Title: Software
1Software Services IndustryFY04 Results FY05
ForecastsKiran Karnik, President Jerry Rao,
ChairmanJune 3, 2004
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2STRUCTURE
Indian software services industry performance
and outlook Industry Challenges Trusted Sourcing
Initiative Key thrust areas in 2004
3INDIAN IT INDUSTRY EXCEEDS GROWTH PROJECTIONS IN
FY04
Key trends
- Exports growth of 30.5 against forecast of
26-28 in USD and actual growth of 25 in 2002-03 - Exports grow to 12.5 bn against 9.6 bn in
2002-03 - Strong growth validates economics of offshore
outsourcing - Highest growth since the slowdown of 2001
Growth exceeds projections
- Domestic market growth of 22, same as 2002-03
- Domestic market size is now 3.4 bn against
2.8 bn in 2002-03 - Growth rate marks drop in prices, volume growth
higher
Domestic market grows 22
- ITES BPO growth of 46
- Exports grow to 3.6 bn, up from 2.5 bn in
2002-03 - Growth rate slows from 68 in 2002-03 due to
larger base - Software services grow 25 up from 15 in
2002-03, to 8.9 bn in 2003-04, from 7.1
bn in 2002-03
ITES BPO grows 46, software services growth
rapid too
4KEY IT SERVICES TRENDS REVEAL GROWTH IN ALL
INDICATORS
Pricing trends stable
- Pricing trends of 2002 reversed
- Onsite 55-60 per hour, offshore 18-24 per
hour, stable since Q2
Growth in addressable market
- New segments such as package software
installation, systems integration and consulting - New markets not only Fortune 500 but Global
2000 - Number of million customers 442, up from 331
in 2002-03
Geographical mix unchanged
- North America 70 of market
- Strong traction in Japan, Germany and France
- UK share unchanged at 15
Start-ups increase
- New startups grow to 112 from 47 in 2002-03
- VCs increasingly demand strong offshore presence
even for startups
SMEs outperform
- Of NASSCOMs 660 SME members, 414 grew revenues
by gt20 - Most SMEs report strong utilisation rates and
stable pricing - Year-end surveys reveal optimistic outlook
5ITES BPO TRACTION CONTINUES
Customer interest
- Offshore BPO is mainstream now
- 80 of Fortune 500 evaluating offshore now -
Gartner
- Wide range of service lines technical help
desks, FA, engg services, equity research - Strong focus on data protection, security, audit
compliance - Attrition rates stabilise in Q4 50 for call
centers, but lower for back office and EU markets - Pricing trends stable new pricing parameters
per seat new business models - BOT - Captive presence continues at 65 of industry,
1 new captive center a week in 2003-04 - Greater presence beyond metros Vizag, Jaipur,
Kochi, Pune, Ahmedabad, Chandigarh
Maturity in all parameters
Some negatives persist
- Small, undifferentiated vendors continue to lose
share over 110 units have seat utilisation of lt
0.5 - Infrastructure bottlenecks urban mass
transport, airports - Education curriculum movement is slow
- Govt tax policy needs to be consistent
6FY05 INDUSTRY SIZE 20 billion, from 10
billion in FY02
Key forecasts
- Industry to grow from 15.9 bn in FY04 to 20.5
bn in FY05 - Among the top 10 industries in India, larger than
telecom - Driving productivity growth in India and around
the globe
Overall industry growth 29
- Exports growth at 30-32 to 16.3 bn
- IT services forecast to grow at 26-28 to 11.2
bn - ITES BPO growth at 40 to 5.1 bn
Export growth of 30-32
- Government focus on governance, broadband and
convergence will lead to market growth to 4.2
bn ( 3.4 bn in FY04) - Mobile market strong growth drives applications
- Higher spend from education, banking, automotive
and retail sectors - Lower hardware tariffs further drive growth
Domestic market growth faster at 24
7THREE MEGA TRENDS WILL DRIVE THIS INDUSTRY
Key trends
Key elements to be assimilated
- Customers will outsource most non-strategic
processes - BPO gains share in new contracts
- IT services and BPO bundling
- SI (Systems Integration) contracts only for
strategic processes
Budgets shift to IT outsourcing and BPO contracts
- Infrastructure elements (app servers, security,
storage, middleware) are standardised - Top 3 players in each segment have 45-85 share
- IBM, Microsoft, Oracle and SAP have architectural
control - New apps customised at process level
Standards controlled by 3-4 vendors
- Global vendors setting up offshore development
bases in lower cost labor pools - Most companies will have 3 tier delivery
- All winning players have a network of global
centers
Execution through a global delivery model
8THE INDUSTRY IN INDIA IS FOCUSING ON 3 INTERNAL
CHALLENGES
Key area
Key challenges
- Developing new transition management
methodologies, process and capabilities - Creating referencability through actual client
work
Operational
- Shifting significant component of workforce
offshore while growing local jobs in markets - Attracting highest quality programming talent in
India - Recruiting lateral, good senior/middle managers
Talent
- Managing downward pressure on revenue (and
absolute profitability) - Significant one-time costs of severance,
knowledge transfer and duplicate facilities
Economics
9THE INDUSTRY FACES EXTERNAL CHALLENGES AS WELL
Key area
Key challenges
- Robust legal and enforcement framework in India
- Abiding by country vertical specific laws
Security Privacy concerns
- Anxiety re jobs
- Numerous 3rd party studies endorse benefits
- Work with allies
- Focus on GATS, movement of personnel
Demonstrating benefits of free trade
- Focus on upgrading quality and quantity of
manpower - Focus on improving infrastructure
Enablers in India
10NASSCOM 4E FRAMEWORK FOR TRUSTED SOURCING
Engage
- Creation of Global and National Advisory Boards
on Security - Meet all stakeholders in India and key markets
SETS, CERT, BITS, FSTC, CGI, CMU, IISc, et al
- Reports to members on model contracts, SLAs,
security practices and standards, industry
legislation like HIPAA, GLB, DPA - Seminars to educate members, lawmakers and
judiciary - Create intellectual capital for members and other
stakeholders
Educate
- Examine areas to strengthen legal framework in
India - Work with coalitions and regulators in key
markets to identify relevant provisions - Best security practices in member companies
Enact
Enforce
- Established Mumbai Cyber Labs to be extended to
other cities - Security audit of members, security certification
for employees