validating the opportunity - tholons - consulting. research. …€¦ · · 2012-02-08post 2005,...
TRANSCRIPT
© 2009 Tholons 2 of2
Background and Introduction
Dramatic improvements over the last few years in the Indian
industrial and economic scenario, has set the platform for most
Indian firms to go global. India, with an average GDP growth rate
of 8% for the last four years is one of the fastest growing
economies in the Asia Pacific region making it a highly attractive
business proposition. Increasing shareholder value and
transparency required to win confidence over not just Indian, but
global stakeholders has remained the key to such success. This
has driven most firms to achieve state of efficiencies and global
standards. Hence the need to streamline processes/outsource
activities has become an imperative.
We spoke to multiple clients and suppliers to get a clearer picture
and crystallize our hypothesis. In this paper we analyze and
present a summary of our findings on the opportunity and trends in
outsourcing in the Indian market.
Market and Potential for Outsourcing
Establishing the Market
Outsourcing in the Indian market started since the early 2000.
However the maturity and rate of speed of adoption has still
remained low, characterized by low spending on technology and
related services. Post 2005, the domestic market has witnessed an
increase in the number outsourcing contracts.
In order to establish the opportunity in the market, we analyzed the
current revenues and spend on technology across industries in
India.
Table showing Industry Classification and Current
Outsourcing Potential (Sample Set)
# Industry Industry Size
(Revenues in $B) IT Spend
Current Outsourcing
Potential
1 Agriculture $213 Bn
2 Banking $ 90 Bn
3 Education $80 Bn
4 Government * $167 Bn*
© 2009 Tholons 3 of3
5 Insurance $54 Bn
6 Logistics & Transportation
$100 Bn
7 Manufacturing $ 182 Bn
8 Telecom $34 Bn
Sources: Industry Reports, Tholons Research
* Industry size based on planned and unplanned budget expenditure
** Industry size based on annual average investment outlay
Industries such as telecom, BFSI and the government have
inherently remained high spenders in technology. However,
the Indian industry is yet to attain the level of maturity as seen
in the global markets such as the USA and UK. A quick
comparison showed us that the Indian banking industry spent
only 1% of its revenues on technology and technology related
expenditure annually. On the contrary, this number was 7%-
8% in the US, revealing the scope for technology up gradation
to be immense, thereby scope for outsourcing. Areas such as
Healthcare, Logistics and Education are beginning to see the
importance of technology in streamlining and implementing
processes.
With significant maturity in global outsourcing/offshoring, it will
be easier for these industries to adopt technology and BPO in
their growth planning.
Currently:
� Government is the largest spender in the country
� Government controlled sectors such as healthcare,
education & e-Governance are opening to private
� IT adoption is minimal. significant untapped potential
� Client market: BPO has not matured lack of structure
© 2009 Tholons 4 of4
Client Market Classification in India
Source: Tholons Research
Government – Single Largest Spender and Employer
In a largely populous country like India, the role of the
government in economic development and social security is
immense. Our estimates revealed that close to 64% of
revenue contribution across all industries came from
government/government owned Public Sector Undertakings
(PSU)
� SBI and top 7 nationalized banks contribute 40% of the
revenues from scheduled commercial banks
� BSNL & MTNL account for over 30% of the total
telecom services market
� Retail – PDS is the largest form of distribution in India
reaches over 30% of the population
� Road transport and rail transport is largely monopolized
by the state
Government is the
largest client across all
key verticals - cannot be
ignored
© 2009 Tholons 5 of5
Source: Tholons Research
Public sector IT expenditures in India is expected to increase
yearly by at least 15%-20%, outpacing all other countries in
Asia Pacific. Spending will remain largely driven by hardware
but is predicted to decline slightly from 57% this year to 54% in
2011.
E-governance activities, infrastructure set up and management
and ICT implementation across departments, ministries and
states are some of the top initiatives undertaken by the PSU’s.
A National e-Governance Plan (NeGP) was launched in 2006
with a proposed outlay of US$5.1 billion, covering 27 mission
mode projects. However, till 2008 only 25% of the outlay was
spent, leaving a significantly large pie yet to be tapped. This
project included initiatives such as establishment of State Wide
Area Networks (SWAN), Common Service Centers (CSC),
Land Records Digitization, Computerization of Transport
System at Regional Transport Office (RTO) and Passport
departments and India Post, development of the India Portal
etc.
Our estimates reveals
that close to 64% of
revenue contribution
across all industries
came from
government/government
owned Public Sector
Undertakings (PSU)
Increased spending on
citizen development and
e-governance activities
© 2009 Tholons 6 of6
Snapshot of Current Outsourcing in India
For the past two decades Indian service providers have been
providing services to the global market. Success in the global
arena has provided Indian corporations to venture and adopt
outsourcing. However, the market is still nascent and clients
are still testing waters.
NASSCOM estimates the size of the current Indian
outsourcing market for IT services to be US$7.7 billion and the
BPO market to be US$1.8 billion.
Source: Tholons Research
ITO – Excludes hardware
BPO – Excludes revenues from captives
Tholons estimates the potential for domestic outsourcing
services to reach US$40 billion by 2013 from the current
US$23 billion (2008).
Service Provider Landscape in India
Composition of service providers includes MNC’s, Large Indian
majors and India based vendors.
Source: Tholons Research
Tholons estimates the
potential for
outsourcing to reach
over $40 Bn by 2013
50% has been tapped
spending on citizen
development and e-
governance activities
© 2009 Tholons 7 of7
Contribution from captives forms a significant part of the
landscape. Large part of the potential US$20 billion market
has still remained in captives.
Source: Tholons Research
Key Characteristics and Trends of the Indian Domestic
Outsourcing Market
� Multiple region specific vendors are emerging to the
foray with advantages of local demographic knowledge
and language capability.
� Highly fragmented market – currently there seems to
be a no clear winner in market share. However, MNC’s
such as IBM and HP have adopted well to penetrate
the Indian market, having a full suite of IT and BPO
services to offer
� Telecom and Banking are the two main verticals
adopting outsourcing, currently, in a large scale
� Most engagements in ITO are end-to-end
transformational deals including hardware,
application outsourcing, infrastructure outsourcing and
system integration
� Maturity of BPO has remained very low – 80%
outsourcing is voice based customer support and
acquisition
� Total Contract Values (TCV) for IT outsourcing in
India varies from ~ US$ 75-100 million
� IT players leverage their existing global outsourcing
delivery teams, infrastructures. However, a center in
the client location is preferred. Tier II low cost location
delivery model is significant in BPO
© 2009 Tholons 8 of8
Analyzing Client’s Key Drivers to Outsource
Significant growth in various industry segments such as
Telecom, Banking, Insurance, Utilities etc has spurred the
market potential for outsourcing of technology services and
BPO. In addition to growth, the maturity of the services
industry in catering to the global markets and the increased
demand for service quality has only catalyzed the adoption
rate for outsourcing.
Decision to do in-house or procure services is dependant on:
� Maturity of vendor capabilities
� Benefits from outsourcing
� Savings potential
Unlike, global outsourcing which provides a significant cost
arbitrage, the lever for domestic clients to gain direct labor cost
benefits from outsourcing remains low. Multiple other drivers,
providing indirect topline and bottom-line impact, influence the
CTO/COO’s decision to outsource.
Drivers to Outsource
We spoke to clients/buyers from various industries, to gain a
perspective on their need for an outsourced environment in a
maturing India market. Key findings are:
� Process Standardization – Having geographically
widespread business units, buyer environments are
relatively less process efficient with minimal
synchronization. Coupled with this, the legacy and
home grown systems are not geared up to facilitate high
growth environments.
� Faster Time to Market – India has been experiencing a
high growth environment. Industries such as telecom,
Banking, Insurance, Retail etc are growing at 50-60%
annually. Telecom service providers are aggressively
launching newer, more innovative and high margin
services such as Value Added Services (VAS).
Outsourcing helps firms achieve lesser Turn Around
Time (TAT) in launching such products/services and
gaining first mover advantages.
� Access to Skills – With need to grow in leaps and
bounds, buyers need access to “Right Skills”.
Analyzing clients’ key
drivers for outsourcing:
We spoke to clients/buyers
from various industries, to
gain a perspective on their
need for an outsourced
environment
© 2009 Tholons 9 of9
Outsourced environments provide significant leverage
of teams having experience of global best practices with
options of easy ramp up to meet demand variations.
� Talent Availability and Retention –. With minimal
onsite opportunities and ability to pay highly competitive
salaries, has created a threat to recruit and retain high
quality talent.
Source: Tholons Research
� Long Term Cost Advantage – Outsourced
environments offer improved process efficiencies and
mitigating risks of project overruns. It helps convert
fixed costs to variable costs thereby in the long run
reducing the total cost of ownership
� Increased Customer Service Levels – Achieving
higher levels of customer satisfaction has become the
priority for Indian firms. Outsourcing is a key element to
reach and sustain the desired levels.
Cost reduction clearly
not the top driver to
outsource
© 2009 Tholons 10 of10
Business case from Outsourcing
Indian clients are highly cost sensitive and hence the need
for constantly reducing costs is an imperative. The need for
outsourcing in the India market is quite evident. However, its
translation to direct financial benefit needs to be ascertained.
Unlike global outsourcing, cost arbitrage from direct labor is
minimal. However, delivering from Tier II/III locations could
offer a 3%-5% labor cost savings.
Service Provider Landscape in India
Source: Tholons Research
Our initial findings reveal that most Indian corporations and
firms are yet to adopt cost rationalization techniques such as
moving to a shared services model, providing a 10%-12%
reduction in cost of operation. This would help them achieve
efficiency levels through aggregation of services, streamlined
processes, vendor consolidation and economies of scale.
Our cost analysis reveals that moving to an outsourced model
could potentially provide a 20%-25% savings on costs.
Limited labor cost
arbitrage
Outsourcing could
deliver upto 25% reduced
cost of operations.
© 2009 Tholons 11 of11
Implementing Outsourcing
In order to leverage and to achieve best results from
outsourcing, both clients and service providers need to adopt
best practices.
What buyers must do?
� Clearly understand the benefits of Outsourcing -
Understand various outsourcing models prevalent and
undertake a business case to identify the savings
potential
� Adopt a ‘Portfolio Approach’ to outsourcing –
Clients are often seen to make the decision to
outsource on a more ad-hoc basis. Adopting a portfolio
approach may deliver value across the value chain.
� Outsourced Vendor to Partner – the imperative from
outsourcing to deliver and support, has driven clients
to adopt the service provider to not just be a part of but
a facilitator to growth
� Identify your ‘Partner of Choice’ – selecting the right
partner is critical. Clients must evaluate their potential
partners across parameters such as
o Skill/capability
o Past Experience
o Assets they possess – tools, technologies,
platforms etc
o Delivery model – tier II delivery capabilities
o Financial stability
� Leverage the partner for innovation and growth
� Leverage skilled/experienced advisors to
undertake outsourcing initiatives – In order to get
access to global best practices in vendor selection, it is
advisable to use services of a full service advisor
What service providers must do?
� Understand/Align services to meet client
requirements – Indian client is highly cost sensitive
� Build capability and competency – reach and
customization to satisfy client needs
© 2009 Tholons 12 of12
o Set up delivery frameworks to support
domestic markets – need for more regional
and tier II location delivery to provide added
cost advantage
o Develop new operations and delivery
models such as SaaS, platform based
services to reduce costs and increase margins
o Build Assets – Assets help creating a
differentiator in the market
� Create niche value propositions – revenue share
models, partnership approach, cost effective delivery
models
© 2009 Tholons 13 of13
Conclusion
Are we there yet? It is well established that the Indian market
is at a point of inflection. Indian clients are seeing value in
outsourcing. ‘Best of Breed’ service providers are leveraging
skill/expertise from global operations to provide solutions to
domestic client.
Industries in India such as Telecom, Banking, and Insurance
are experiencing high growth providing a significant
opportunity for outsourcing
In order to remain competitive globally, clients need to achieve
considerable levels of process standardization, have access to
the right skills and reduce time to market.
Translating the market, moving in-house operations to a more
efficient model of shared services or outsourcing is in the
offing. Clearly, moving to an outsourced model offers
significant savings on costs which could be repatriated for
growth.
Coupled with the cost advantage, the maturity of the service
providers in delivering to global clients has instilled the
confidence amongst the ‘risk averse’ Indian client community.
Outsourcing adoption growth in the Public Sector is the best
example to such success.
© 2009 Tholons 14 of14
About Tholons
Tholons is a Services Globalization and Investment
Advisory firm that combines "Best of Breed" consulting
experience with deep execution expertise and
investment insights to deliver truly effective services to
its clients. Tholons offers a detailed understanding of
business processes and combines it with practical
hands-on expertise in executing the strategy. Tholons
draws upon the considerable experience of a hand-
picked team, which has successfully formulated and
executed globalization strategies to unlock value for
Global Fortune 1000 companies. Service providers
leverage Tholons expertise to optimize their global
delivery model. Tholons advisors engage with
government bodies to build compelling strategies for
making countries attractive destination for outsourcing.
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Author:Ankita Vashistha Editor: Sabyasachi Satyaprasad Partner