NVCA 4-Pillar Plan to Restore Liquidity in the U.S. Venture Capital Industry - Presentation Transcript

1. NVCA 4-Pillar Plan to Restore Liquidity in the U.S. Venture Capital Industry April 29/30, 2009 Dixon Doll DCM Co-Founder and General Partner, NVCA Chairman Mark Heesen NVCA President 1
2. Reinvigorating Liquidity in the U.S. VC Industry The Background The Situation The Solution Liquidity Challenges ? Job Creation Lack of IPOs Is ? Harmful to Job Innovation Creation and Overall Economy I II III IV Ecosystem Enhanced Taxation Regulation Partners Liquidity Comprehensive ? Paths Review of VC Ecosystem Is Required to Reinvigorate Our VC Industry U.S. Government Industry (once Financial Crisis & IPO Markets Stabilize) Drought Revealed Systemic Issues 2
3. Venture Capital Fuels Job Creation VC-Backed Companies 92% of Job Growth Create Jobs Faster Occurs Post-IPO Employment CAGR (2006 – 2008) VC-Backed Company Employment Growth 97% 94% 88% 76% 92% Pre-IPO Post-IPO 12.1M Jobs Created Sources: Left: Global Insight, 2009 Right: NVCA, Global Insight and Survey of Top 136 VC-Based Companies That Went Public 1970–2005 3
4. Numerous World-Leading Companies Were First Funded or Founded During Downturns 1970s 1980s 1990s 2000s F 4
5. Dramatic Decline in IPOs in the 2000’s Number of Venture-Based IPOs vs. M&A Exits 2000s 1990s 1,776 392 IPOs M&A IPOs M&A 13% 87% 56% 44% IPOs IPOs (’01 – ’08) (’92 – ’00) Lack of IPOs Is Harmful to Job Creation and Economy Source: Thomson Reuters/NVCA 5
6. IPOs in Decline This Decade Number and Value of Venture-Backed IPOs in the U.S. Number of IPOs IPO Value ($B) * Base Year 1998 = 100 Sources: Qatalyst Partners, Securities Data Company (All U.S. venture-backed IPOs of > $10MM from 1978 through 1991) Dow Jones VentureSource (All U.S. venture-backed IPOs from 1992 through December 31, 2008) 6
7. The Recent Realities of Venture-Backed M&As and IPOs Longer Time to IPO and M&A Median Age at IPO 4.5 9.6 Years Years 1998 2008 Median Age at M&A 3 6.5 Years Years 2008 1998 Source: Thomson Reuters, Dow Jones VentureSource 7
8. The Death of the Under $50M IPO 100 90 Transactions Raising $50M+ 80 70 60 Percent of 50 Total IPOs 40 30 20 Transactions Raising Less Than $50M 10 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008* 80% of IPOs 20% of IPOs Smaller than $50M Smaller than $50M *Data Includes Corporate IPOs as of 10/31/08. (Excludes Funds, REITs, SPACs and LPs). Source: Dealogic, Capital Markets Advisory Partners 8
9. NVCA 4-Pillar Plan to Restore Liquidity in the U.S. Venture Capital Industry Job Creation Innovation I III II IV Ecosystem Tax Enhanced Regulation Partners Incentives Liquidity Paths VC Industry U.S. Government 9
10. NVCA Plan: Pillar I – Ecosystem Partners Job Creation I-Banks Innovation VC Firms Buy Side Ecosystem I III II IV Partners Entrepreneurs Exchanges Ecosystem Tax Enhanced Regulation Partners Incentives Liquidity Paths Accounting Law Firms Firms VC Industry U.S. Government 10
11. I A Vacuum Exists for Small, Medium-Size Company IPOs Implicit Post-IPO Company Valuation ($MM) Boutique banks needed to help cover unserved areas $500 Would You Consider a Boutique I-Bank To Be the $400 Lead Book Runner for Going Public on a U.S. Stock Exchange?* $300 NO MAN’S LAND $200 32% 32% No Not Sure 36% $100 Yes IPOs not Appropriate $0 * Source: DCM Analysis / $25 $50 $75 $100 Survey of Venture-Backed Companies, 2009 – Size of IPO Offering ($MM)1 Participants (N) = 108 21st Century Versions of “4 Horsemen” Required : Assuming 25% of Company Sold in IPO 1 11
12. Major I-Banks and Big 4 Accounting Firms I Dominate U.S. IPOs Recent VC-Backed IPOs Nov. 2007 Feb. 2009 IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 I-Bank at IPO Audit Firm at IPO Investment Bank Audit Firm IPO Managed by Major I-Banks Traditional Big 4 IPO Co-Managed by Boutique and Major I-Banks Traditional Non-Big 4 IPO Managed by Boutique Bank Only 15 Out of 21 Recent IPOs Led by Major I-Banks and Big 4 Accounting Firms Source: NVCA, Thomson Reuters 12
13. I Accounting Firms Examined More Closely NVCA Recommends Use of New Terminology “The Global Six” in Describing Major International Accounting Organizations Qualified to Support Venture-Backed Portfolio Companies The Global Six Deloitte LLP KPMG LLP ? ? Ernst & Young LLP PricewaterhouseCoopers LLP ? ? Grant Thornton LLP BDO Seidman LLP ? ? Recent Research Performed by Capital Markets Advisory Partners (an Independent Advisory Firm) and Validated by the Above Six Firms, Shows All Six Organizations Have Created Global Accounting Networks Operating in More than 90 Countries Worldwide.* * Source: “Which Audit Firms are Accepted by Wall Street? A Reference Guide by Capital Markets Advisory Partners, 2009, Version 1.0 13
14. I NVCA Promoting Alternate Ecosystem Partners Investment Banks Accounting Firms NVCA Organizing Workshops NVCA Meeting with “Global Six” ? ? With Boutique Banks and Large Accounting Firms to Discuss Facilitate I-Banks to Identify and Address Needs of VC-backed Companies Needs of Emerging Growth and Ways To Provide Better Companies Worldwide Support NVCA Encourages Joint Book NVCA Encourages Obtaining ? ? Running (Major Bank and Bids From Global Six and Non- Encourage Boutique Bank Partnership) with Global Six Accounting Firms as Fee Sharing as a Desirable Desirable Practice in IPO Practice Planning NVCA Actions Can Create More Competitive Ecosystem 14
15. I Other Ecosystem Partner Recommendations I-Banks and VCs need to cultivate and ? nurture new buyers / funds specializing in venture IPOs Accounting Firms encouraged to ? provide lower-cost services to IPO candidate portfolio companies 15
16. NVCA Plan: Pillar II – Enhanced Liquidity Paths Job Creation Innovation I II III IV Ecosystem Enhanced Tax Regulation Partners Liquidity Incentives Paths VC Industry U.S. Government 16
17. II Current Liquidity Mechanisms Public Sellers Current I-Banks Market Buyers (Portfolio Companies) (Institutional/Strategic) Too Many Public Market Jitters Restricted Analyst and ? ? ? Companies Below I-Banker Collaboration Short Selling Increases ? Critical Mass Market Volatility Undergoing Massive ? Too Few Organizational Changes ? Minimum Bite Size ? Transformative Due Diligence Burden Companies ? Distribution System Is Broken 17
18. II Enhanced Liquidity Mechanisms In Addition to Major I-Banks we Need Innovative Boutique Banks ? Serving Emerging Growth Companies Use of New Private Market Platforms ? – InsideVenture – PORTAL Alliance (NASDAQ) Enhancements – SecondMarket – Xchange – Other Additional Use of Global Financing / Fundraising and International ? Stock Exchanges 18
19. Enhanced Liquidity Mechanisms – Example II Public Sellers New Liquidity Platforms Market Buyers (Portfolio Companies) (Institutional/Strategic) VC-Backed Private Market Platform ? Access to Long- Pre-Screened Deal Flow ? ? Enforced Membership Criteria ? Term Investors Efficient Due Diligence ? Last Round of Financing $20-200MM – Accelerated Fund ? Increased Visibility Seeking to Go Public in 6-18 Months – ? Raising In-House Vetting Process, ? Including Company Information Portal, Conferences New Platforms Will Increase VC Ecosystem Liquidity 19
20. NVCA Enhanced Liquidity II Mechanism Recommendations II. Portfolio Companies III. Pro-Active M&A I. Liquidity Platforms • Raise Rounds From • Venture Firms • Venture Firms Global Financing Encouraged to Pro- Encouraged to Use Sources actively Explore M&A Enhanced Liquidity Roll-Up of Smaller Mechanisms Such as • Explore Global M&A Portfolio Companies InsideVenture and • Explore IPOs on Intl. to Achieve IPO Others Stock Exchanges Critical Mass • Consider Longer Lock- Ups to Increase Demand for Venture- Backed IPOs 20
21. NVCA Plan: Pillar III – Tax Incentives Job Creation Innovation I II III IV Ecosystem Enhanced Tax Regulation Partners Liquidity Incentives Paths VC Industry U.S. Government 21
22. III NVCA Pro-Growth Taxation Recommendations New Preserve Adopt New Tax Incentive to ? Keep Long-Term Capital Gains Tax ? Stimulate IPOs Rate Globally Competitive One Time Only – Preserve Meaningful Differential ? 10% Capital Gains Tax Rate for IPO Between Ordinary Income and – Purchaser and Investors Long-Term Capital Gains Tax Rates Only Applicable for Holding Periods > – Promote Tax Incentives for Venture ? 2-3 Years Capital Investments of Certain Consider a Longer Holding Period for Types and Sizes (e.g. Cleantech, ? Long-Term Capital Gains Life Sciences) Special IPO Program Will Increase Government Revenues 22
23. NVCA Plan: Pillar IV – Regulation Job Creation Innovation I II III IV Ecosystem Enhanced Tax Regulation Partners Liquidity Incentives Paths VC Industry U.S. Government 23
24. IV Barriers to Going Public on U.S. Stock Exchanges Exit Route Preference Top 3 Barriers to Going Public # of Responses Answered as a Top 3 Issue and Expectation (Participants = 108) (n=108) Compliance Requirements (Sarbanes-Oxley, Audit, Governance) M&A Increased Volatility in the Public Markets M&A Better Alternative (Faster Process, More Liquidity) Investment-Banking Related Issues (Analyst Coverage, Requires High Rev Threshold) Transaction Costs of Going Public (Legal, Banker Fees, Non-Compliance Related Costs) IPO Higher Perceived Litigation Risk from U.S. Investor Base Other Current Regulation Has a Major Impact on How Emerging Companies Consider their Exit Route Source: DCM Analysis/Survey of Venture-Backed Companies, 2009 24
25. IV Uncoordinated Regulations Severely Harm Small Companies Regulations Original Intent Unintended Impact Reduce Fraud Prohibitively Expensive for Small Companies ? ? Sarbanes Restore Confidence Extended Time to IPO ? ? Oxley M&A More Attractive ? Eliminate I-Bank Conflict Sell Side Analyst Exodus ? ? “Spitzer of Interest Reduced Analyst Coverage and ? Decree” Aftermarket Support Equal Information Access Communication Gap Grows Between Small ? ? Reg. Fair for All Investors Caps and Potential Buyers Disclosure Faster Development of Restrictions Limit Usefulness ? ? Rule 144A Private Placements Regulations Need Updating to Eliminate Unintended Consequences 25
26. IV NVCA Recommendations for Regulatory Changes Pre-IPO Post-IPO Private Placement • 144A – Expand Definitions of • Permit À La Carte • Suspend Minimum Market Cap Qualified Institutional Buyers Disclosure System Requirements • 144A – Relax Requisite Holding • Permit Confidential • Prohibit Short Sales of Newly Periods and Volume Registration Filings Issued Company Shares for at Restrictions Least 12 Months • Phase in SOX 404 • NASDAQ/Portal Alliance – Open Requirement For Small • Expand Usage of Form S-3 to It Up to Private Companies and Companies Enable Offerings Beginning 90 Accredited Investors Days Post IPO • Permit Research Analysts to Better Collaborate with Both • Eliminate Restrictions on Use of the Issuer and Investment S-3 for Certain Primary Offerings Bankers During the IPO of Non-accelerated Filers Process • Revise Requirement • Relax Financial Statement for Obtaining Shareholder Requirements Approval to Sell Securities Below Market or Book Value • Educate CFOs on Reg FD Restrictions and Allowances NVCA Requests Full SEC Review of Recent Laws to Streamline Small Company IPO Process 26
27. NVCA 4-Pillar Plan Summary Job Creation • Request Full SEC Regulatory • Stimulate Ecosystem Review to Streamline Small Competition : I-banks Innovation Company IPO Process (Majors/Boutiques), Law • Eliminate Harmful Spitzer Firms, Acctg. Firms Settlement Provisions (Global Six - Lower • Relax SOX 404 Compliance Costs) I II III IV Restrictions and Permit • Encouraging Joint Book Optional Extended Lock-ups Running with Shared Ecosystem Enhanced Tax Regulation • Expand usability of NASDAQ Economics Partners Liquidity Incentives PORTAL Alliance to private Paths • Cultivate New Buyers / companies and accredited Funds for IPOs investors VC Industry U.S. Government • Adopt New Tax Incentive to Stimulate IPOs: • Use New Platforms for Linking Buyers and Sellers One Time Only (Like InsideVenture) • Keep Long-Term Capital Gains Rate Competitive • Encourage Use of Global Funding Sources for New Rounds, M&A and IPOs • Promote Tax Credits for VC Investments of Certain Types/Sizes (e.g. Cleantech) • Utilize Pro-Active M&A to Achieve Critical Mass • Consider Longer Holding Period for Long-Term capital Gains 27
28. NVCA Expresses Its Appreciation Harry W. Kellogg, Jr., Silicon Valley Bank The NVCA Board of Directors ? ? Stan Lapidus, Helicos Hassan Ahmad, Sonus Networks ? ? Bob McCooey NASDAQ Mike Brooks, Venrock ? ? Michael Millman, JP Morgan Stuart Cable, Goodwin Procter ? ? Chuck Newhall, NEA James L. Callinan, RS Investments ? ? Duncan Niederauer, NYSE Euronext Frank Currie, Partner, Davis Polk & Wardwell ? ? Sandy Robertson, Robertson Stephens Scott Cutler, NYSE Euronext ? ? James D. Robinson III, RRE Ventures Ash Dahod, Starent Networks ? ? Bill Schnoor, Goodwin Procter Mona DeFrawi, InsideVenture ? ? Antoinette Schoar, MIT Paul Deninger, Jefferies & Co. ? ? Larry Sonsini, Wilson Sonsini Goodrich & Rosati Susan Page Estes, Global VC Coverage, UBS ? ? AG David Topper, JP Morgan ? Irwin Federman, USVP ? Brian Truesdale, Deutsche Bank ? Leslie Wolff Golden, Ridgewood Capital ? David Weild, Markets Advisory Partners ? Bob Grady, The Carlyle Group ? Thom Weisel, Thomas Weisel Partners ? Bill Hambrecht, W.R. Hambrecht + Co. ? Rian Wren, Neutral Tandem ? Felda Hardymon, Harvard Business School ? Thanks to DCM, Highland Capital Partners, the NYSE and Wilson Sonsini for their generosity in hosting the Blue Ribbon dinners 28

# T & I Te S December 2008 www.ibef.org
# MARKET OVERVIEW www.ibef.org 
# MA R K E T OV E RV I E W IT & ITeS • December 2008 IT/ITeS industry: On a steady growth track • The Indian IT-ITeS industry grew at a rate Revenue segmentation of IT/ITeS sector in 2008 (US$ billion) of 33 per cent in FY2008 • Contribution of IT/ITeS industry to India’s GDP has grown from 1.2 per cent in FY1998 to an estimated 5.5 per cent in FY2008 23.2 • Potential size of India’s offshore IT/BPO industry 40.8 in 2015 is estimated at US$ 120 to 180 billion (10 to 12 per cent of GDP) n Exports n Domestic Sources: IDC, NASSCOM  www.ibef.org
# MA R K E T OV E RV I E W IT & ITeS • December 2008 IT/ITeS industry: On a steady growth track • Direct employment for four million and indirect Indian domestic market, 2008 (US$ billion) employment for 10 to 12 million by 2015 • Expected to earn revenues of US$ 64 billion 1.6 in FY2008, recording a CAGR of 31 per cent 2.2 over the last five years • Domestic market comprises hardware, software 11.5 and IT-BPO services 7.9 • The sector estimated well within reach of the US$ 60 billion exports target; growth at 23.2 per cent required to reach exports n Hardware n IT Services target in 2009-2010 n Software n BPO Sources: IDC, NASSCOM  www.ibef.org
# MA R K E T OV E RV I E W IT & ITeS • December 2008 Revenues by segment – Indian IT industry Revenues by segment 31.0 2008 (E) 64.0 8.5 12.5 12.0 48.0 2007 23.5 6.5 9.5 8.5 17.8 2006 5.3 7.2 7.1 37.4 1% :3 GR 2005 13.5 3.8 5.2 5.6 28.1 CA 2004 10.4 3.4 21.7 2.9 5.0 0 10 20 30 40 50 60 70 US$ billion n IT Services n Engineering services, software products and R&D n BPO n Hardware Source: NASSCOM Strategic Review 2008 Note: E - estimates  www.ibef.org
# MA R K E T OV E RV I E W IT & ITeS • December 2008 India maintains lead in IT/ITeS • Indian IT/ITeS sector has matured considerably with its - expansion into varied verticals - well differentiated service offerings - increasing geographic penetration • India’s importance among emerging economies, both as a supply and demand centre, is fuelling further growth of the sector • Continues to be one of the fastest growing industries in India, while India maintains its GSLI position as a strategic off-shoring destination India topped A.T. Kearney Global Services Location Index, 1 beating 49 other countries of the world, emerging as the for MNCs worldwide destination of choice as an off-shoring location of global IT/ITeS powerhouses • IT/ITeS sector contributed to over 5.4 per cent of India’s GDP in 2006-07, an increase from 4.8 per cent in 2005-06  www.ibef.org
# MA R K E T OV E RV I E W IT & ITeS • December 2008 IT services: Anchor segment for the sector • Hardware accounted for about 49 per cent IT Services Export Revenues US$ billion of the total domestic IT-BPO spend in FY2007 Project Oriented 7.71 IT consulting 0.35 • Domestic hardware revenues grew by Systems integration 0.37 20 per cent in FY2006 and are expected to Custom application development 6.54 exceed US$ 7.5 billion, growing at about 17 per cent Network consulting and integration 0.17 by FY2008 Software testing 0.28 Outsourcing 4.36 • Software exports expected to reach Application management 1.59 US$ 40.8 billion, while the domestic market is IS outsourcing 0.84 expected to touch US$ 23.2 billion by FY2008 Others 1.94 Support and Training 1.23 • Increasing traction in offshore product development Software deployment and support 0.99 and engineering services is supplementing India’s Hardware deployment and support 0.08 efforts in Intellectual Property (IP) creation; the IT education and training 0.17 segment has grown by 23 per cent to report Total 13.31 US$ 4.9 billion in exports in 2006-2007  www.ibef.org
# MA R K E T OV E RV I E W IT & ITeS • December 2008 IT services: Anchor segment for the sector • Banking, Financial Services and Insurance (BFSI) Revenue by Verticals vertical continues to account for the largest share 3% 4% of exports at 31 per cent 5% 1% • Telecom vertical accounts for second-largest 35% share of the pie at 19 per cent • Other verticals such as manufacturing, retail, 33% media and healthcare are rapidly gaining pace 19% n BFSI n Hi-tech/Telecom n Manufacturing n Retail n Media, Publishing and Entertainment n Construction and Utilities n Other Source: NASSCOM  www.ibef.org
# MA R K E T OV E RV I E W IT & ITeS • December 2008 ITeS-BPO: Outsourcing growth story • Services exports account for nearly two-third ITeS Sector Revenues of the total IT/ITeS sector exports. 0.54 2004-05 • Indian IT-BPO sector grew at an estimated 4.6 28 per cent in 2007 • Total revenue aggregate for the sector is expected 0.9 2005-06 6.3 to exceed US$ 47.8 billion, nearly a ten-fold increase over the aggregate revenue of US$ 4.8 billion, 1.1 reported in 1998, and direct employment is likely 2006-07 8.4 to cross 1.6 million 2 0 4 6 8 10 US$ billion • The concept of outsourcing is increasingly n Domesitc Market n Exports gaining acceptance even in the more conservative Source: NASSCOM markets around the world  www.ibef.org
# MA R K E T OV E RV I E W IT & ITeS • December 2008 ITeS-BPO: Outsourcing growth story • Industry has graduated to providing a high Revenue by Segments proportion of voice-based services and a wide range of back-office processing activities 10% • Scope of services has expanded in the last 11% (three to four) years, to include increasingly complex processes involving rule-based decision 13% 66% making and research services requiring informed individual judgment n Customer Interaction n Finance and Accounting n Human Resource n Others Source: NASSCOM 10 www.ibef.org
# MA R K E T OV E RV I E W IT & ITeS • December 2008 IT/ITeS sector: Moving up the value chain IT/ITeS sector: From the back-end services location Current Position to the global innovation hub Hub of global IT/ITeS activity • India, earlier the primary global offshoring Emergence of R&D, knowledge destination for low-end back-office services, process outsourcing is now emerging as an innovation and Business Process Domain expertise, research hub Outsourcing, improved legal Service Offering large contract framework projects • India is estimated to continue attracting Economies of scale, Testing services, substantial investments in the sector, with talent at par with entry-level global standards projects the cost-arbitrage factor expected to prevail Recognition of quality, Offshoring of for another 10 to 15 years* skilled resources low-end back office services • The ITeS segment is expected to leverage the Cost arbitrage, penetration of the IT segment; complementing manpower availability Low Sector Competencies High and completing end-to-end customer requirements with the aid of offshore and Source: Ernst & Young Analysis onshore service offerings *Source: AT Kearney, GSLI 2007 11 www.ibef.org
# ADVANTAGE INDIA www.ibef.org 1
# ADVA N TAG E I N D I A IT & ITeS • December 2008 India:Value proposition Breadth of service offering • Service offerings have evolved from low-end application development to high-end integrated IT solutions • Range of services offered by leading players spans a wide spectrum cutting across multiple verticals Quality/maturity of processes • Host to more than 55 per cent of global SEI CMM Level 5 firms • Expected to host the highest number of ISO certified companies 1 www.ibef.org
# ADVA N TAG E I N D I A IT & ITeS • December 2008 India:Value proposition Cost advantage • Cost of an engineer is about 20 – 40 per cent of comparable cost in European Union (EU) • Selling, general and administrative costs approximately 80 per cent of comparable cost in EU • Average offshore billing rate of US$ 20 to 35 per hour; about 50 to 70 per cent lower than EU Ease of scalability • 6,75,000 technical graduates per annum, of which 4,00,000 are engineers • Over 50,000 MBAs graduating per annum • Leading firms add more than 10,000 new employees per annum Global and 24/7 delivery capability 1 www.ibef.org
# ADVA N TAG E I N D I A IT & ITeS • December 2008 India: Strong offshoring credentials Key offshoring destination Top five Global Services Locations Country Index on a scale of 7 • India’s share in the global market has increased India 7.00 by 3 per cent in the IT segment and by 6 per cent China 6.56 in ITeS from 2000-01 to 2005-06 Malaysia 6.12 • India has maintained its position as the preferred Thailand 6.02 Brazil 5.89 outsourcing destination; Indian IT/ITeS companies are now offering a global delivery model, at par with Source: AT Kearney - GSLI 2007 the highest global standards • India offers low costs, technical and language skills, abundant skilled pool, mature industry players and supportive government policies 1 www.ibef.org
# ADVA N TAG E I N D I A IT & ITeS • December 2008 India: Strong offshoring credentials Quality of Services • Demonstrated process quality, adherence to standards and expertise have been key to India’s overall value proposition. Majority of Indian companies have aligned their operations to meet international standards, in order to establish credibility in the global market • Currently 55 per cent of the world’s CMM Level 5 companies are based out of India; India is host to the second-highest number of ISO certified companies in the world 1 www.ibef.org
# ADVA N TAG E I N D I A IT & ITeS • December 2008 India: Strong offshoring credentials • ITeS industry stakeholders recognise information security as a critical element of global service delivery. Individual firms’ efforts are complemented by policy framework established by Indian authorities • Initiatives include strengthening regulatory framework through proposed amendments, scaling up the cyber lab and scaling up the National Skills Registry (NSR) 1 www.ibef.org
# ADVA N TAG E I N D I A IT & ITeS • December 2008 Firm foundations in talent and infrastructure Infrastructure • Dedicated cost effective quality real estate in the form of Software Technology Parks (STPI) and Special Economic Zones (SEZs) • STPI infrastructure available across the country demonstrates government’s support to the sector • High quality telecom infrastructure with cost of connectivity declining rapidly and service levels improving significantly • Real estate, air and road connectivity, hospitality registering impressive growth and providing supportive business environment to IT sector • Infrastructure availability is set to complement the industry growth, with the Government of India working towards capacity building 1 www.ibef.org
# ADVA N TAG E I N D I A IT & ITeS • December 2008 Firm foundations in talent and infrastructure Scalability • India’s young demographic profile and academic infrastructure have potential to cater to the growing demand for IT-ITeS • An estimated additional demand for 0.8 million IT and 1.4 million ITeS professionals by 2009-10 • India possesses an abundant talent pool, producing 6,75,000 technical graduates per annum, of which 4,00,000 are engineers 1 www.ibef.org
# ADVA N TAG E I N D I A IT & ITeS • December 2008 Firm foundations in talent and infrastructure • Industry stakeholders including individual firms, associations undertaking initiatives to address issues concerning suitability of talent • Some such initiatives include - National rollout of skill certification through NAC (NASSCOM Assessment of Competence) - Setting up finishing schools in association with Ministry of HRD to supplement graduate education 0 www.ibef.org
# ADVA N TAG E I N D I A IT & ITeS • December 2008 Value addition at competitive costs Cost of operations Financial attractiveness of top five global services locations • Amongst the top five global services locations, Country Index on a Scale of 4 India maintains a substantive lead with respect India 3.22 to the financial attractiveness index China 2.93 Malaysia 2.84 • Sourcing from India is estimated to deliver Thailand 3.19 cost savings in the range of 25 to 60 per cent Brazil 2.64 for MNCs Source: GSLI 2007 • Cost of an engineer is about 20 to 40 per cent, SG and A about 80 per cent and offshore billing rates about 50 to 70 per cent lower than costs in EU • Average offshore billing rate at US$ 20 to 35 per hour is about 50 to 70 per cent lower than EU • Apart from lower administration and labour costs, the central and state governments offer fiscal and non-fiscal incentives to industry players, further adding to the cost advantage 1 www.ibef.org
# ADVA N TAG E I N D I A IT & ITeS • December 2008 Value addition at competitive costs Value Addition • Companies aggressively investing in innovation and R&D to differentiate their service offerings. Change Management and Process Consulting services increasingly becoming part of the end-to-end service requirements of clients • R&D divisions of various MNCs being set up in India; number of patents and licences being filed from Indian firms increasing rapidly; India’s IPR laws are now compliant to WTO TRIPS (Trade-Related Aspects of Intellectual Property Rights) • HP, Microsoft, Cisco, Oracle, Motorola and Qualcomm are some of the leading IT giants who have set up their R&D centres in India, with aggressive expansion plans in the pipeline  www.ibef.org
# ADVA N TAG E I N D I A IT & ITeS • December 2008 Increasing investment activity Sustained investor confidence Break-up of VC/PE Investment in 2006 (Value) • The IT-BPO sector has consistently attracted the highest share of Private Equity (PE) 20% 25% and Venture Capital (VC) investment in the country 13% • IT/ITeS sector attracted deals worth US$ 144 million 9% during the first three months of 2008 2% 3% 13% 8% • With 14 deals worth about US$ 87 million, the sector 7% has retained its status as being on the top of the list n n IT-BPO BFSI of investors during the first quarter of 2008 n n Manufacturing Engineering & Construction n Healthcare & Life Sciences n Real Estate n n Media F&B and Retail n Others Source: NASSCOM  www.ibef.org
# ADVA N TAG E I N D I A IT & ITeS • December 2008 Increasing investment activity Sustained investor confidence Breakup of VC/PE Investment in 2006 (Volume) • About 10 out of 21 deals during the first quarter of FY2008 came within the range 11% of US$ five to 10 million 6% 28% 4% • Majority of these include outbound acquisitions 5% by Indian companies 8% 18% 10% 10% n n IT-BPO BFSI n n Manufacturing Engineering & Construction n Healthcare & Life Sciences n Real Estate n n Media F&B and Retail n Others Source: NASSCOM  www.ibef.org
# ADVA N TAG E I N D I A IT & ITeS • December 2008 Some recent PE and M&A deals Target Acquirer Value in US$ million InfoCrossing Wipro 5,984 Med Assist Holding First Source Solution 330 Syndesis (Canada) Subex Azure 164.5 Lason (US) HOV Services - Flextronics Software System Kohlberg Kravis Roberts 900 and Co. Mphasis BFL Ltd. Electronic Data Systems 398 Corporation (EDS) Syndesis Subex Azure Ltd. 158 Azure Solutions, UK Subex Systems 141 Source: E&Y research  www.ibef.org
# ADVA N TAG E I N D I A IT & ITeS • December 2008 Established IT/ITeS hubs in India NCR - Delhi • Total STPI registered units by 2006-07: 1,400 (150 added in 2006-07) • IT/ITeS majors: IBM, Genpact, Oracle, Am Ex, Convergys, HP, General Motors NCR-DELHI Kolkata • Total STPI registered units by 2006-07: 166 KOLKATA KOLKATA 7 (28 added in 2006-07) MUMBAI 2 MUMBAI • IT/ITeS majors: IBM, Cognizant, TCS, 3 PUNEHYDERABAD PUNE HYDERABAD Infosys, Wipro 6 BANGALORE Mumbai BANGALORE 45 • Total STPI registered units by 2006-07: 630 CHENNAI CHENNAI (40 added in 2006-07) • IT/ITeS majors: TCS, Infosys, Wipro, Siemens, Accenture Sources: STPI,Tramell Crow Meghraj  www.ibef.org
# ADVA N TAG E I N D I A IT & ITeS • December 2008 Established IT/ITeS hubs in India Hyderabad • Total STPI registered units by 2006-07: 1,060 (130 added in 2006-07) • IT/ITeS majors: HP, Amazon,Verizon, Convergys, EXL, Infosys, TCS NCR-DELHI Pune • Total STPI registered units by 2006-07: 635 KOLKATA KOLKATA 7 (108 added in 2006-07) MUMBAI 2 MUMBAI • IT/ITeS majors: Cognizant, Convergys, EXL, 3 PUNEHYDERABAD PUNE HYDERABAD KPIT, Msource 6 BANGALORE BANGALORE 45 CHENNAI CHENNAI Sources: STPI,Tramell Crow Meghraj  www.ibef.org
# ADVA N TAG E I N D I A IT & ITeS • December 2008 Established IT/ITeS hubs in India Bangalore • Total STPI registered units by 2006-07: 1,700 (201 added in 2006-07) • IT/ITeS Majors: Infosys, Wipro, TCS, HP, Siemens, HSBC, Compaq NCR-DELHI • Cumulative software exports from Bangalore are estimated at US$ 11 billion, positioning it as the leading IT hub of India KOLKATA KOLKATA 7 MUMBAI 2 MUMBAI Chennai 3 PUNEHYDERABAD PUNE HYDERABAD • Total STPI registered units by 2006-07: 900 6 (131 added in 2006-07) BANGALORE BANGALORE 45 • IT/ITeS majors: Infosys, Wipro, CHENNAI CHENNAI Accenture, Cognizant Sources: STPI, Tramell Crow Meghraj  www.ibef.org
# ADVA N TAG E I N D I A IT & ITeS • December 2008 Emerging IT/ITeS destinations Transitioning to the Tier  and Tier  cities • Indian IT-ITeS industry is primarily concentrated in seven clusters: Bangalore, NCR-Delhi, LUDHIANA Hyderabad, Chennai, Pune, Mumbai and Kolkata CHANDIGARH • Most IT companies started their operations in India in tier 1 cities, and have subsequently JAIPUR expanded into tier 2 cities KOTA GANDHINAGAR AHMEDABAD • Emergence of tier 3 cities like Chandigarh, VADODARA Mysore is prominent in the ITeS-BPO segment SURAT NAGPUR • Tier 2 and tier 3 cities are gaining importance in the IT/ITeS industry as these locations offer higher savings in administration, maintenance, MANGALORE real estate and infrastructure costs and human MYSORE COIMBATORE resource availability and costs MADHURAI  www.ibef.org
# POLICY www.ibef.org 0
# PO L I C Y IT & ITeS • December 2008 Government initiatives and progressive policy reforms Establishment of a nodal agency (STPI) Software Technology Parks of India (STPI) was set up to provide: • Fiscal benefits like tax holidays to attract investment into the industry • Basic Infrastructure • Single-window clearances for setting up Export Oriented Units (EOUs) • Virtual model allows firms to avail benefits without restrictions on location 1 www.ibef.org
# PO L I C Y IT & ITeS • December 2008 Government initiatives and progressive policy reforms Telecom sector deregulation • Sector deregulated in the mid and late 1990s to allow private sector and MNC participation • Regulatory reform to allow adoption of new technologies • Enable benefits of free market competition, improved service quality and declining tariffs Progressive policy reform (fiscal/trade/other) • No FDI restrictions • Fiscal reform (international taxation, overseas investment, etc.) to facilitate ease of international transactions  www.ibef.org
# PO L I C Y IT & ITeS • December 2008 Government initiatives and progressive policy reforms Recent/current initiatives • Area limit exemptions for the IT-BPO sector in the SEZ policy • Special emphasis on talent and infrastructure development • Infrastructure development; provisions designed to complement the STPI scheme • Highest level of commitment to addressing core issues faced by the industry  www.ibef.org
# PO L I C Y IT & ITeS • December 2008 Government initiatives and progressive policy reforms Semiconductor Policy, 2006 • Encourages FDI investment in hardware production segment and provides lucid policy structure for attracting capital through focus policies • Government to bear 20 per cent of the capital expenditure for manufacturing units located inside SEZs and 25 per cent for those outside SEZs • Emphasis on wafer fabrication and ancillary manufacturing plants  www.ibef.org
# KEY TRENDS AND DRIVERS www.ibef.org 
# KE Y T R E N D S & D R I V E R S IT & ITeS • December 2008 Increase in global IT services spend Technology-related spending Global technology spend • Worldwide technology products and related services 470 IT Services sector spends are estimated to have grown at 444 7.3 per cent to reach nearly US$ 1.7 trillion in 2007 423 BPO • Market size estimated at over US$ 1.5 trillion 385 • Software and IT-BPO services account 228 US$ 1.5 Packaged Software 211 for over 70 per cent of the total technology spend trillion • Spend on engineering and R&D 457 Hardware 424 estimated at US$ 780 billion R&D and 783 Engineering 764 100 200 0 300 400 500 600 700 800 US$ billion n 2005 n 2006 Sources: IDC, NASSCOM  www.ibef.org
# KE Y T R E N D S & D R I V E R S IT & ITeS • December 2008 Increase in global IT services spend Worldwide IT services spending Worldwide services spending • IT services form the largest segment 189 2006 338 of the worldwide spend on technology products 138 and related services 199 2007 • Spend on IT services estimated at 368 144 US$ 470 billion, growth of 5.9 per cent over 210 US$ 444 billion in 2004-05 2008 402 151 • Within IT services, outsourcing is the largest and fastest growing category 221 2009 438 • In 2005-06, spend on IT outsourcing was 157 estimated at over US$ 170 billion, more than 233 2010 36 per cent of the total technology spend worldwide 473 163 100 0 200 300 400 500 US$ billion n Project based n Outsourcing n Support and training Sources: IDC, NASSCOM  www.ibef.org
# KE Y T R E N D S & D R I V E R S IT & ITeS • December 2008 Increasing global spending on IT/ITeS • In 2007, the worldwide spending on IT/ITeS Global spending on IT/ITeS in 00 was estimated to be around US$ 1.7 trillion Segment Growth (per cent) Aggregate (US$ bn) Hardware 5.9 478 • Various factors leading to the sector’s sustained Software 8.5 250 growth are: Services (IT) 6 495 Services (BPO) 10 462 • Increased reliance on IT for operational cost control Source: NASSCOM Strategic Review 2008 • Increased requirement of IT for quality and regulatory compliance • Large scale recruitment, variable pricing in service sector businesses  www.ibef.org
# KE Y T R E N D S & D R I V E R S IT & ITeS • December 2008 Increasing global spending on IT/ITeS Global spending on software, 2007 (in percentage) Global spending on BPO sector, 2007 (in percentage) 3% 11% 14% 19% 50% 70% 33% n Europe, Middle East & Africa n Americas n Western Europe n Americas n Asia-Pacific n Others n Asia-Pacific  www.ibef.org
# KE Y T R E N D S & D R I V E R S IT & ITeS • December 2008 Emerging countries – demand and supply centres Increasing importance of emerging countries (BRIC) Share of BRIC spendings on IT, 2007 • Importance of emerging countries as both supply and demand centres being recognised 23.8% • Technology spendings of Brazil, Russia, India and China (BRIC) together accounted for US$ 94.9 billion in 2006-07 11.0% 65.2% • BRIC spending registered a growth rate of 14.3 per cent in the hardware segment, 17 per cent in the packaged software segment and 18.1per cent in the IT services segment Total BRIC spending - US$ 94.9 billion n Hardware n Packaged software • Global multinational corporations n Services are increasingly focusing on tapping Source: IDC opportunities in these markets 0 www.ibef.org
# KE Y T R E N D S & D R I V E R S IT & ITeS • December 2008 Emerging countries – demand and supply centres Demand for offshoring accelerating • With maturing socio-political attitude, Europe is witnessing increased offshoring of services and growth rates from Europe are expected to be higher • With increasing maturity in ‘near-shore’ delivery capabilities, European-language speaking countries like Hungary, Czech Republic, Russia, Poland, Bulgaria and Romania expected to support this trend • European enterprises expected to offshore services to India, Philippines and China and other lower-cost locations, depending on the language and culture- dependence of the particular service • Customers’ desire to focus on their ‘core’ services and utilise the benefits of globalisation in execution of their ‘non-core’ activities expected to further drive adoption of outsourcing strategy 1 www.ibef.org
# KE Y T R E N D S & D R I V E R S IT & ITeS • December 2008 Evolving nature of outsourcing contracts Growth in number of multi-vendor contracts • Deals signed in recent times indicate a growing customer preference for multi-sourced contracts; helps customer tap best of breed vendors and reduce the risk • 2004-05 saw the most contracts signed (293) ever in the past five years with total contract value greater than US$ 50 million • Number of contracts with total contract value greater than US$ 1 billion continued to decline  www.ibef.org
# KE Y T R E N D S & D R I V E R S IT & ITeS • December 2008 Evolving nature of outsourcing contracts Large long term offshoring contracts • Large players scaling up, increasing credibility of large- cap companies for handling large global projects • British Telecom awarded US$ 1 billion contract to Tech Mahindra • General Motors awarded Wipro a five-year contract of the value of US$ 300 million • Single contracts being unbundled and awarded to multiple vendors for effective risk management • ABN Amro awarded a US$ 500 million five-year contract to TCS, Infosys and Patni • TCS and Satyam together signed a seven-year contract worth US$ 145 million with Qantas Airlines  www.ibef.org
# KE Y T R E N D S & D R I V E R S IT & ITeS • December 2008 Evolving nature of outsourcing contracts Emergence of vendor consolidation • Large MNC clients are outsourcing their global IT requirements to limited number of vendors, who in turn, execute by themselves, or outsource it to third parties, e.g., Vodafone and EDS’ deal • Clients expecting the status of ‘client of choice’ to ensure greater attention, increased responsiveness and high service levels Demand through renewals • Significant value of outsourced agreements coming up for renewal in 2007; estimates indicate the number to be approximately US$ 100 billion • Alternatives for renewal of these contracts expected to drive increased share of the business to ‘offshore-based’ service providers  www.ibef.org
# KE Y T R E N D S & D R I V E R S IT & ITeS • December 2008 Increasing presence across the globe Global IT vendors increasing their India presence • Global Vendors (such as Accenture, HP, EDS, IBM, Cap Gemini) looking at India with a long term view, by enhancing their offshore delivery capability through the organic and/or inorganic route • Growing onshore presence of service providers who are able to deliver seamless hybrid onshore- offshore services at a lower cost • Global vendors with limited or no India presence losing opportunities/contracts • Large players scaling up dramatically in locations such as China and India with plans to add thousands of people to their offshore resources • Large number of India based employees : Accenture (16,000+), IBM (39,000+), EDS (15,000+) and Cap Gemini (4,000+)  www.ibef.org
# KE Y T R E N D S & D R I V E R S IT & ITeS • December 2008 Increasing presence across the globe Emergence of Indian IT multinationals • Expansion of global footprint by Indian IT companies through the Global Delivery Model (GDM), to service client needs seamlessly across the globe • Indian firms gaining a global foothold, with giants like TCS, Wipro, Infosys and Satyam expanding their overseas presence, particularly in Asia and Europe • Drivers for expansion are language requirements other than English; need to cater to ‘near-shore’ markets • Increased M&A activity to be driven by the need for global service delivery capabilities while mitigating risks and timelines involved in moving to new geographies • HR strategies of firms are geared towards building a workforce comprising diverse cultures  www.ibef.org
# KE Y T R E N D S & D R I V E R S IT & ITeS • December 2008 Mergers and acquisitions Industry consolidation through acquisitions • Over 94 cross-border deals in 2007 with investments crossing US$ two billion, with increasing outbound deals • IT/ ITeS sector emerged as the preferred space for venture capital investments in India in the first three months of 2008, attracting over two-third of the total deals worth US$ 144 million • With 14 deals worth about US$ 87 million, the sector has retained its status as being on top list of investors during the first quarter of 2008. About 10 out of 21 deals, during the quarter, came within the range of US$ five to 10 million. The same stood at six out of 28 deals within the range of US$ two to five million, in the previous year’s first quarter  www.ibef.org
# KE Y T R E N D S & D R I V E R S IT & ITeS • December 2008 Mergers and acquisitions Industry consolidation through acquisitions • The average ticket size of the deals has increased over the last few years • Enhanced M&A activity has been witnessed by service providers seeking to add expertise in specific industry vertical or domain areas to their portfolio of services; hence this enables service providers to move up the value chain • Relatively smaller service providers are now actively looking for opportunities to be acquired by larger firms or to form partnerships • Companies based in the West are expected to take keen interest in organisations in India to stay competitive as well as explore local markets, which is now, not only a cost effective delivery location but also a rapidly emerging market by itself  www.ibef.org
# KE Y T R E N D S & D R I V E R S IT & ITeS • December 2008 Mid-cap growth story • Mid-cap companies (US$ 50-250 million) are growing at an aggressive pace, with well-defined strategies, rivaling large-cap Mid-caps: Building market competitiveness credentials and capabilities in attracting clients Niche service Multi-domain Consolidators Solution • Mid-cap companies also following a strategy providers players providers of exploring new markets to insulate themselves • Focused on • Multi-domain • Growth through • Growth through developing capabilities across equal - sized well-defined against over-dependence on the US market, capability in a high growth verticals mergers and target product/ specific domain significant solution segments and to shield themselves from price competition to compete with • KPIT Cummins, acquisitions with the large-caps large-cap players Mastek, Zensar • Scandent Solutions • Aztec, Hexaware • Crane Software, • Companies are increasing their focus on the (merged with Geodesic, Polaris domestic market, especially in emerging sectors SSI Tech) such as retail, logistics, telecommunications and SMEs • Companies leveraging their outsourced testing services and Offshore Product Development (OPD) capabilities with the Indian OPD market are estimated to grow to US$ eight to 11 billion by 2008  www.ibef.org
# KEY PLAYERS www.ibef.org 0
# KE Y P L AY E R S IT & ITeS • December 2008 Indian IT/ITeS industry structure Top 10 Indian IT/ITeS firms (by revenue) 1 Tata Consultancy Services 6 Tech Mahindra Ltd. 2 Infosys Technologies Ltd. 7 Patni Computer Systems Ltd. 3 Wipro Technologies Ltd. 8 I-flex Solutions Ltd. 4 Satyam Computer Services Ltd. 9 L&T InfoTech Ltd. 5 HCL Technologies Ltd. 10 Polaris Software Lab Ltd. Source: NASSCOM 1 www.ibef.org
# KE Y P L AY E R S IT & ITeS • December 2008 Indian IT/ITeS industry structure Revenue Key characteristics – business model Large-cap Revenue > US$ 250 million • Mainly concentrated on application development and maintenance, package implementation, business process outsourcing (BPO) and consulting • Well positioned to bag large IT contracts with scalable capabilities • Strong delivery capabilities across multiple verticals • Low client concentration • Competes with global IT vendors such as Accenture, IBM, EDS, Cap Gemini Mid-cap Revenue US$ 50 to 250 million • Mainly concentrated on specific domain capabilities • Scale and margin pressures • Increasing competition from both small-cap and large-cap players Niche Players Focussed on key niche areas • Focussed on developing capabilities around a specific niche domain and aspire of operations to be leader in that domain • Scale and growth pressures; limited growth available in specific niche areas • High client concentration • Threat from large-cap/ middle-cap players entering the niche areas Note: Revenue as at the end of 2006-07 is used to classify companies Source: NASSCOM  www.ibef.org
# KE Y P L AY E R S IT & ITeS • December 2008 Indian IT giants Tata Consultancy Services • Revenues of US$ 4.56 billion in 2006-07, recording a 41 per cent growth over revenues of US$ 3.23 billion in 2005-06 • Profitability for the year was at 22 per cent of revenues • Workforce of over 85,000 professionals by 2006-07, with growth of 36 per cent over 2005-06 employee base of 62,832 • With a strong foothold in Indian market, global presence is being established primarily through acquisitions; expanding the business verticals and exploring opportunities in the western and BRIC markets Sources: Dataquest, E&Y Research  www.ibef.org
# KE Y P L AY E R S IT & ITeS • December 2008 Indian IT giants Wipro Technologies Ltd. • Revenues of US$ 4.97 billion in 2007-08 recording a 36 per cent growth over revenues of US$ 3.56 billion in 2006-07 • Profitability for the year was at 21 per cent of revenues • Workforce of over 67,000 professionals by 2006-07, with growth of 26 per cent over 2005-06 employee base of 53,742 • Acquired six companies and entered into a joint venture (JV) with another two, increasing offshore delivery centres and expanding service offerings Sources: Dataquest, E&Y Research  www.ibef.org
# KE Y P L AY E R S IT & ITeS • December 2008 Indian IT giants Infosys Technologies Ltd. • Revenues of US$ 4.18 billion in 2007-08 recording a 35 per cent growth over revenues of US$ 3.12 billion in 2006-07 • Targeting to reach US$ 4.18 billion by 2008-09 with a year-on-year growth of 19 to 21 per cent • Profitability for the year was at 29 per cent of revenues • Workforce of over 72,000 professionals by 2006-07, with growth of 37 per cent over 2005-06 employee base of 52,715 • Infosys has chosen primarily the organic route for developing its overseas operations Sources: Dataquest, E&Y Research  www.ibef.org
# KE Y P L AY E R S IT & ITeS • December 2008 International players Hewlett-Packard India • The total revenue from HP’s businesses in India was valued at US$ 2,907 million in 2006-07 and includes India sales (US$ 2,357 million), application services (US$ 454 million), BPO (US$ 115 million) and engineering services (US$ 96 million) • Workforce of over 29,000 professionals, constituting 19 per cent of the global workforce of HP in 2006-07, with a growth of 87 per cent over 2005-06 employee base of 15,454 • Domestic market contributed to 81 per cent of HP India’s revenues with a share of domestic product sale revenues  www.ibef.org
# KE Y P L AY E R S IT & ITeS • December 2008 International players IBM India • Revenues of US$ 2.01 billion in 2006-07, recording a 52 per cent growth over revenues of US$ 1.32 billion in 2005-06 • Workforce of over 55,000 professionals constituting 15 per cent of the global workforce by 2006-07, with a growth of 34 per cent over 41,000 employee base in 2005-06 • Asia-Pacific recorded the strongest revenue growth of IBM, with Indian revenues being the top contributor • IBM plans to invest US$ six billion in India over the next few years  www.ibef.org
# KE Y P L AY E R S IT & ITeS • December 2008 ITeS giants Genpact • Workforce of over 28,000 employees by 2006-07 • Spread across more than 25 global delivery centres • Revenues of US$ 823 million in 2007-08, recording 29 per cent growth over revenues of US$ 623 million in 2006-07 Sources: Dataquest, E&Y research  www.ibef.org
# KE Y P L AY E R S IT & ITeS • December 2008 ITeS giants Transworks • Workforce of over 9,978 employees in 2006-07 • Spread across eight global delivery centres • Revenues of US$ 368 million in 2006-07, recording 826 per cent growth over revenues of US$ 40 million in 2005-06 Sources: Dataquest, E&Y research  www.ibef.org
# KE Y P L AY E R S IT & ITeS • December 2008 ITeS giants IBM Daksh • Workforce of over 22,000 employees in 2006-07 • Spread across 14 global delivery centres • Revenues of US$ 307 million in 2006-07, recording 72 per cent growth over revenues of US$ 178 million in 2005-06 *NF: TransWorks was not featured in the top BPO companies of FY 2006 IT/ITeS players: Revenue considered is solely the contribution of IT/ITeS businesses Profitability of a company was calculated taking into account the cumulative revenues of IT/ITeS/BPO/other services offered by the company Source: Dataquest, E&Y research 0 www.ibef.org
# KEY OPPORTUNITIES www.ibef.org 1
# KE Y O P P ORT U N I T I E S IT & ITeS • December 2008 Domestic market India – one of the emerging markets Prominent domestic ITeS deals in 2005-06 Vendor-Client Engagement type • The domestic market is picking up, showing definite MphasiS BPO-State Bank of India Voice based customer support operations signs of breaking out of the trend of hardware linked Nortel and IBM Daksh and MphasiS and Call centre services growth with the contribution of software and services HTMT and Teletech-Bharti Tele Ventures (A US$ 244 million deal) Infovision-Whirlpool Customer support activities exceeding that of hardware for the first time in Spanco Tele-Air India In-bound customer service FY2005-2006 Dialnet Communications Ltd-Star Plus IVR Platform based services • Overall size of the domestic market in 2006-07 Customer First-Apollo Hospitals Customer support activities was US$ 15.9 billion, a 20.4 per cent growth Source: NASSCOM in revenues of US$ 13.2 billion for 2006-07 • Domestic IT market is dominated by the hardware spending accounting for over 50 per cent of the total spending  www.ibef.org
# KE Y O P P ORT U N I T I E S IT & ITeS • December 2008 Domestic market India–one of the emerging markets Prominent domestic IT services deals in 2005-06 Vendor-Client Engagement type • Government is taking up e-governance initiatives TCS-Central Bank of India System integration and increasing its IT spends/outlays; allocation Wipro-Ashok Leyland IT consulting has increased from US$ 96 million in 2006-07 HCL-Bangalore Development Authority Application development to US$ 175 million in 2007-08, indicating IBM-Bharti End-to-end IT outsourcing increasing IT spends Wipro-YES Bank End-to-end IT outsourcing HP-Bank of India End-to-end IT outsourcing • Demand for domestic BPO services increasing Source: NASSCOM-IDC IT Report 2006 rapidly, with niche verticals like healthcare and retail fast gaining traction apart from the traditional verticals of BFSI and manufacturing  www.ibef.org
# KE Y O P P ORT U N I T I E S IT & ITeS • December 2008 Knowledge Process Outsourcing (KPO) Knowledge Process Outsourcing – Legal Process Growth driver for ITeS sector Outsourcing • The genesis of KPO followed BPO services in India. However, KPO is now picking rapid pace, with MNCs setting up third party captive units for data analytics, Knowledge data modelling, etc. Process Outsourcing • NASSCOM estimates global KPO revenues Financial and Engineering Services of US$ 17 billion in 2009-10 with an estimated Market Research Outsourcing 60 to 70 per cent Indian share, translating into a US$ 12 billion worth opportunity Source: E&Y-IACC Global Offshore Outsourcing Summit 2006  www.ibef.org
# KE Y O P P ORT U N I T I E S IT & ITeS • December 2008 Knowledge Process Outsourcing (KPO) Knowledge Process Outsourcing – Growth driver for ITeS sector • Growth drivers for this business include high productivity of Indian resources and growing adoption of KPO by Small and Medium Enterprises (SMEs) • Opportunities span across several service offerings: Legal Process Outsourcing (LPO), financial and market research and engineering services outsourcing are considered as fast moving service offerings  www.ibef.org
# KE Y O P P ORT U N I T I E S IT & ITeS • December 2008 ‘Engineering’: A new outsourcing opportunity Engineering services outsourcing Engineering services outsourcing verticals • Global engineering services spend estimated at US$ 750 billion, which is expected to increase to more than US$ one trillion by 2020 30% • India’s share is about US$ 1.5 billion of the 43% US$ 10 to 15 billion outsourced services in 2005-2006; India estimated to garner a share 19% of about US$ 50 billion by 2020 8% • Range of services includes engineering n High-tech and telecom industries n Automotive components and designing solutions across diverse n Aerospace n Others industry verticals like telecommunications, Source: E&Y-IACC Global Offshore Outsourcing Summit 2006 automotive, construction, aerospace, utilities and industrial design  www.ibef.org
# KE Y O P P ORT U N I T I E S IT & ITeS • December 2008 ‘Engineering’: A new outsourcing opportunity • Labour cost arbitrage in this sector is about 60 per cent of US counterparts • Bechtel, General Motors, Ford, John Deere, Caterpillar, Silicon Automation Systems and John Brown Engineering are a few global giants that have set up their engineering services divisions in India Migration of engineering services from low-end designing to complete product designing - NPI process - Ownership of design - Conceptual design improvement - 2D Drafting - Manufacturing - Analysis - CAD migration - Quality consulting - 3D Modeling coordination - Design validation - Drawing conversion - e-Engineering Solutions - Digital mock-ups - Field support - Design automation - System architecture - CPC/PDM Source: E&Y-IACC Global Offshore Outsourcing Summit 2006  www.ibef.org
# KE Y O P P ORT U N I T I E S IT & ITeS • December 2008 Legal Process Outsourcing Legal Process and IP Research Outsourcing • Outsourcing of legal and IP research is presently at a nascent stage with tremendous growth potential. India offers the advantage of employing full-time legal professionals, resulting in higher efficiencies, compared to the temporary paralegals employed overseas for a large quantum of work • India offers impressive opportunities to scale up, with a large pool of legal professionals (over 1 million lawyers and over 70,000 law graduates passing out every year) and cost arbitrage, with Indian lawyers billing one-tenth of their US counterparts (US$ 40 to 60 in India compared to US$ 350 per hour in the US)  www.ibef.org
# KE Y O P P ORT U N I T I E S IT & ITeS • December 2008 Legal Process Outsourcing • While most of the business presently comes from the US, there is huge untapped opportunity in Europe (especially UK), Canada and Australia • Firms like SDD Global Solutions, JuriMatrix, Integreon, Pangea3, RR Donnelly are mushrooming, with increasing venture capital investment, tapping the vast market opportunities  www.ibef.org
# KE Y O P P ORT U N I T I E S IT & ITeS • December 2008 Legal Process Outsourcing Migration of legal and IP services from low value addition to creative services Legal content services Legal documentation and analysis Legal documentation and analysis (litigation) Intellectual property rights (non-litigation) • Updating, summarising, annotating • Contract drafting • Research and Evidencing for litigations • Research on potential areas for product • Due diligence • Drafting of legal notices development • Contract review • Analysis of case laws • Patent research • Preparation of model contracts • Review of court orders • Patent documents drafting • Managing content • Identification of patentability and infringement • Management and maintenance • Docketing of contracts • Managing case papers • Management of compliance • Prior art searches • IP asset management Source: E&Y-IACC Global Offshore Outsourcing Summit 2006 0 www.ibef.org
# KE Y O P P ORT U N I T I E S IT & ITeS • December 2008 Research and analytics Business, financial and market research Revenues by geographies • Wave of new entrants comprising captive research centres set up by leading global 10% investment banks, foreign banks and consulting firms, as well as several third-party service 40% providers and leading BPO players • Players aggressively ramping up their employee base, with captive centres by McKinsey & Co. 50% (for business and financial research) and General Electric (for financial research) n North America n Europe n Asia Pacific Source: E&Y-IACC Global Offshore Outsourcing Summit 2006 1 www.ibef.org
# KE Y O P P ORT U N I T I E S IT & ITeS • December 2008 Research and analytics • Leading third-party service providers have reported growth of over 100 per cent per annum over the past four to five years • The Big Four of accountancy and professional services firms - Ernst & Young, Deloitte, PwC, KPMG have their presence in India, along with other leading firms like Datamonitor, Standard & Poor; India emerged as the choice destination for their front-end research and analysis divisions, migrating from the back-room services offshoring  www.ibef.org
# KE Y O P P ORT U N I T I E S IT & ITeS • December 2008 Research and analytics Spectrum of offerings Business research Financial research Market research • Industry research • Equity research • Market research • Company research • Company research and analysis • Situation analysis • Credit analysis • Market segmentation • Database building • Instrument analysis • Secondary research and • Portfolio valuation surveys • Financial modeling • Forecasting through • Comparable valuation predictive modeling analysis • Data analytics Source: E&Y-IACC Global Offshore Outsourcing Summit 2006  www.ibef.org
# KE Y O P P ORT U N I T I E S IT & ITeS • December 2008 Continued growth opportunities Testing services outsourcing • Indian export revenues from software testing services were estimated at US$ 385 million in 2006-07, a 36 per cent increase from US$ 282 billion in 2005-06 • Leading players like Infosys and Wipro obtained 7-10 per cent of their revenues from quality assurance and software testing • Functional testing of software and applications has gained critical importance with progression towards service oriented architecture • Shrinking software product release cycles and increasing complexity of requirements, is resulting in the outsourcing of the bulk assignments and also fuelling this segment’s growth  www.ibef.org
# KE Y O P P ORT U N I T I E S IT & ITeS • December 2008 Continued growth opportunities Software products • Indian software products segment presently forms a very small percentage of the overall Indian IT-ITeS industry • Several large and small niche players developing and marketing indigenous software products, deployed both in the domestic as well as international markets • Indian software product vendors touched revenues of US$ 666 million in 2005-06, a 44 per cent increase over 2004-05; top 10 companies contributed 85 per cent to segment revenues  www.ibef.org
# KE Y O P P ORT U N I T I E S IT & ITeS • December 2008 Continued growth opportunities • Firms are fuelling demand by making software affordable and easily available • Besides scouting opportunities in Europe, Indian companies are making inroads into the Middle East, North Africa and Latin America, with the revenues heavily skewed towards exports  www.ibef.org
# IN F O R M AT I O N T E C H N O L O GY December 2008 DISCLAIMER This presentation has been prepared jointly by the Author’s and IBEF’s knowledge and belief, the content is not India Brand Equity Foundation (“IBEF”) and Ernst & Young to be construed in any manner whatsoever as a substitute for Pvt. Ltd. (“Authors”). professional advice. All rights reserved. All copyright in this presentation and related The Author and IBEF neither recommend or endorse any works is owned by IBEF and the Authors. The same may not be specific products or services that may have been mentioned reproduced, wholly or in part in any material form (including in this presentation and nor do they assume any liability or photocopying or storing it in any medium by electronic responsibility for the outcome of decisions taken as a result means and whether or not transiently or incidentally to some of any reliance placed in this presentation. other use of this presentation), modified or in any manner Neither the Author nor IBEF shall be liable for any direct or communicated to any third party except with the written indirect damages that may arise due to any act or omission approval of IBEF. on the part of the user due to any reliance placed or guidance This presentation is for information purposes only. While due taken from any portion of this presentation. care has been taken during the compilation of this presentation to ensure that the information is accurate to the best of the www.ibef.org  www.ibef.org