Lessons from the downturn, and the road ahead.NASSCOM 2002
Nandan M. Nilekani
Managing Director, President and Chief Operating Officer
Infosys Technologies Limited
Bangalore, India
The story of IT is of the semiconductor revolution: price and performance improvements…
Moore’s Law– Number of transistors
and performance of processor (measured in MIPS) doubles every 18 month
Today’s computers have 66,000 times computing power, at the same cost, as the computers of 1975
Improvements in communications and death-of-distance
Gilder’s law– Doubling of communications
power every six months • due to advances in fiber-optic
network technologies
The cost of transmitting a trillion bits of information from Boston to Los Angeles has fallen from $150,000 in 1970 to 12 cents in 2000
Sources: UNDP, World Bank and The Economist
Metcalfe’s Law: The network effect
The usefulness, or utility of a network equals the square of the number of users
The more people use a particular software, a network or a book the more valuable it becomes ,and the more new users it attracts , increasing both its utility and the speed of adaptation by still more users.
Utility
Users
Utility=Users2
Law of disruption: The network effect
Law of disruption – Until a critical mass of
users is reached, a change in technology only affects the technology.
– Once critical mass is attained, social, political, and economic systems change 0
30
60
90
120
‘22‘30‘38‘46‘54‘62‘70‘78‘86‘94‘02
Us
ers
(M
illio
ns
)Internet
Years to reach 50M users:
Radio TVCable
Radio= 38
TV= 13
Cable= 10
Internet = 5
Source: Morgan Stanley.
…Led to more information at a lower cost
Source: UNDP 2001
The dot-com boom and bust
Internet revolution fuelled corporate tech spending…
Source: U.S. Department of Commerce.
PC Introduction
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1960
1961
1963
1964
1966
1967
1969
1970
1972
1973
1975
1976
1978
1979
1981
1982
1984
1985
1987
1988
1990
1991
1993
1994
1996
1997
Commercial Internet
US-based IT spending as a share of business capital equipment spending
Note: Information technology spending includes purchases of information processing and related equipment (including office, computing, and accounting machinery), computers and peripheral equipment, communication equipment, instruments, and photocopy and related equipment.
…And increased funding for startups
US technology funding (US$ billion)
$0
$20
$40
$60
$80
$100
$120
$140
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
IPO proceeds of techcompanies
VC funding to techcompanies
Source: Morgan Stanley
Technology statistics for 1999 and 2000 as a percentage of total for last 21 years
70%
56% 54%62%
Venture capitalfinancing
IPO financing Follow-on financing M&A (dollarvolume)
The highpoint in funding
Source: Morgan Stanley
...Leading to the boom in the year 2000
US IT Spending Hit a Record $532 Billion – Growth of 23% Over 1999– 51% of Its Capital Equipment
Spending
Since 1960, There Have Been Only Three Years When Annual IT Spending Growth Exceeded or Equaled 23%– All Previous Instances
Occurring Prior to 1980 on a Much Smaller Base
Technology wealth creation (US) as on Jan 31, 2000
0.1470.4
3.8
0.792
Technology companies thatIPO'd between 1980 and 1999
The Internet sector
US$ t
rillion
Market value creation
Technology wealthcreation
…And also opportunities for new categories of companies
B2B providers Ariba and Freemarkets
Business reengineering verticals
eBay
Online commerce companies
Amazon.com
Content and aggregation providers
America Online and Yahoo!
Internet software providers
Netscape
Internet Infrastructure
Cisco and UUNet
1994 1995 1996 1997 1998 1999 and 2000
The genesis of the boom? The 1996 Telecommunications Act
Required Bell companies to open their local networks to competitorsStipulated that Bells could enter the long distance market upon proving
the existence of sustainable local competition– Verizon Communications (formerly Bell Atlantic) was the first Bell to be
granted entry into the long distance market in New York State in December 1999
Granted additional spectrum to TV broadcasters to deploy advanced services
Provided a framework under which cable television could be deregulatedCreated new funds for the development of telecommunications services
in rural and underserved areas. – $5 billion Universal Service Fund
Gave the FCC authority over deregulating the voice businessLed to Competitive Local Exchange Carriers (CLECs)
Effects of the Telecommunications Act
Source: FCC reports and Bear, Stearns & Co
Decreasing prices
Increasing share of CLECs
The telecom sector witnessed strong growth...
TelecomBoom
Accelerated Innovation and Infrastructure
Expansion
IncreasedInvestments
And New Entrants
Improved Utility, Price Performance
and Profits
Increased Bandwidth Demand
And cheap capital led to the telecom exuberance Equipment companies aggressively
financed the vendors during 1995-1999
– At the end of FY 2000 $25.6 billion worth of loans on books of nine telecom giants: Alcatel, Cisco, Ericsson, Lucent, Motorola, Nokia, Nortel, Qualcomm and Siemens
Total vendor financing by 5 North American companies in the above group equalled 123% of their FY 1999 pre-tax earnings
Typically, these loans were at uneconomical terms and for companies with no cash flow promise– 35-40% of the $25.6 billion credit disbursed at risk
Combined with other drivers of growth in bandwidth supply
Increase in investments and new entrants– Carriers increased capex
Increase in bandwidth demand– Dot-com boom
Improvements in technology– Dense Wavelength Division Multiplexing (DWDM)
DWDM advancements
832
160
320
0
50
100
150
200
250
300
350
Past Present Future
Number of wavelengths
Sources: CSFB and Kaufman Bros
Which was not sustainable Leading to excess bandwidth
5 percent of the 39 million miles of glass fiber in US networks is 'lit'
– 1 percent of the installed fiber of 39 million miles is used
Decline of telecom
Sources: CSFB and Kaufman Bros
The bust after the boom
Technology IPOs since 1980 lost more than $ 1 trillion by Dec 31, 2000– Despite additional investment of $300 billion through new
IPOs in 2000
Source: Morgan Stanley
Technology wealth creation (US)
0.40.7
0.15 0.24
3.8
2.5
0.790.22
Technologycompanies that IPO'dbetw een 1980 and1999 as on Jan 31,
2000
Technologycompanies that IPO'dbetw een 1980 and2000 as on Dec 31,
2000
The Internet sector as on Jan 31, 2000
As on Dec 31, 2000
US
$ t
rillio
n
Market value creation
Invested amounts
The impact of the downturn
Short term impact of the shifting paradigms
Short-term demand tightening Focus on ROI / business benefits Lengthening decision cycles Downsizing – throwing out the baby with the bath water Less willingness to rush into e-business Carefully evaluating IT initiatives and choosing to work
with larger, more stable vendors Widespread carnage among dot-coms and e-consultants Survivors looking to newer, more cost-effective
business models“New” Economy
Traditional IT Markets in Recession
The Old and New Economy Converge
“Old “Economy
Global Economy
Long term impact of the shifting paradigms
“New” Economy
Traditional IT Markets in Recession
The Old and New Economy Converge
“Old “Economy
Global Economy
Increased customer interest in IT and business process offshoring,
Loss of talent – weakening ability to bounce back Look to integrate a wide variety of disparate systems,
applications and business processes Look to outsource non core business and IT
processes to a reliable cost effective vendor Survivors look at sustainable business models with a
stronger customer value proposition
Technology will continue to be a key driver of businesses worldwide
Impact of technology
Online organizations
Companies that deal in technology
Companies that are directly affected by digitization
Traditional companies that use technology to improve productivity
eBay – the future of online business models?
Growing at twice the rate of overall e-commerce sales
Source: Goldman Sachs, Yahoo Finance
eBay
Yahoo
Amazon
Trends in market capitalization
eBay a powerhouse on Internet– Largest marketplace and community with diverse range of products – Liquid market place– Diverse Revenue streams: international and domestic auctions, fixed
price listing, advertising etc– High ROIC (estimated to be 87% for FY 2001)
• No investment in warehouses or distribution centers• Neither side of the transaction controlled
– Growth opportunities furthered by International expansion, Acquisitions and innovative price and listing formats
Digitization will influence companies to embrace IT – e.g. Kodak Traditional film business hit by
digital technologies Introduced EasyShare cameras
starting at $ 200– Features include easier-to-download
images and longer battery life– In a December 2001 survey, 50% of
retailers mentioned Kodak as their best-selling brand
Worldwide digital camera shipments (MM)
Purchased Ofoto, online photo service for $58 million– Online imaging products and services.
Document Imaging– Capturing and archiving images– Purchased Bell & Howell’s imaging business for $135 million.
Source: SG Cowen 2001 and Merrill Lynch
Traditional companies will continue to use technology in numerous ways
Corporations will use technology to be more customer-friendlyCRM
Extranet
Electronic Delivery Channels
Global call center
Electronic markets
Corporations will use technology to improve internal processesIntranet
Computer Integrated Manufacturing
Office productivity tools
Teleworking
Video conferencing
Corporations will use technology to closely integrate with vendors and suppliers
SCM / ERP
EDI / Intranet
Electronic markets
Boeing launched myboeingfleet.com which gives airlines web access to maintenance information for their fleets– Boeing saves on paper, printing, and postage
– Airlines benefit by not having to manage paper work Source: BusinessWeek September 18, 2000
Source: Booz Allen Hamilton.
$0.00
$0.20
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$1.00
$1.20
Transaction Costs (Banking)
Cos
t / T
rans
actio
n
Branch
TelephoneATM
PC BankingInternet
Technology in bankingNet transactions cost far less than transactions through traditional channels
Investment for a commercial bank to reach 10M potential customers
–Bricks & Mortar: $900M
–Internet: $1M
Moreover, technology enables outsourcing in both old economy and new economy firms A firm expands until the cost of performing a
transaction inside the firm exceeds the cost of performing the transaction outside the firm– Search costs– Contracting costs– Coordinating costs
Co
st
Transaction cost
Reduced optimal size of firm
Increasing levels of integration
In-house cost
Lowering in-house costs
Lowering transaction costs fueled by
outsourcing companies
Earlier optimal size of firm
Forces defining level of integration of the firm
Optimal size of firm due to interplay of two forces
Building durable organizations in these challenging times
Business will remain cyclical
Forecasts of the upturn vary– V shaped recovery
• A sharp upturn
– W shaped recovery• A sharp upturn followed by a downturn and
then by another upturn
– U shaped recovery• A slow upturn
Imperatives before us: Shift from a supply constrained to a more challenging, demand constrained environment
Clients have become more demanding:– Increased long term interest in offshoring but
continuing short term volume and pricing pressures
– Demand for end-to-end capabilities– Understanding of clients’ business and domain
critical Companies have realized the merits of
offshoring:– Big 5, other e-consulting firms looking to expand
offshore operations– Large telecom and software product majors
looking at India as R&D base
The road ahead Consolidate and build organizational strengths Be prepared to capitalize on the upturn
– People
– Processes
– And infrastructure
Look beyond current short term considerations and build durable organizations
Focus on cost control – Manage under low visibility
• Budget on a more regular quarterly basis
– Link salary hikes to company performance
The road ahead: Competence building
Implement meritocracy– Strengthen performance orientation– Performance improvement program for low
performers– Promotions based on match of skill sets and
organizational need Build next generation of leadership Ensure employee loyalty through good times and
bad– ESOPS
The road ahead: Enhance client relationships
Enhance footprint w.r.t client’s IT needsBring out your best in all client interactionsDevelop high touch and high quality relationshipCreate a client first mindset within the
organizationsNew service initiatives
– Larger, longer term contracts– Improves predictability of revenues– Can possibly lead to more “follow on” business
The road ahead: Build new drivers of growth
Create new services and strengthening existing services – Systems integration
– Business process outsourcing
– Consulting / package implementation business
Expanding into new verticals and geographies– Look at stable, recession proof verticals
• Utilities and healthcare
– Build presence closer to customer
– Strengthen presence in Indian market
The road ahead: Explore new avenues
Finally, our learnings
A strong, de-risked business model helps succeed in both growth and recessionary environments
Openness and adaptability to change is keyCut costs but focus on sustaining growth even in
difficult timesCapitalize on opportunities thrown up by the
turbulent environment– Offshoring opportunities– Change in competitive landscape
Thank you