tier companies
• Access to talent from top universities available
  in the country
• at low cost
• With more than 250 universities, 1,500 research
  institutions and 10,428 higher-education
  institutes, India produces 200,000 engineering
  graduates and another 300,000 technically trained
  graduates every year. 2 million additional
  graduates qualify annually.
• The Indian Institute of Technology (IIT) is among
  the top three universities from which McKinsey
  Company, hires most.

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Advantage India..
Global Outsourcing Trends IT-enabled Services
BPOs KPOs
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• Key drivers for Global offshore/ outsourcing as a
  strategic alternative
• Increasing global competitiveness
• Access to global talent
• Economies of scale
• Process engineering and enhancements
• Wage arbitrage
• Increased profit margins
• Improvements in quality

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India holds 55 of the global Offshore BPO
IndustryMore than ½ of Fortune 500 companies
have outsourced to IndiaIndia BPO Services grew
by about 49 in 2004Indian BPO is growing at 7
times the domestic GDPIndian outsourcing is
moving up the value-chainLOBs developing HR
and FinanceIndian KPO (knowledge process
outsourcing) to grow from 1.2 billion to 15.5
billion in 2010 (ie. 75 of the global KP market)
Advantage India..
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The real economics of offshoring

• . . . and makes the global pie that much bigger

• . . . creates new value from reemploying U.S.
  labor . . .

• 1 previouslyspent in U.S.,now offshored to
  India . . .

Estimate based on historical U.S. reemployment
trends Source McKinsey Global Institute
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• Indias Value Proposition for ITES-BPO Industry
  PQRS Productivity, Quality, Rate, Scalability
  factor
• Abililty of Indian vendors to ramp-up operations
  rapidly
• Widening breadth of services
• Shift towards high-value services
• Sustained cost advantage nearly 40-50 cost
  savings in India offshore operations
• Delivery process enhancement and improvement
• Access to an abundant skill pool India has the
  largest english speaking IT talent pool in the
  world, over 120,000 trained IT professionals and
  about 3 million other graduates added each year.
• Global quality credentials ISO,TQM, 6 SIGMA

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• Key markets
• U.S 2/3rds of total market
• Western Europe, mainly U.K. 20 approx.
• Market profiles
• Customer Care 35 of the sectors employee base
  at 122,000 employees, and 1/3 of revenues
• Finance 25 of revenues
• Administration 16 of revenue
• Content Development 13 of revenue

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• Ecosystem
• View from SAP Labs- Offshoring India Center
• Bangalore is one of the worlds top IT clusters
• System Integrators can be enabled to implement
  SAP NetWeaver and the Business Process Platform
  for customers
• Independent Software Vendors (ISV) can provide
  platform-based composite solutions

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• Cost Factor
• India is the one of the most cost-efficient
  locations for many mncs from Europe and U.S.
• Mckinsey Study
• and will be below 50 cost of Germany at least
  for the next 5 years (--SAP Labs)
• Context can be outsourced to a large spectrum
  of service providers

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Offshoring Engagement Models

• Outsourcing contracting a single supplier to
  perform full range of Application Development and
  Maintenance
• Selective Sourcing contracting a vendor to
  perform a portion of Application Development and
  Maintenance
• Co-Sourcing a partnership that is developed on a
  shared management arrangement to cooperatively
  build applications or systems
• Out-Tasking engaging suppliers to perform a
  specific task whilst the organization maintains
  control of the strategy and integration
• Skills Infusion integrating experts into the
  team of impart build expertise within
• Resource services hiring of delivery staff to
  manage performance bottlenecks
• Advisory Services ad-hoc services to fulfill
  gaps /or specialist advice

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Phobias of Outsourcing view from IBM
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The Seven Phobias of Offshoring
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People
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Geo-Political
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Service Provider
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Fear Of Unknown
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• What Executives are asking about India?
• Will economic reforms continueIndias noisy
  democracy perplexes many MNC Executives
• Are the multinationals really welcome?
• Isnt China the richer opportunity?
• How do successful multinationals approach India?
• Is offshoring in India worth the political risk?
• Will infrastructure be a problem?
• Will India protect intellectual property?

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China Vs India

• Average Wage costs
• China gt India
• HR Managers China 16,600 India 7,900
• Financial Experts China 6,900 India 4,400
• Rate of Wage Increase India 11.5 China 7.5
• Employment Culture China.. Driven by personal
  accomplishment, fair pay and benefits India..
  Driven by confidence in senior management and
  organizational reputation

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• Poonam Barua
• Director
• PAMASIA
• Global Corporate Advisory
• New Delhi
• email pamasia_at_vsnl.com