Indian IT Software

& Service Industry

2002-03
CONFIDENTIAL

Kiran Karnik
President, NASSCOM
June 3, 2003

Document
Date

This report is solely for the use of client personnel. No part of it may be
circulated, quoted, or reproduced for distribution outside the client
organization without prior written approval from McKinsey & Company.
This material was used by McKinsey & Company during an oral
presentation; it is not a complete record of the discussion.
Unit of measure
IT Software and Service Exports growth

Industry achieved 26.3% growth clocking a revenue of Rs. 46,100

crores (US$ 9.5 billion)
 IT Services,products and technology services have grown by 18.3%
reach Rs. 34,800 crores (US$ 7.2 Billion)
 ITES-BPO segment has registered a growth of 59.1% to reach Rs.
11,300 crores (US$2.3 Billion)

Despite a tough market environment and Rupee appreciation,

industry has witnessed growth

* Footnote
Source: Source
Unit of measure
Absolute Growth for Year 2002-03

1200 1064
1000 852 856
800
549
600

400

200

IT Services, Products & ITES-BPO

Tech Services

2001-02 2002-03

Source: NASSCOM, STPI

* Footnote
Source: Source
 Work has considerably moved offshore
Unit of measure

DELIVERY MODELS

70% 62%
56% 57%
60% 52%
48%
50% 44% 43%
38%
40%
30%
20%
10%
0%
2000-01 2001-02 2002-03 2003-04E

Onsite Offshore

* Footnote
Source: Source
Unit of measure
Exports by Geography

Geography 2001-02 2002-03

Americas 67.1% 71%
UK 12.6% 14%
Europe (excl UK) 11.1% 9%
Rest of the World 9.2% 6%

US & UK continue to be the primary destination for exports

* Footnote
Source: Source
Unit of measure
Exports by vendor type (US$ M)

IT Services, Products & Tech Services ITES-BPO industry

6000 5490 1600

4825 1350
5000 4434 1400
1200
4000 985
1000
769 710
3000 800
1700 530
2000 600 400
1300
840 400
1000
200
0 0
Third Party Vendors Captive units Third Party Vendors Captive units
2000-01 2001-02 2002-03 2000-01 2001-02 2002-03

• Products & Tech services exports by Indian players have increased

• Captive ITES-BPO players have almost doubled their presence
* Footnote
Source: Source
Unit of measure
IT Services Growth: India & Worldwide
70
60
50
Growth

40
30
20
10
0
1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003-
96 97 98 99 00 01 02 03 04

Worldwide IT Services Indian IT Services

* Footnote
Source: Source
 Growth of Exports by vendor type (US$ M)
Unit of measure

IT Services, Products & Tech Services ITES-BPO industry

60% 55% 100% 90%

50% 78%
80%
40%
31% 60%
30% 45%
40% 28%
20% 14%
9%
10% 20%

0% 0%
Third Party Vendors Captive units Third Party Vendors Captive units
2001-02 2002-03 2001-02 2002-03

• ITS/Products & Tech services: Third party vendors have grown

• ITES-BPO players: Captives have grown the maximum

* Footnote
Source: Source
Unit of measure
Composition of Exports

IT Services, Products & Tech Services ITES-BPO industry

2001-02 2001-02
21%

48%
52%

79%

2002-03 2002-03
24%

42%

58%

76%

Third Party Vendors

Captive Units
* Footnote
Source: Source
Unit of measure
Growth by vendor size (US$ M)

IT Services, Products & Tech Services

3500

3000 26
2500 %
2000

1500 31%
1000
-5%
500
4% 19%
0 - 4%
Tier 1 (Above Tier 2 (250- Tier 3 (100- Tier 4 (50-100 SMEs (Below MNC
Rs. 1000 1000 crores) 250 crores) crores) Rs. 50 crore) Backends
crore)

2001-02 2002-03

While Tier 1 companies and MNC backends have registered good growth,
SMEs have also registered 19% growth
* Footnote
Source: Source
 Industry going through a transitionary phase
Unit of measure

Period Phase I Phase II Phase III Phase IV

1985-95 1995-00 2001-04 2005-2007

Negligible Under $1 US$ 6 billion US$ 14

Size of Industry billion billion plus

App dev & + E-biz, ERP, + SI, NM, Pack + IT consult, IT

Service Lines Maintenance Soft, BPO,
Y2K Outsourcing
Products, Tech

Staff Aug., Staff Aug., Onsite, Global

Delivery Model
Onsite Onsite Offshore Delivery

Large no. of Big 5 increase Mid-size expand, Big 5 in global

Industry Structure startups share and SME Big 5 grow and league
growth niche firms emerge

Peak Contract Size < US$ 5,00,000 = US$ 5 million = US$ 40 million = US$ 100 million

Large Fortune Large Fortune 500 Global 2000 Global 5000

Customer Profile
100

Industry value to + quality, + security, data + business

Lower costs
customers productivity protection, innovation
process mgt

Notes; SI: System Integration; NM: Network Management; Pack Soft: Package Software
* Footnote
Source: Source
Unit of measure
Trends in the Industry

 Medium sized companies need to

IT Services sharpen focus/USP or gain size to
grow
 Margins will continue to face
pressure as rupee is expected to
appreciate over the year

 Scale of operations (1000 seats) is

ITES-BPO critical factor for survival
 Captive units will continue to grow
at a faster pace than third party
vendors

* Footnote
Source: Source
Unit of measure
Challenges facing the industry

Anti-outsourcing
bills & Visa issues
 No immediate impact
 Bills introduced will need to go
through a long drawn process of
approvals
 Increased trend towards offshoring
will offset impact if any

NASSCOM
 Initiated a dialogue with various
playing a Pro- policy makers, legislators and
active role customers
 Working with the Ministry of
External Affairs, STPI and Ministry
of Communications & IT,
Government of India
* Footnote
Source: Source
Unit of measure
Realities of offshoring to India

 Resistance to offshoring will restrict long-term growth of the US

industry
– US Auto industry is competitive while the Steel industry is
faced with downturn
 US businesses have witnessed significant cost savings from
Offshoring to India
– US BFSI sector costs are 7 to 10% lower than their
European counterparts
– US BFSI industry has saved US$ 6 billion in the past 4 years
 Apart from cost savings, offshoring has resulted in quality and
productivity gains
– US BFSI sector has received productivity gains of 15 to 20%
– And customer satisfaction levels of almost 85%

* Footnote
Source: Source
Unit of measure
India’s contribution to US Economy
Projected Software and Services Exports US$ 8.5 Billion
to US in 2003-04
Savings to the US Economy by Offshoring to US$ 10-11 Billion
India
Hi-Tech Imports from US to India US$ 3 Billion
Contribution by Indian IT professionals to US US$ 0.5 Billion
Social Security

Income Tax paid Indian IT professionals in US$ 0.5 Billion

US

Spending by Indian IT professionals in US US$ 1.8 Billion

Total benefits to the US economy US$ 16.8

Source: NASSCOM
All figures are estimated
* Footnote
Source: Source
Unit of measure
Outlook for 2003-04

Industry is projected to achieve 26-28% in growth clocking a

revenue of over $12 Billion (at current exchange rates)
 IT Services, Products & Technology Services are
projected to register a growth of 17% to reach revenues
of over US$ 8.4 billion
 ITES-BPO segment is projected to register a growth of
54% to clock revenues of US$ 3.6 billion

* Footnote
Source: Source
 Questions
CONFIDENTIAL

Document
Date

This report is solely for the use of client personnel. No part of it may be
circulated, quoted, or reproduced for distribution outside the client
organization without prior written approval from McKinsey & Company.
This material was used by McKinsey & Company during an oral
presentation; it is not a complete record of the discussion.