Indian It/Ites Industry: Evolving Business Models For Sustained Growth

Confederation of Indian Industry
Indian IT/ITeS Industry

Evolving Business Models for
Sustained Growth*
Contents
1.0 Introduction 06
2.0 Economy and the Indian IT/ITeS Industry 08
3.0 Industry Landscape 11
3.1 IT/ITeS Industry in North India 16
4.0 Small & Medium IT/ITeS Providers 18
5.0 Emerging Technologies 24
6.0 Geographical Scenario and Trends 33
7.0 Evolving Trends 50
8.0 Key Insights 51
PricewaterhouseCoopers 3
Foreword
Dear Friends,
Wishing you a very happy and prosperous new year 2010.
India is referred to as the back office of the world owing mainly to IT and ITes
Sector. The revenue of the information technology sector has grown from 1.2 per
cent of the gross domestic product (GDP) in 1997-98 to an estimated 5.8 per cent
in 2008-09. Today, Indian IT companies have carved a great niche for themselves
in the global market and are known for their IT prowess. Global giants are using the
successful outsourcing strategy and keeping ahead of their rivals - thanks to the
competitive advantage gained by investing in India.
Realising the wealth of potential in the IT-ITeS sector, the central and state
governments are also working towards creating a sound infrastructure for the
IT-ITeS sector. CII aims to make the Indian IT and ITeS industry world class by
continuously providing a platform for understanding and adoption of the new
developments & best practices worldwide in this sector, taking up issues and
concerns of the Indian industry with the relevant ministries at National and State
level, coming up with studies, reports and surveys to help understand the potential
of Indian IT and ITeS market and the issues faced.
Given the current economic slowdown, growth notwithstanding, the IT / ITeS
industry in India stands at the water-shed moment in its history, from where steps
in any direction would alter the economic landscape of the country in the days to
come. The CII - PWC report “Indian IT / ITeS industry – Evolving Business Models
for Sustained Growth”, keeping the strengths and potential of the Indian IT scenario
in view, strives to enhance these aspects so as to transform the Indian IT identity
to an iconic status. CII believes that this report would help turn the goals envisaged
by the Industry into realities, and result in directing the world’s focus on India as the
hub of IT.
We thank all the participants associated with this survey for their immense support
and vital inputs. We hope that you find this report enriching and meaningful.
Partap Aggarwal
Conference Chairman ,
Chairman CII Chandigarh Council & Managing Director
IDS Infotech Ltd
Foreword
Dear Friends,
We wish you a very happy and prosperous new year 2010!
An old Chinese saying goes “May you live in interesting times”. An extremely
“interesting” 2009 having just gone by, it is a good time to take stock of where we
stand and what we need to do in order to sustain the growth momentum that the IT/
ITeS industry has built up over the last fifteen years.
The last few years have witnessed the Indian IT/ITeS industry evolve from executing
projects at the lowest end of the value chain, to one where Indian players are
aggressively bidding for and winning large scale turnaround projects hitherto the
domain of global behemoths. At the same time we have also seen the Indian Small
and Medium Providers (SMPs) in this sector holding their own during some very
exacting times.
With a business model closely aligned to exports, the industry faced the brunt of the
economic shake-up that has literally redefined the economic order amongst nations.
The new decade would bring in a whole set of new opportunities and challenges
that may necessitate fundamental changes in business outlook and culture. Our
report “Indian IT / ITeS industry – Evolving Business Models for Sustained Growth”
looks at this very aspect and tries to bring out the opportunities and possible
pitfalls that lie just beyond the visible horizon. We have attempted to bring out the
critical underlying factors through secondary research and analysis of a survey of
IT / ITeS service providers and the client community that we had conducted with
Confederation of Indian Industry (CII)
We thank CII for selecting us as the Knowledge Partners and for their immense help
in getting this survey underway. We also thank all the participants of our survey,
without whose invaluable inputs this report would not have been possible. We hope
you find this report interesting, informative and insightful.
Jairaj Purandare Ambarish Dasgupta

Executive Director & Leader, Executive Director & Leader, TICE,
Markets & Industries, PricewaterhouseCoopers
PricewaterhouseCoopers
1.0 Introduction
The year 2009 would, for many reasons, be marked as a watershed year in the history
of India’s IT/ITeS industry. The industry, that heralded the entry of India as a global
economic super power, was significantly impacted by what was arguably one of
the most severe economic contractions in decades. After over a decade of 30%+
compounded annual growth the industry “slowed down” to a growth rate in the high
teens and India’s largest employment growth sector was talking about “manpower
rationalization”. We are now seeing signs of recovery and optimism. The character
of this recovery in the aftermath of the Great Recession will be very different from the
recovery after the dot-com bust, which was a sector specific correction.
India has moved from being a major driver to “the largest player” in the off-shore
delivery world. The processes delivered are amongst the highest in the value-chain
of companies, the supply-side elasticity of skilled English speaking manpower across
technology and non-technology spaces is unmatched, the economic surplus in the
industry has shifted to the off-shore players who are now looking at acquisition targets
worldwide and the Indian service provider community is being viewed as a “strategic
business partner” – not just an IT services vendor.
While there could be alternate points of view, we believe that the “structural downturn”
has opened more avenues for enabling Indian IT/ITeS industry to move further and
possibly strengthen it. The slowdown forced many providers to consolidate their
operations by focusing on productivity, efficiency and optimal utilization of resources,
both human and hardware. Emergence of new disruptive technologies like cloud
computing and sustainability and Green-IT have entered the mainstream dialogue.
The value proposition has shifted from labour arbitrage to skill availability,
transformational objectives, innovation and non-linear models for growth. The recent
downturn notwithstanding, India’s success has given rise to competition from low cost
economies which has encouraged bigger players to add offerings, move towards full
service offerings with wider geo-diversity in their delivery models. The centre of gravity
of consumption geographies are shifting from US and UK to emerging markets of
India, China and Latin America.
The Small and Medium Providers (SMP) in the IT/ITeS industry have come into focus
as a critical segment that needs to be developed if we are to see the growth of the
industry as a whole. The interesting aspect is that in addition to the common issues
plaguing the industry in general, the small and medium segment faces challenges
unique to themselves. We take a close look at this segment of the industry under a
separate section to study the various opportunities and challenges faced by them and
the business strategies that could shape their future growth.
Box 1.0.1: CII-PwC IT/ITeS Survey

In order to collect responses we had prepared 2 sets of questionnaires, one
focussed on the Service Provider outlook and the other aimed at getting inputs
from the CIOs of their client companies.
80% of the Provider respondents have a turnover of less than INR 500 cr., while
52% of the Client respondents have a turnover of over INR 500 cr.
6 Indian IT/ITeS Industry: Evolving Business Models for Sustained Growth

This report takes a critical look at the development of the industry and explores a few
of the evolving trends for the future. To bring out a holistic perspective on the various
aspects pertaining to the IT/ITeS industry in India, a survey was undertaken to identify
the opinion and views of leading industry practitioners on the various opportunities
and challenges they see in the future and also supplemented by secondary research.
Figure 1.0.1: CII-PwC IT/ITeS Survey Respondent Profile
Source: CII-PwC IT/ITeS Survey
As one of the integral components of the Indian and Global economies, the recent
turbulence has also seen itself manifested through slowing industry growth rates.
The earlier downturn in 2001 was primarily a result of bust of a part of the technology
sector i.e. the dotcom bust. However this time, the slowdown in the IT/ITeS segment
is due to unfavourable overall economic scenario. We have examined the various
economic linkages with the Indian IT/ITeS industry and commented on the outlook.
The Indian industrial scenario has shown remarkable resilience in the face of the
global turmoil and no small credit is due to the regulatory rigour in the Indian economy
coupled with the stimulus packages provided by the Government, the robust quality
and process orientation in the industry in general and the IT/ITeS sector in particular.
Hari Rajagopalachari Shovon Mukherjee

Executive Director & Leader, Executive Director
Technology Sector PricewaterhouseCoopers
2.0 Economy and the
Indian IT/ITeS Industry
The global economy has begun to pull out of one of the most severe recessions
in several decades aided by a synchronized and massive government stimulus
response across the world. The transition in the economic environment has been
captured in the recent IMF projections for the global economy. After a number of
downward revisions to its world growth projections, the IMF in its October 2009
World Economic Outlook has raised its GDP forecast for 2009 and 2010 by 0.3% and
0.6% respectively. Global activity is now expected to expand by 3.1% in 2010, after
contracting by around 1% in 2009.
Prospects of recovery have improved for both advanced as well as emerging market
economies as co-ordinated public intervention enacted during the depths of the crisis
have helped revive domestic demand and reduce economic uncertainty.
2.1 Key IMF Projections

• Advanced Economies are expected to grow at a sluggish pace of 1.3% in 2010
following a contraction in growth of 3.4% in 2009.
–– US is expected to expand by 1.5% in 2010 after weathering a recession which
saw its economy shrink by 2.7% in 2009
–– GDP is forecast to rise by 0.3% in the Euro Area in 2010 and 0.9% in the UK
after contractions of 4.2% and 4.4% respectively in 2009
• Emerging and Developing Economies are projected to cross 5.0% growth in 2010,
up from 1.7% in 2009.
–– China and India, the two fastest growing major economies globally and the
chief drivers of global economic recovery are slated to grow at 9.0% and 6.4%
in 2010 up from 0.5% and 1% respectively from the previous year.
Box 2.1.1: India on the Steady Recovery Path: Growth Beats Expectations
The Indian economy is firmly on the recovery path with GDP numbers in the current
fiscal coming well ahead of expectations. GDP in the first half of 2009-10 stood at
an impressive 7% in spite of the pervasive effects of the global crisis, boosted by
significant traction provided by the industry and services sectors.
• Surge in Industrial Activity: Industrial production for April-October 2009 stood at
7.1% compared with 4.3% in the corresponding period of the previous year led
by a surge in growth in the manufacturing sector.
• Growth tempo in Services on upswing: Q2 2009-10 GDP reverses declining
trend in growth over the 3 previous quarters boosted by strong performance of
‘Trade, Hotels, Transport and Communication’ which accounts for 50% of the
services sector output.
Stimulus Push: Growth has been powered by a rise in Government expenditure
via fiscal stimulus measures and RBI’s monetary accommodation through rate
reductions which have together helped spur domestic demand.
• Investment Demand gains pace: rising from 4.2% in Q1 2009-10 to 7.2% in Q2
supported by a low interest rate environment and abundant liquidity.
• Private Consumption picks up: accelerating to 5.6% in Q2 2009-10 from 1.6%
in Q1.

Business Outlook Optimistic: Surveys conducted by different agencies (NCAER, FICCI
and Dun and Bradstreet) reveal a broad pattern of optimism and marks a turnaround
from the bearish sentiments of the previous quarters.
Authorities likely to raise projections: The Prime Minister’s Economic Advisory
Council, Planning Commission and the RBI had projected growth for 2009-10 in the
range between 6.0 and 6.5%. International bodies like the IMF and World Bank have
been more conservative in their growth projections.
• The positive GDP releases have prompted authorities (Planning Commission and
Finance Minister) to suggest an upward revision in 2009-10 GDP numbers.
• The Government of India in its recent Mid Year Review of the economy has
indicated that growth in 2009-10 could now be around 7.75%, with H2 growth
estimated at 8.5%
2.2 India’s Software Earnings and Global Economic Activity

With exports accounting for the predominant share in overall IT revenues, the
performance of technology sector is closely linked to the overall health of the global
economy. The growth rates of global GDP and India’s net software earnings have been
observed to move in sync with each other as highlighted in Figure 2.2.1. The high
correlation co-efficient of 0.81 over the period December 2006 to September 2009
underscores the strength of the association between the two variables.
Box 2.2.1: The recent upward revisions to global growth for 2010, including the
significant improvements in the growth forecast of the advanced economies (US, UK
and the Euro Area) along with the favourable GDP outlook for the Indian economy
are likely to strengthen the growth prospects of the Indian IT sector, benefiting both
export and domestic revenues.
Figure 2.2.1: Growth Trends in Global GDP and India’s Net Software
Service Earnings
Source: IMF, CMIE
Growth in exports which had plunged to a low of -33.2% at the start of 2009-10 has
since seen a significant slowdown in the intensity of decline. It has subsequently
bounced back into positive territory in November 2009 registering an impressive
expansion of 18.2% after 13 consecutive months of negative growth. In fact, India and
China’s export growth has been partly assisted by the global crisis which has taken a
greater toll on other trading nations.
2.3 Growth Trends of GDP and Technology Indices: Rising

Sentiments
Growth rates of the NSE IT and NASDAQ 100-Technology sector indices were found to
reach their inflexion points in the last quarter of 2008 which was a quarter before world
(and domestic) GDP hit its trough ( Refer to Figure 2.3.1).
Box 2.3.1: IT based Initiatives driving World Recovery

The technology indices reflecting overall sentiments and health of the IT sector
appear as a lead indicator of world GDP growth suggesting IT based efficiency
enhancing initiatives driving global recovery.
The revival in the growth of the technology indices in 2009 has been sharper
than the rebound in GDP growth rates. With the upward trajectory in global GDP
forecast for the coming quarters (Refer to Figure 2.3.1), the momentum in the
recovery of the technology sector is likely to be sustained.
Figure 2.3.1: Trends in Growth of GDP and Technology Indices
Source: NSE, NASDAQ, IMF, Government of India

3.0 Industry Landscape
Over the past decade, the IT / ITeS industry in India has been a story of unparalleled
growth. The compounded annual growth rate (CAGR) of the industry has been over
25 % in the last 5 years. Over these years four main components have formed the
industry – IT Services, BPO, Engineering Services and Hardware, Figure 3.0.1 shows
the component-wise breakup.
Box 3.0.1: The Indian Technology Sector – A Profile

• Key contributor to the Services Sector accounting for 5.8% of India’s overall
GDP
• Among the largest employment generators in the organized sector employing
7.5 million people, estimated to cross the 10 million mark by 2010
• Revenues estimated at USD 71 billion in 2008-09, consistent rise in growth with
5 year compound annual growth (CAGR) at 27%
• Exports constitute two-third of overall revenues with a marginally higher 5 year
CAGR of 28.7%
–– US and UK remain the largest export geographies – 79%, steady expansion
of other export destinations notably Continental Europe – CAGR more than
50% over FY 2004-08
• Domestic IT revenues estimated at USD 24.3 billion, with a 5 year CAGR of 24%
• Industry’s vertical market exposure well diversified across several mature and
emerging sectors
–– BFSI, Telecom and Manufacturing :Among the top 4 verticals for both export
and domestic market
• ITeS-BPO sector the fastest growing segment of the IT industry in both the
export and domestic market
–– Export earnings in 2008-09 estimated at USD 12.8 billion (a 5 year CAGR of
32.9%)
–– Domestic revenues at USD 1.9 billion – a growth of 45.3%
Source: CRISIL, Nasscom
Figure 3.0.1: Industry Contribution by major components
Source: Nasscom
Figure 3.0.2: Component-wise breakup – Exports and Domestic
Source: Nasscom

While hardware dominates the domestic market, IT services tops in the overall
industry. Also over the years, Business Processes Outsourcing has become the
second largest segment in Indian IT/ ITeS and also the fastest growing. The scope
of process outsourcing has widened over the past few years to include Knowledge
Process Outsourcing (KPO) operations.
Banking and financial services account for the dominant share in India’s total IT
export revenues. The sector has seen a consistent rise in share from 37% in FY 2004
to 41% in FY 2008. Telecom and Manufacturing, the other consumers of India’s IT
services have also witnessed increase in share over this period resulting in a rise in
concentration of the 3 sectors in the export pie from 64% to 78%.
With the intensification of the global economic crisis in fiscal 2008-09, there is likely
to be a slowdown in growth of export revenues from the BFSI sector given its close
linkages with the financial sector and overall GDP.
Figure 3.0.3: Changing Shares of Key Export Vehicles of the Indian IT/ITeS Sector
Source: Nasscom, CMIE
While Application Development and Maintenance contributes a major portion on the
IT services side (refer Figure 3.0.4), Customer Care is the largest contributor in the
BPO segments.
Figure 3.0.4: Offering-wise split up of Revenues for IT Services segment
Source: CRISIL
In terms of markets, the US and the UK remain the key markets for Indian IT / BPO
exports (excluding hardware), accounting for nearly 80% (refer to Figure 3.0.5) of
the total global market; we see these markets slowing down relative to the earlier
growth rates.
Figure 3.0.5: Geography-wise split of India’s IT Exports
Source: Nasscom

Over the years we have seen the IT/ITeS industry evolving from a “Lift and Shift” model
of moving headcount in and out of India for projects at the lowest end of the value
chain, to one where Indian players are aggressively bidding for and winning large scale
turnaround projects hitherto the domain of global behemoths. The predominant models
in use today are Fixed Price Model where a pre-determined price is charged for the
project, and Time & Material (T&M) where the charge out rates are in accordance with
the resources involved in the development. While 30% of the revenues come from Fixed
Price billing, 65% is generated by T&M. The balance 5% comes in from non-linear forms
like Outcome based pricing, per transaction/ticket pricing.
The Indian IT/ITeS sector traditionally began by tapping into opportunities in
the mainframe space. Though this section still commands a major staple of the
maintenance business, the development of the World Wide Web and corresponding
internet based technologies have seen providers thriving amidst the explosion of
opportunities in the rapidly shrinking world. Today, the emphasis is on minimizing the
time to market and the first mover advantage cannot be ignored any more.
The Indian IT/ITeS industry has largely been India centric – both in terms of delivery
centres and human capital. Within India, the activity is currently concentrated around
Bangalore, Chennai, NCR-New Delhi, Hyderabad, Pune, Mumbai and Kolkata. In
addition to central government intervention, we also see the IT/ITeS action including
more and more state governments vying with each other to offer a favourable
business environment in order to attract IT/ITeS companies to set up development
units in their states.
The Indian IT/ITeS industry is dominated by large players; however the Small and
Medium Providers (SMPs) form a significant portion of the industry, contributing over
30% of the exports. The classical “scale” vs. “scope” debate is now playing out in
the strategies of companies in the Indian IT/ITeS industry sector. While most of the
large players have established their brand positions in the global market place and
are ready to take on the largest global service providers in a “full-service” mode,
the SMPs still face the challenge of having to evolve their own focused, niche and
differentiated value propositions. Both segments will have to focus on high growth
rates, retain their sharp focus on profitability where they have set an enviable global
and local “gold standard” benchmark and minimize risk which can broadly be
defined as “predictability of cash flows”.
3.1 IT/ITeS Industry in North India
Boasting of excellent national and international connectivity, reasonable real
estate rates and enjoying among the best infrastructure in the country, North
India is fast emerging as an attractive hub for the IT/ITeS sector. The prospect
of 2010 Commonwealth Games have also given an impetus to infrastructural
investment from both, the central as well as the state governments. We see
the connectivity between the states of Haryana and Uttar Pradesh improving
tremendously thanks to the development of roadways and flyovers. The
sanctioning of the Gurgaon-Delhi-Noida Metro Project has also ensured that
while there is enhanced inter-state connectivity, the roadways infrastructure
is sufficiently freed up to take on the increased needs of a highly mobile
workforce.
The supply of manpower is also taken care of thanks to the presence of various
technical and management institutes in this region. The “Golden Triangle”of
Delhi, Gurgaon and Noida have been successful in luring many National and
Multi-National IT/ITeS companies to open up their corporate offices here. One
of the critical magnets for these companies to set up their offices in the National
Capital Region (NCR) would be the proximity to the national decision making
authority in Delhi.
NCR-Delhi has formally approved 28 (approved as of 15 January 2009) IT/
ITeS Special Economic Zones (SEZs). Already 260 companies have registered
with the Software Technology Parks of India and 135 out of these are exporting
their services actively. In 2007-08, software exports from this region were a
staggering 117 million USD.
Simultaneously we see neighbouring northern states, who do not enjoy the
evident pull factor of central government proximity that NCR enjoys, like
Rajasthan and Himachal Pradesh focussing on building up their capabilities
on lines of the Andhra Pradesh model where government initiative has been
largely responsible in setting the foundation for the private sector to build on.
As in the case of Hyderabad, the governments in these states are pushing their
flagship cities like Chandigarh (Punjab / Haryana), Jaipur (Rajasthan) and Shimla
(Himachal Pradesh) to the forefront of IT.

The Punjab government is offering various sops to information technology (IT)
companies operating in the state, including a 24-hour uninterrupted power supply,
in order to boost the sector. Chandigarh is emerging to be a prominent destination
for the ITeS-BPO segment for its advantages of savings in administration,
maintenance, real estate and infrastructure costs and human resource availability
and costs. Software exports from Chandigarh and its adjoining towns of Panchkula
and Mohali grew 31 percent to cross Rs.1,050 crore in 2008-09, compared to
Rs.800 crore the year before. Growth results show that software exports in the
union territory, particularly from the Rajiv Gandhi Chandigarh Technology Park
here, rose from Rs.504 crore in 2007-08 to Rs.750 crore last year. Chandigarh’s
growth alone was nearly 50 percent. It is expected that the that total software
exports from the park will cross Rs.4,500 crore by the end of 2011
Another case in point would be Himachal Pradesh where NASSCOM has
estimated that the IT industry can achieve an annual turnover of USD 4.7 billion by
2009-10 subject to implementation of its recommendations. The state government
has established a Software Technology Park and an Earth Station at Shimla, which
are proposed to be co-located at a later date with the Hi-Tech City. At the same
time, an international gateway has been commissioned at Shimla and an IT hub is
being developed in Solan (around 25 Kms away from Shimla). At the same time,
with upgradation of three existing airports in the state at Shimla, Kullu and Kangra,
this state is poised to become an attractive destination for IT/ITeS companies in
the future.
Hence we see that the Nothern India region is aggressively taking steps to become
viable hubs for the IT/ITeS industry and we see more and more companies setting
up their delivery centres and liason offices in these locations in order to take
advantage of high quality infrastructure, manpower, real estate and supportive
government policies.
4.0 Small & Medium IT/ITeS
Providers
Contributing almost USD 18 billion and generating employment for around 700,000
people directly and in multiple millions through cross employments, the Small and
Medium IT/ITeS Providers (SMPs) in India are integral to the growth engine of the
industry in particular and the Indian economy in general. The prevailing growth
trends are expected to continue into the near future on account of the increasing
maturity of this segment and the emergence of new opportunities into the future.
Figure 4.0.1: SMP in IT/ITeS Segment Contribution
Source: Frost & Sullivan
Figure 4.0.2: SMP in IT/ITeS Segment Contribution by Employment (00’s)
Source: Frost & Sullivan

IT/ITeS SMPs in India can be broadly classified in to following four distinct categories
depending on the customer and market segment
Table 4.0.1: SMP Segmentation for the Indian IT/ITeS Sector
Niche Service Providers Multi-Domain Players Consolidators Solution Providers

Focus on developing Multi-domain Growth through Growth through
capability in a specific capabilities across high equal sized well defined target
domain to compete growth verticals like mergers and product/solution
with large-cap players telecom, media etc. significant segments
acquisitions
Niche service providers have recorded highest growth since they did not face significant
competition from the large players who were still not present in those segments.
Currently SMPs are growing at 17% p.a. At the prevailing growth rates, the
percentage share of non-SMPs to national exports will continue to increase by 2012.
The share of non-SMPs is expected to grow from 63% in 2009-10 of the national
exports to 67% of the national exports and subsequently, the share of SMPs will fall,
from contributing to 37% in 2009-10 to 33% of national exports in 2011-12 (Figure
4.0.3). The Indian small and medium IT/ITeS providers will continue to experience
growth in the domestic market as well given their lower cost structures, flexible
business models and agility compared to the larger players.
Figure 4.0.3: IT/ITeS SMP Contribution to Exports
Source: STPI, And the 11th five-year plan (2007-2012)

- Working Group on Information Technology
However, we see an increase in the competition in the domestic space from larger
players, many of whom had not focused on the Indian domestic market. We believe
that SMPs, backed by the entrepreneurial spirit of their promoters, will be able to
navigate through the various challenges. A few of the priorities for which the SMPs
have to prepare themselves to optimally tap the potential that exists in the domestic
and the export markets have been discussed below.
Identify the Right Markets – SMPs in India have largely targeted the same primary
markets (UK and USA) as the bigger players. Driven by the volume-advantage, the
established companies are capable of introducing considerable pricing pressure. The
SMPs could focus on smaller, untapped markets both in terms of geographies as well
as services provided. There are a few SMPs who targeted Europe and the Middle East
much before the larger players did and the investments paid off.
Many companies take a myopic view on competition in the established markets by
ignoring the phase of market assessment because of the investment involved.
Increase Focus on the Domestic Market – Tap the domestic market, as it will act
as a test bed for innovation and new service lines and help in rapid accumulation
of higher value-added skills through development of low cost, tailored solutions for
domestic companies and the government. Moreover, India is predicted to be one of
the fastest growing markets for IT /ITeS services as more and more Indian companies
have started looking at IT/ITeS as an enabler for operations efficiency and cost
management. The domestic IT-services market is expected to be worth US$10.7bn by
2011, according to Gartner. The India market is still an order of magnitude smaller than
the U.S. market, however, it is expected to grow, and even if SMPs can target some
proportion of their revenue from this market especially within the other industries Small
and Medium Businesses (SMBs), it will help diversify geography risk in the future. The
domestic outsourcing market with respect to SMBs has a potential for a large number
of sourcing agreements that are too small in value to interest the larger companies. IT
SMPs could leverage these to establish long-term relationships with domestic clients
who too are looking to grow.
Talent Retention – Enhance Recruitment and Retention of top talent through varying
business cycles. In an industry where attrition rates vary from 15% to 50% between
companies and recruitment and development costs form a significant component of
the operating costs, good talent management practices are being seen as increasingly
critical to survival. While the larger companies have full-fledged HR structures to
handle employees, the SMPs struggle to retain talent and end up becoming training
beds for their larger counterparts. Investment in talent management practices will lead
to significant savings in terms of employee costs and lead to higher client satisfaction.
While this can be done through various innovative employee friendly practices, one
way could be to provide higher responsibility to capable employees – something which
larger players cannot afford because of their layered structures.
Talent management is one critical area which is overlooked by many SMPs

Create a Niche – Identify a defensible niche in nascent verticals such as healthcare,
education, transportation, utilities, e-governance, and technology areas like
Geographic Information Systems (GIS), embedded software or web services and
products. These new niches will be growth drivers. The estimates are that niche
products could contribute over 50% to the revenues of these companies soon. A
Bangalore-based BPO has launched a new software which will enable call centre
operators to predict customer demand, and respond in a way that doubles customer
satisfaction. From 15 customers last year this software has now got them 30 new
clients this year.
Build Alliances – Make clear, strategic choices to secure alliances with Systems
Integrators. Also on the products and technology front, SMPs are not very active.
Another form of alliance is partnering between themselves. In the past, today’s large
Indian players used to bid along with MNCs, similarly SMPs could come together
to provide a bouquet of services if required. The key thing would be to work out the
operating arrangements for smooth delivery.
Financing for growth – According to market research firm Cleantech, the share
of software in venture capital funding has shrunk significantly. Clean energy and
technology currently takes the top spot in terms of venture capital share. In a
scenario where the total VC spending has shrunk to 2003-levels, this is clearly a
cause of concern for IT SMPs. At the same time, the technology funding space is
once again getting active with the macroeconomic picture looking brighter. The
total capital raised in private equity (PE) or venture capital (VC) funds for India is at
$2.5 billion in 2009 and will potentially balloon to $4bn in 2010 – the same amount
raised in 2008. External fund raising can be done through debt syndication and/or
equity dilution. In either case, the promoters need to ensure that their companies are
made attractive for consideration by fund disbursers, by continuously optimizing on
delivery quality while relentlessly streamlining processes to ensure faster turnaround
while reducing costs and thereby increasing margins. A parallel approach could be to
increase focus on niche segments.

IT Service providers are seeking additional funding largely for the purpose of
Inorganic growth (55%) and they believe that the Private Equity (73%) route
would be suited source of funding for their needs. This result underscores the
fact that the Indian IT/ITeS industry can expect to see a wave of consolidation in
the near future.
Also while we have the smaller players placing equal emphasis on using fund
injects for inorganic growth and running operations, their larger counterparts
require external funds primarily to fund mergers / acquisitions. This is in line with
expectations.
Interestingly, we find larger players more reluctant to divest equity with 100%
preferring debt syndication to SMPs who preferred equity dilution (89%). This
could also be an indicator that big players feel more confident with the debt
route than SMPs.
Increase Operational Efficiencies – While there has been lot of activity on this from
the larger players, SMPs need to shore up performance by curtailing costs, not by
cutting down on important areas like training, but by bringing in genuine efficiencies
in delivery. In short, SMPs need to take a hard look at their operations and improve
efficiencies.
Retain and Mine Customer – As a revenue-producing asset, it makes sense,
especially for SMPs operating under stringent budgetary constraints, to account
for the costs incurred for retaining clients than for acquiring new ones. Long-time
customers are more profitable than new clients who generally would like to test the
mettle before settling for the provider. Acquiring new customers costs anywhere
between 4-6 times more than selling more products to existing clients. Profiling the
existing customer basket to identify more profitable clients with highest potential
requires periodic:
• Client Profile Analysis with regard to long term value potential. This may help trigger
some long-overdue decisions that might help walk away from high-cost, low-profit
customers
• Acquisition Trend Analysis for cost of new wins. If this keep on increasing, it means
that market is getting tougher to penetrate, or the marketing organization has not
figured out how to operate more efficiently
• Channel Analysis – Looking at customer acquisition costs by channel can be an
eye-opening experience.

Increasing Operational Cost is seen as the biggest challenge by 67% of the service
providers in the current market scenario closely followed by the pressures of keeping
up with technology changes. A significant 50% of smaller companies have felt that
they are finding it difficult to sustain the increasing competition from captives

Once, the client hierarchy is established, steps need to be taken to proactively
track and target them from a business development point of view. This would
include proactively tracking client developments, identifying their needs, opening up
communication channels and delivering sales and marketing excellence.
Partner with the Customer – SMPs have a far more flexible model than the bigger
players and those that are able to reorient themselves quickly and become truly
customer-centric will find more doors opening. While bigger players would move
towards standardized solutions, SMPs need to play the customized solutions card.
This would work particularly well in markets where offshoring/outsourcing is new
Enhance Industry-Academia Linkages – Involvement in shaping the curriculum
aligns the goals of education with that of industry. Through a rigorous industry-
academia engagement, companies can ensure that the curriculum is tailored to meet
the needs of the organization. Particularly for SMPs, this exercise would also help
reduce the on-the-board technology training costs that form a substantial chunk of the
employee development costs.
Use Technology to level the Playing Field – Technology is great leveler; emerging
technologies like Cloud Computing could nullify some of the advantages that larger
players have in delivering services. The cloud model’s advantages of lower capital
outlay and operating costs, coupled with the reassurance of more major players
coming on board and building capabilities (including enabling and educating the
channel), will encourage more customers at the margin to invest in cloud offerings.
Comparable to the transition from standalone electricity generators to use of electricity
grids in the early 20th century, cloud computing too includes an aspect of payment
as per usage or on a subscription basis. This will lead to lower capital expenditure
and lower overheads while improving access to more services and applications. The
important thing here would be to choose the appropriate model to adopt.
5.0 Emerging Technologies
Currently in spite of a slowdown in the mature IT markets, we see growth potential in

the under penetrated emerging IT markets like BRIC nations. However, the increased
need for internet-oriented models and technologies face obstacles in the form of cost,
speed and complexity pressures of conventional IT models and technologies. The
opportunity has been usurped by major technology players like Amazon, Salesforce.
com, Google etc. leading to a whole new world of cloud computing which could lead
to business optimization and better ROI.
Box 5.0.1: Cloud Computing

What is Cloud Computing?
Unfortunately there is no industry consensus on a definition. Cloud Computing evolved
in response to customer needs for better, faster, cheaper environment for services.
Cloud Computing is all of these
“A buyer centric view of technology, where applications are available through purchase
or rental or even development, wherever and whenever.”
“An approach to consume technology in a pay-as-you-go model where consumers only
pay for what they use.”
“A comprehensive virtualization model for technology from infrastructure through
application delivery.”
Key elements of cloud computing
Speed, revenue based on consumption, clearly defined services managed
to appropriate service levels, on demand availability and scalability, location
independence, complexity hidden from view.
Cloud computing encompasses computing services being delivered to users

of an organization. Server virtualization, service oriented architecture, software
as a service etc. are the technologies enabling this. Users can access data and
software applications from anywhere and virtually from any device. This allows
enterprises to cut their capital costs of buying software and infrastructure as a
service. The concept closely resembles the development of electricity network
few decades ago when enterprises plugged themselves to electricity grids and
stopped generating power themselves. Similarly individuals and businesses
can now connect to the cloud of computing and storage resources rather than
purchasing and maintaining their own software and infrastructure.

5.1 Cloud Computing Services
Infrastructure as a service (IaaS) - Utility computing data center providing on
demand server resources: HP Adaptive Infrastructure as a Service, Rackspace,
Amazon E2C & S3. Typical characteristics are as follows:
• Compute resources (processors, memory, storage, bandwidth, etc.) are provided in
an as-needed, pay-as-you-go model
• Able to provide from single server up to entire data centers
• Creates new opportunities such as Cloudbursting: shifting usage spike traffic to
alternate resources
• Infrastructure scales up and down quickly to meet demand
• Built on a utility computing architecture to host a SOA application layer
Platform as a service (PaaS) - Hosted application environment for building and

deploying cloud applications: Salesforce.com, Amazon E2C, Microsoft Azure. Typical
characteristics of PaaS are as follows:
• Applications are built in the “cloud” on the platform using a variety of technologies
• Simplifies orchestration of cloud services
• Development, testing, and production environments (servers, storage, bandwidth,
etc.) are billed monthly like hosting
• Pay-as-you-go model
• Environments scale up & down at the click of a button
• Concerns include code & data privacy, security and scalability
Software as a service (SaaS) – Applications built on other cloud services are

hosted in the cloud. The applications include enterprise applications like CRM, office
applications etc. These are applications typically available via the browser: Google
Apps, Salesforce.com. SaaS will disrupt the application management functions for
both internal IT and outsourcers. A logical extension of Software as a Service is
Process as a Service which can involve full provisioning of business processes such
as claims processing, expense management and procurement. The characteristics of
SaaS are as follows:
• Applications (word processor, CRM, etc.) or application services (schedule,
calendar, etc.) execute in the “cloud” using the interconnectivity of the internet to
propagate data
• Custom services are combined with 3rd party commercial services via orchestration
(SOA) to create new applications
• Requires investment to build an enabling layer with governance, security and data
management functionality
• May require integration with back-office systems
• Pay-as-you-go model
Box 5.1.1: CII-PwC IT/ITeS Survey Results
79% of the IT/ITeS providers felt that SaaS would be important in making their
company more competitive. About 67% of the service providers plan to offer SaaS
in the near future in order to increase customer base (90%), enhance their service
offerings basket (80%) and for ease of product maintenance (70%). Refer Figure 5.1.1
We also see that around 33% of the smaller players are sceptical of SaaS on account
of higher implementation time and difficulty in maintaining the system.
Also we see an overwhelming acceptance to SaaS from the clients for the benefits
like Lower Implementation time (71%), Faster Delivery (71%) and Easier Product
maintenance (67%). Refer Figure 5.1.2
The results show that SaaS is increasingly gaining prominence as a change
harbinger for the future. Also we see that the larger players are more enthusiastic
about embracing SaaS than their smaller counterparts. The big players look at SaaS
predominantly as a way to reach out to more customers while smaller players also see
SaaS as a way to increase their basket of offerings.
At the same time, with only a meagre 30% of the clients considering Brand of the
service provider to be critical while adopting SaaS, we see that SaaS is also playing
the role of levelling the playing field for Small and Medium Providers.
Figure 5.1.1: Reasons for Favoring SaaS (IT/ITeS Providers)

Figure 5.1.2: Reasons for Adopting SaaS (Clients)
What new capabilities/models will IT gain?

• Ability to overflow workload to external computing resources as needed when
internal resource capacity is completely utilized
• Adopting in-network redundancy with automated recovery to eliminate disaster
recovery risks and costs
• Data as a Service built on the concepts of Master Data Management and the
Semantic Web
• Rapid deployment (SaaS) or development (PaaS) to meet the immediate needs of
the business
• New models and tools for improving & evolving internal IT
New services will emerge as entrepreneurs identify new ways to leverage clouds to
address corporate concerns. A few possibilities are:
• Data Warehousing & Business Intelligence as a Service – Today companies are
challenged to find and build in-house expertise in both technologies, and expertise
directly correlates with value. A service would obviate the large investment in
people and technology focusing expenditures on results
• Business Process Outsourcing as a Service – Outsourcing business processes
requires adoption for the outsourcer or migration for the customer. Service
enablement obviates the need for platform changes focusing instead on pushing
data through the process in a seamless stream
• Business Continuity & Disaster Recovery as a Service – Clouds break the link
between applications and hardware enabling lightning fast responses to outages
and disasters without disruption. Billions of dollars spent provisioning “just in case”
environments can be saved while improving service.
As part of an IT transformation, adopting cloud would look something like this…
• Rationalizing infrastructure & applications - Reducing the complexity by identifying
redundant, outdated, or underperforming components and consolidate servers.
• Defining the cloud architecture - Creating a cloud architecture leveraging SOA
for applications, utility computing for infrastructure, and ESB for integration with
appropriate standards, governance, and reference architectures.
• Building cost profiles for each application - Identify the costs to support, update,
and operate each application on a per user basis.
• Identifying and assessing SaaS alternatives - Target SaaS alternatives offering
a better economic model than internal hosting. If not available target SOA
alternatives.
• Migrating infrastructure to a cloudbursting model - Further consolidate servers from
just-in-case to average load provisioning using the internal pool of servers left over
or an external IaaS provider to handle peak loads. Identify systems management
gaps and discuss with vendors
• Building new applications on a SOA foundation - Applications requiring significant
development or new applications are constructed on a SOA foundation with a
particular focus on application virtualization.
• Creating a cloud enablement roadmap for retained applications - Defining a
development roadmap which migrates retained applications to a cloud model
through outsourcing (SaaS), replacement (SaaS or SOA), or development (SOA).
… And there are many on-ramps to Cloud Computing:
External SaaS
• Driver - Quickly gain new capabilities, Select best in class point solutions with already well
defined integration methods (EDI)
• Requires - Nothing
• Challenges - Governance, Data security, privacy, and ownership, 3rd party SLA’s, Integrated
support
External IaaS
• Driver - Cloudbursting – overflowing from internal to external compute resources, Storage
on demand, New compute intensive services
• Requires - Scheduler to move jobs to cloud, Internet bandwidth
• Challenges - Security
PaaS
• Driver - Development of external facing web solutions
• Requires - Understanding of SaaS application and data models
• Challenges - Integration to backend systems, Data security, privacy and ownership, 3rd
party SLA’s
Internal IaaS
• Driver - Agility, Maximize efficiency, Maximize ROA
• Requires - Server virtualization, Service level agreements, Automated infrastructure provi-
sioning and orchestration, Integrated systems management suite
• Challenges - Application silos
Internal SaaS
• Driver - Agility, Maximize reuse, SOA
• Requires - Internal IaaS, Application virtualization
• Challenges - Application monitoring tools

Preparing for the Cloud
Getting started to Cloud Computing follows a standard technology adoption
methodology as shown below:
Learn (Concept Realization)

• Client briefing • Define target architecture
• Technology Workshop • Identify technology gaps
• Identify candidate pilots • Create high-level pilot project plan
• Review existing architecture
Pilot (Knowledge Realization)

• Identify required process • Refine pilot project plan
changes • Procure technology
• Define requirements • Execute pilot
• Create estimates • Gather metrics and evaluate pilot
• Define pilot evaluation metrics • Create recommendation
• Create business case • Update support knowledge bases
• Refine target architecture • Update training materials
Transform (Benefits Realization)

• Establish PMO • Define business processes
• Create change management plan • Build technology blueprints incorporating
• Define target organization structure concept
• Build business architecture • Develop roadmap
• Execute roadmap
5.2 Benefits & Challenges
Benefits: As no dedicated capital investment is required and users only pay for
what they use, the fixed costs are reduced. Due to sharing of computing resources,
utilization of IT resources improves and servers are not left idle unnecessarily. This
gives cost benefit to all the players in the value chain. The service providers will incur
upfront costs and would spread these costs over a span of time. This is all the more
important in the wake of the slowdown in economic activity as companies suffer IT
budget cuts. This is all the more relevant with reduced cost driven by less hardware,
less floor space from smaller hardware footprint, higher level of automation from fewer
administrators and lower power consumption.
Users can choose the specifications of computing resources to be used by them. This
increases flexibility and simplifies the deployment model. Cloud computing will enable
transferring some or all of support obligations; eliminate licensing risk and version
compatibility.
Cloud computing would allow leveraging the proven data centers and IT infrastructure
of the service providers leading to greater reliability. The redundancy built in the IT
infrastructure of these service providers will result in decline of the threat of outages.
Due to cloud computing, companies can increase or decrease hardware and software
according to customer needs thereby enhancing scalability. Systems managed by
SLAs should equate to fewer breaches.
Challenges: In the cloud computing world, data is managed by cloud computing
service providers. This could lead to loss of control of personal information.
A major risk of cloud computing is the possibility of getting locked-in to a vendor.
Users of a software application could find it tough to switch providers due to familiarity
of the service or non-availability of the application elsewhere. Social networks and
other web 2.0 services could create hassles for users to retrieve their data creating a
lock-in.
Using the cloud means total opacity regarding data location. The users have a little
idea of where the data is hosted. This could create security issues as users cannot
mandate the service providers to abide by local security and compliance regulations.
The service level agreements (SLAs) will have to be defined differently. Ideally this
should include mention of planned and unplanned unavailability of service and
penalties associated.

Cloud Computing Issues
For Cloud Computing Customer
• Defining standard requirements for cloud service providers
• Defining minimum design, development and performance standards for service
• Develop a cloud aware IT and security infrastructure and architecture
• Establishing a role based user identity service to manage users on the internet,
trusted infrastructure
• Regular risk assessment of cloud computing environments
• Educate users about the risks of working in the cloud
• Aligning services with the business requirements
• Cost benefit analysis of the services
• Alternate plans for service interruption
• Infrastructure level compatibility with cloud services
• Loss of control of business information
• Defining and implementing Security policies & standards
• Protect Intellectual Property
• Transfer of regulatory obligations
• Use of untried technology
• Migration & Termination
• Conducting due diligence of service providers prior to service purchase
• Tax and Regulatory issues in terms of characterization of cloud computing
transaction, transfer pricing issues, inbound and outbound tax consideration,
local taxes etc.
For Cloud Computing Service Provider

• Providers of SaaS and PaaS have to implement best practice malware
monitoring and protection solutions
• Compliance with current industry best practices and certifications
• Incidence response reporting including remediation arrangements
• Assess performance against agreed KPIs and take corrective actions when
necessary
• Regular audit of systems and infrastructure
• Set minimum design, development, operational and performance standards for
service
• Timing of revenue recognition based on various revenue models
• Cost for set up / implementation and amortization thereof.
Source: Security Implications of Cloud Computing June 2009, Information Security Forum
56% of clients surveyed would be open to the concept of cloud computing primarily
for its advantages like Lower Implementation time (75%), Easier Product Maintenance
and Faster Delivery (each 69%). However, scepticism also abounds on account of Data
security concerns (78%), increased response time and Accountability in case of error
(each at 56%). Refer Figure 5.2.1
On the other hand, about 60% of the service providers are open to using Cloud
Computing.
This shows that though there is awareness both at client end as well as provider
end on the importance of cloud computing, there are critical issues that need to be
resolved before this can be considered an industry DNA.
Figure 5.2.1: Reasons for Adopting Cloud Computing (Clients)
6%
69%
25%
13%
19%
50%
69%
75%

6.0 Geographical Scenario
and Trends
A 100 million English speaking demographic was one of the key reasons why it was
initially easy for Indian companies to align themselves with businesses in US and
UK. However, with the pipeline slowing down, we see the emergence of new growing
markets across Continental Europe, Latin America and the Asia Pacific poised to fuel
the growth into the coming years. Europe, the Middle East, and Africa (EMEA) are
expected to reach 35.8% of the worldwide offshore IT services market in 2013. At
the same time, we see the domestic market in India opening up with the government
push substantially for better governance through increased transparency and speed of
operations. With increasing competition, homegrown industries are scrambling to keep
up with the external entrants through systems automation and process re-engineering,
giving the Indian IT/ITeS industry a greater geographical spread to target. This trend
towards a broader geographic market exposure is positive for the industry, not only as
a de-risking measure but also as a means of accelerating growth.

US and UK are still considered attractive markets for expanding into as we see
significant 71% of service providers keen to expand or plan to enter US/UK market.
Eastern Europe is also an attractive destination as evidenced by around 57% of the
service providers planning to tap the market in the near future.
The interesting aspect is that we see the smaller players more excited about US and
UK while the bigger players prefer Eastern European countries as attractive markets
to target. This signifies that there might be an impact owing to the recent protectionist
measures announced by these countries which see a drying up of big ticket projects
that would traditionally be targeted by the big service providers. At the same time,
there still seem to be plenty of value at the bottom of the pyramid for the smaller
players to target and grow.
On the delivery front, we observe several emerging countries —where wages are
low, competencies are high, and foreign investment is encouraged—that are making
increasingly sophisticated efforts to enter the market and take a share of this fast-
growing industry. Other developing countries with a significantly underutilized
university-educated population are trying to replicate what India has done by providing
incentives to attract outsourcing business. China, for example, has designated 20
cities as outsourcing hubs to attract more international investment and has provided
them with tax breaks, labor hour systems, and employment subsidies. Similarly,
the Philippine government has declared outsourcing a priority industry and has
implemented policies (e.g., formation of economic zones and income-tax holidays) to
boost foreign investment.
The increase in government intervention with private sector industries, such as finance
and manufacturing, coupled with rapidly increasing unemployment, particularly in
the United States, is heightening citizen reaction to the use of offshore resources
as undermining employment opportunities. The impacts of these events are moving
governments to consider greater levels of protectionism in Europe and the United
States. Hence we see on-shoring / near-shoring gaining momentum among companies
currently offshoring and those considering it. Media reports point to a substantial
number of companies making changes or planning to bring their offshoring closer to
their home country.
The emergence of new service providers in on-shore / near-shore locations and
the toll of time zone differences and geographical distance in offshoring are also
likely to have influenced this trend. Incumbent service providers are under pressure
to establish delivery centers in multiple locations in order to serve an increasing
demand for on-shore / near-shore locations. However, this introduces the challenge
of managing increasing operating costs.
6.1 Emerging Overseas Markets

The five-year CAGR (from 2008 to 2013) for the offshore IT services market will be
lowest in the United States, increasing at just 4.0%, with EMEA growing at 8.8%
over this same period of time. Canada and Asia/Pacific will be growing the fastest
over this five-year period at 16.5% and 19.0%, respectively. While the United States
continues to compose about 65% of the market over the forecast period, EMEA
is expected to grow to 35.8% of the global total in 2013. Due to the economic
slowdown in the United States, many offshore providers have increased their
strategic focus on EMEA in a bid to shift their mix of customers to include a greater
percentage of European companies.
Table 6.1.1: Global Offshore IT Service Spending by Importing Region
Worldwide Offshore IT Services Spending by Importing Region, 2005-2013 ($M)

2008 2009 2010 2011 2012 2013 2008-13
CAGR (%)
US 20,125.0 19,918.0 20,439.1 21,379.6 22,677.8 24,429.3 4.0
Canada 375.0 462.2 518.8 590.4 687.7 804.6 16.5
EMEA 9,818.3 10,362.6 11,130.1 12,179.1 13,426.8 14,978.9 8.8
Asia 687.0 766.0 910.0 1,112.0 1,351.2 1,640.8 19.0
Pacific
Total 31,005.3 31,508.8 32,998.0 35,261.1 38,143.5 41,853.6 6.2
Source: IDC - Worldwide and U.S. Offshore IT Services 2009

– 2013 Forecast: A Transforming World
The five-year CAGR, ending in 2013, for the offshore IT services market in Asia/Pacific
(including Japan) is 19.0%. The market is expected to grow from $687 million in 2008
to $1.64 billion by 2013. Over the five-year forecast period, application outsourcing
represents the fastest-growing offshore IT service from 2008—2013, with a five-year
CAGR of 23.4%.
Unlike the United States and EMEA, where application-related services represent
the largest single block of offshore IT spending, Asia/Pacific leans more heavily
toward offshore systems and infrastructure services, with systems integration and
infrastructure outsourcing representing a combined 49.2%. Even by 2013, this
combined percentage is expected to shrink to just 46.1%. However it is likely that
language issues may make it more difficult and costly for Asia/Pacific to outsource
application work.

Table 6.1.2: Global BPO Spending by Region
Worldwide BPO Services Spending by Region, 2005-2013 ($M)

2008 2009 2010 2011 2012 2013 2008-13
CAGR
(%)
Americas 69,998.8 73,762.9 79,953.2 87,378.6 96,349.2 105,358.5 8.5
EMEA 21,894.3 23,640.0 25,848.0 28,302.3 30,960.2 33,789.9 9.1
Asia/Pacific 19,489.5 21,544.7 23,870.8 26,502.0 29,384.9 32,630.6 10.9
Worldwide 111,382.7 118,947.6 129,672.0 142,182.9 156,694.4 171,779.0 9.1
Growth 9.1 6.8 9.0 9.6 10.2 9.6
Source: IDC Worldwide and U.S. Business Process Outsourcing Services 2009-2013 Forecast
The worldwide BPO spending forecast for 2013 will increase to US$171.8 billion at
a five-year CAGR of 9.1%. The Americas continue to dominate the BPO spending
landscape and is projected to spend US$105.4 billion in 2013 at a CAGR of 8.5%.
This represents approximately 61.3% of worldwide BPO spending. The overall EMEA
region will contribute 19.7% of global BPO spend in 2013 representing a market value
of US$33.8 billion at a CAGR of 9.1%. The Asia/Pacific market will grow at a CAGR
of 10.9% and will represent 19% of global BPO spends. The Asia/Pacific region
continues to lead in growth over the other regions.
Smaller Emerging Markets are The “Little Engines that could” – The formation and
recognition of the G-20 underscores that countries other than the G7 and BRIC are
major players in world economic and financial affairs. Here are a few other reasons to
pay closer attention to them:
• The Next-11 (N-11) and others will provide growth opportunities. With the BRIC
story well known and the opportunities well priced, economists at Goldman Sachs
have now identified the Next-11 (N-11). Of them, four have the potential in terms of
population and conditions necessary to rival the current major economies and the
BRIC countries — Korea, Mexico, Turkey, and Vietnam.
• Internet penetration will be a catalyst for technology spending. Some of the largest
growth rates in Internet use are in non-BRIC emerging markets. For example,
Vietnam, with more than 20 million Internet users, has experienced 10,000% growth
from 2000 to 2008, and, with only 24% of its population connected today, there is
room still for growth. Turkey, with almost 30 million Internet users, also registered
impressive growth of more than 1,000% over the same period, yet it only has
37% of its population online today. More people online creates demand for more
infrastructure and related services.
However, this means that Indian companies can no longer rely purely on the English
speaking demographic to fuel the growth engine. In order to access the emerging BRIC
and European countries, Indian companies need to up their investment in intensifying
multi-cultural orientation and focus on developing new language competencies.
6.2 Tapping the Domestic Market – Government Intervention
The largest opportunity in the domestic market would be in the area of hardware
and access to internet. While the internet penetration levels are at nearly 17% of
the population, ownership of computers is still restricted to 2% of the population.
Even a target of 50 % penetration would require an additional 5,00,000 computers.
Governments at central and state levels in India have initiated policies to prepare the
domestic market for consumption of IT/ITeS services. The National E-Governance Plan
alongside several other initiatives will be instrumental in raising the pace of domestic
IT growth. Actions planned by the government in order to enhance the support
infrastructure include:
• Strengthening of the intra-city road network and public transport infrastructure to
decongest existing hubs.
• Decentralization of the industry beyond existing hubs by developing new townships
• Introduction of faster public transport (high speed trains similar to Train à Grande
Vitesse of France and Bullet of Japan) between important cities.
The government had mandated all the ministries to formulate a plan scheme with an
outlay of about 2% of the total Plan outlay in the field of Information technology in
order to give a boost to e-governance. Some key government initiatives to bring IT/
ITeS closer to the masses and increase penetration in the rural market include:
• Setting up a National e-Governance Plan (NeGP): The NeGP unveiled by the
government covers 27 Mission Mode Projects (MMPs) and 8 support components
which are to be implemented at Central, State, and local government levels, at an
estimated cost of Rs 23000 crore.
• State Wide Area Networks (SWANs): The scheme envisages establishment of
SWANs across the country in all 29 States and 6 Union Territories from State
headquarters up to the block level with a minimum bandwidth capacity of 2 Mbps,
at a total cost of Rs 3334 crore.
• Community Information Centres (CICs): CICs numbering 487 in the North Eastern
States, 135 in Jammu and Kashmir, 41 in Andaman & Nicobar Islands, and 30
in Lakshadweep Islands have been established and are providing e-governance
services and training to the local populace effectively.
• Common Service Centres (CSCs): The scheme envisages establishment of more
than 100000 CSCs across the country at a total cost of Rs 5742 crore. The CSCs
will be established in a honeycomb pattern covering all the 600000 villages in the
country for delivery of content and services such as e-governance, education,
entertainment, telemedicine, agriculture, etc.
• Accelerated Power Development and Reforms Programme (APDRP): Different state
governments are set to spend around Rs. 2,000 crore as part of the initiative.
• Financial Inclusion push by RBI and linking up the Regional Rural Banks (RRBs)

6.2.1 Growth Drivers in the Domestic Market
The BFSI, Government, Telecom and Manufacturing sectors are the key verticals
driving growth in the IT service segment in the domestic market. They accounted for
34%, 29%, 11% and 8% respectively in 2008-09.
• According to CRISIL estimates the Government contribution is likely to expand to
35% becoming the top vertical of domestic IT service revenues by 2013-14. This
can be attributed to increased use of IT for e-governance projects and defence.
• The share of BFSI is projected to come down to 30% by 2013. Nonetheless, IT
spends will remain significant on account of greater emphasis on financial inclusion
measures, expansion of ATM and bank branches along with growth of internet
banking services.
• Telecom and Manufacturing are likely to see their shares fall marginally to 10% and
6% respectively.
• Retail, healthcare and education are some of the emerging sectors with IT adoption
likely to increase as they become more organized.
With around 650,000 villages comprising close to 60% of the total population, the
Indian Rural Market forms one of the largest potential markets in the world today.
With rising demand for consumer products, healthcare, telecom, insurance, banking
and micro-finance, we see immense opportunities for the IT/ITeS sector as an enabler
for these services through supply chain automation, micro-finance / rural banking
related solutions to address inclusive growth, mobile content / interface application
development to help agriculture, weather forecasting applications, rural BPO,
telemedicine etc.

The Urban Domestic market (64%) has emerged as the new hot destination for IT/
ITeS service providers. Considering the fact that providers consider the domestic
opportunity second only to the developed markets in US and UK, which were the
traditional bread providers for the industry, proves that the IT/ITeS industry as a whole
is waking up to the immense potential in the domestic space.
On the other hand, considering that about 37% of the End-Users plan to consolidate
their IT operations to Indian Tier II and III cities for the sake of Lower Employee cost
and Increased proximity to their client base, we might see more providers opening up
development centres in these cities for the same reasons.

A significant 36% of IT/ITeS service providers plan to tap the rural Indian market.
Interestingly, this focus is more from the SMPs than from the big providers. Prime
factors that would motivate focus on the rural market would be Availability of Quality
Manpower (83%) and the Extent of IT awareness (83%) in the rural market.
At the same time, we also see that the big service providers would be willing to
consider the rural market on basis of manpower availability, road and transportation
infrastructure and IT awareness. Considering the current scenario, the areas where
government can play a critical role to develop the rural sector from the viewpoint of
IT/ITeS penetration would be through infrastructure development and enable skill
development through increased awareness and education in the rural sector.
Offerings like e-governance (75%) and distance learning / e-learning (67%) are
considered to be most suited by service providers to enter the rural market.
6.3 Increasing Low Cost Competition
As one would expect, Eastern Europe, Latin America, and China made their move
into the outsourcing space by penetrating areas in which they have developed
skills and capability, such as software development and IT services outsourcing.
The South East Asian markets have emerged as strong alternatives to India as
offshoring options. Australia, Singapore and Hong Kong are ahead of India in terms
of broadband penetration and IT infrastructure.
Armed with a notable technology-oriented education system and solid research
and development foundation, Eastern European countries are positioned as an
attractive IT and software development offshore and near-shore outsourcing
destination for many Western European firms. Based on the PwC and Duke ORN
2009 survey findings, Eastern European providers account for 14 percent of software
development providers, only slightly behind Western Europe and India-based
providers at 17 percent.
Nations like Malaysia and China are emerging with competitive rates. While India
would retain the first mover advantage and the cost differential might not be
significant enough to force a change of location, it is almost certain that the low-
value BPO growth will be hampered by competition. A way out of this would be by
moving up the value chain to higher value processes or KPO (Knowledge Process
Outsourcing). Product development (R&D) and Intellectual Property Creation can also
be considered to avoid competition with low-cost alternatives.
6.3.1 Costs in India – Push Factors for Overseas Delivery Locations

• Cost of manpower – The current demographic status indicates that a large
percentage (almost 45%) of Indians shall be under 25 in 2015. This pool of
manpower, if tapped correctly can sustain the cost advantage.
• Lack of infrastructure
–– IT infrastructure is hardly a problem in the main locations in India any more.
However, if rural growth is to be focused on in the next wave of Indian IT,
infrastructural capabilities will have to be adjusted accordingly.
–– Insufficient physical infrastructure at the major centres has led to overcrowding
of these cities. This could lead to a rise in the manpower costs as replacements
are not available as easily as before.
• Security and Intellectual Property protection

–– While regulations have recently come into effect for both of these issues,
completeness of such regulation and adherence will continue to be a challenge.
–– Physical security is also an aspect which must be considered when evaluating
security.
• Education
–– Education in India is of non-uniform quality with bulk of the skilled resource
pool supplied by a few pockets of excellence. The resulting demand for high
quality talent has resulted in an ever increasing employee cost that is eroding
India’s cost advantage and creating a window of opportunity for other low cost
competitors
–– Education in India needs to be more industry-oriented.

6.4 Expanding Delivery Network
Incumbent Indian service providers are under pressure to establish delivery centres in
multiple locations in order to serve an increasing demand for near-shore location and
also to take on competition from other global providers. Setting up an operation in
multiple locations helps providers distribute their risk of relying on one major operating
location and accommodates their clients’ near-shore demand.
• While offshore providers have made investments in local (developed) markets
and emerging low cost locations, they will need to make considerable additional
investments and a focus on capacity management and utilization, especially for
asset-intensive services requiring technology infrastructure, such as contact centre
and IT services, to ensure continued and reliable growth in markets that require
local investments (e.g., business consulting, infrastructure outsourcing) as well as to
mitigate their risks in developed markets by having access to the total market and
not just a portion.
• Replicating earlier trends when MNCs would set up captives in India in order to
retain greater control on the output and generate revenue by tapping the emerging
market in India, Indian players can look at setting up delivery centres in the
emerging markets to move closer to both the supply side and demand side.
• Taking advantage of the knowledge orientation of the economy, Indian players have
to invest in increasing their portfolio of innovation and knowledge-related offerings
in order to lock in sustainable future growth.
From a domestic stand point, the current 5 year plan has seen the Indian government
committing to holistic infrastructure development. This would lead to development of
Tier II and III cities in India as viable options for expanding the delivery network.
Given the rising cost in the established cities, and the increased interest shown by
the government at the national as well as state level to develop the infrastructure
in Tier II and III cities, we see a lot of established companies extending their
development centres to Tier II and III cities to reduce costs, access manpower and to
take advantage of the government support. Considering that many of the country’s
premier intellectual development institutions are set up in and around these cities,
setting up the delivery centres here would, in addition to driving down the costs, also
lead to easier access to the top talent of the country and a more holistic economic
development. Some prominent upcoming locations are Chandigarh, Mysore,
Mangalore, Bhubaneswar, Jaipur, Ahmedabad, Nashik, etc. For example, we see
significant developments in North India across both National Capital Region (NCR) as
well as satellite cities focussed on making the business environment more attractive
for the IT/ITeS sector.
7.0 Evolving Trends
The combination of the current economic events and shift to both traditional and
emerging set of utility-based outsourcing service options will require offshore providers
to pursue the following to ensure their short- and long-term success. They have to
take advantage of the economy and make strategic investments that will enable
differentiation and alignment with the market in the future.
• Integrated service offerings including Infrastructure Management and Analytics with
strong domain focus
• Provide full array of cost savings options (e.g., labor, technology, new delivery
models)
• Diversify geographic and industry targets as well as delivery locations. Invest in
local (developed markets) to ensure full access to the market
• Target service areas that bring value, including operational excellence and business
flexibility, and emphasize industry specific solutions for specific needs
• Focus on non-linear models like creating IP, Outcome based pricing
• Integrate new delivery models (e.g., software as a service [SaaS] and platform) to
ensure competitive differentiation, focusing on SMB and emerging markets
• Explore innovative marketing and sales channels
• Target Niche solutions specific to individual geographies like Islamic Banking for
Middle East, Distance English education for China and South East Asia etc.
Figure 7.0.1: Factors perceived as helping service provider competitiveness

64% of IT service providers believe that streamlining their internal processes is key
to enhancing their competitiveness in the market. At the same time, the recently
announced government decision to withdraw tax breaks is being seen by the
industry as the single biggest threat to growth (27%).
At the same time, the frequent change in regulations (20%) and the weak
orientation of the academia with industry requirements (20%) is also perceived as
stumbling blocks for the growth.

Across the world, when it comes to utilizing third-party providers for IT services, the
key client drivers include:
• Driving down costs. Customers are looking to cut costs, and in many cases, do
so quickly. The impact of this to providers is the need to provide an array of cost
savings vehicles from offshore (Outcome based pricing) to new technologies (e.g.,
virtualization) and new delivery models (e.g., SaaS, cloud computing, platform-
based BPO).
• Optimizing headcount. Companies around the world are shedding jobs. The impact
for enterprises is the need to find skills and talent. This has become a key driver for
procuring services from third parties.
• Focus on core competencies. Customers’ need to focus on their core competencies
has never been greater. The impact of this is leading more customers to sourcing
their IT services needs from third-party providers.
The days of standalone services are numbered. End-to-End Offerings would dominate
the industry in the years to come. Providing independent Services such as Application
Development, Application outsourcing or BPO services might no longer be as
attractive. For example, we are seeing increasing instances of IT companies leveraging
their rich IT capabilities to offer BPO services by standardizing delivery.
• The death of the large-scale, pure-play integrator: Increasingly, customers are
looking to procure professional services (e.g., consulting, integration) as part of
outsourcing/managed services engagements. In a U.S. survey on application
outsourcing services, fielded in February 2009, more than one-third of end users
want to procure professional services as part of their application outsourcing
engagements. Further, customers want this type of support throughout the life of
the deal, which is likely driven by the constant need for change.
• Need to offer IT and business process services: As highlighted in a recent end-user
study on BPO in the U.S. market, customers increasingly look toward technology-
led BPO firms to support them in key areas of cost optimization, integration of IT
and business process, transformation to new technologies
• Increasing shift to outsourcing/managed services and newer models of delivery:
The key message is that the direction of adoption is increasingly focused on the
convergence of these two markets in the form of utility-based services (e.g., SaaS,
cloud/utility computing, platform-based BPO). It is this trajectory for which offshore
providers that compete in the “traditional” IT services markets need to prepare. This
will require making significant changes to their business models, though this will
apply to all traditional IT and business process services providers.
Integrated Offerings / End to end solutions is perceived to be the key factor, for
growth of the industry, by both Providers (67%) and End-Users (89%). IT Service
providers believe that with Integrated Offerings / End to end solutions they can
charge a premium and similarly the end-users consider it as a critical factor while
selecting the service provider.
Both Providers (93%) and End-Users (89%) agree that Integrated Offerings / End
to End solutions is the key factor that would help growth of Indian IT / ITeS industry
and also serve as the key selling point for the providers.
IT Service providers consider that Developing Unique IP (73%), Integrated Offerings
/ End to end solutions (67%) and their Past credentials (67%) would help them
charge a premium on their products/services.
On the other hand, we see clients planning considerable increase in the investment
in areas like System Integration (89%) and Infrastructural Management (67%). This
is closely followed by Packaged Applications (48%) Application Development (41%)
and Maintenance (37%).
Interestingly, we see the large companies planning on investment increases across
the board as compared with their smaller counterparts who are more focussed on
System Integration, Infrastructure Management and Packaged Applications.
This is a significant indication of growth in the economy post the recent turbulence.
Also the focus on System Integration shows that companies, irrespective of size, are
focussing more on optimizing costs through internal consolidation.
7.1 High Growth Areas

With regards to IT services, the fastest-growing markets are application outsourcing
(AO) and infrastructure outsourcing, with five-year CAGRs (2008–2013) of 11.1% and
15.5%, respectively. This is partially because of its relatively smaller base and the
growth in more robust outsourcing engagements with offshore players, particularly
under current market dynamics. Conversely, custom application development weighs
in with the smallest five-year CAGR of 2.3% over this same period, due in part to its
large and mature size and the fact that customers are shying away from pursuing
custom application development as a result of the economic downturn.
IT consulting represents a fairly stable share of the worldwide offshore IT services
market. However, discrete, standalone IT consulting will experience slower growth
because this consultative approach will be rolled up into bigger and longer-term
contracts such as infrastructure or application outsourcing engagements. This
dynamic also accounts for the growing share of infrastructure and application
outsourcing engagements over the forecast period. In addition, the focus on
transformation gives customers the opportunity to improve and streamline their
IT environment over a longer-term period of time, while it is being managed by an
offshore provider, rather than making a large capital investment up front.

Around 67% of the clients in India plan to increase their investment in the area
of Remote Infrastructure Management (RIM) in the next year which is very much
in line with the Providers’ perception (73%) of Emerging services like Remote
Infrastructure Management being a growth engine for the Indian IT/ITeS industry
into the future.
However, with 60% of clients perceiving that the brand of the organization is a
critical consideration for their choice of a service provider in this space, this might
not necessarily be an area that should be considered by SMPs when they look to
expand their basket of offerings.
Figure 7.1.1: Indian Client Spending Patterns in the Coming Years

(CII-PwC IT/ITeS Survey)

Note : The totals do not add up to 100 for all the segments because all attributes were not
equally applicable to all respondents
Table 7.1.1: Global Offshore IT Service Spending by Offerings
Worldwide Offshore IT Services Spending by Foundation Market, 2005-2013 ($M)

2008 2009 2010 2011 2012 2013 2008-13
CAGR (%)
Application 4,770.6 5,145.8 5,631.3 6,267.3 7,054.3 8,069.3 11.1
Outsourcing
Custom 8,138.5 7,977.5 8,084.4 8,342.5 8,691.5 9,136.4 2.3
Application
Development
IT Consulting 1,404.0 1,353.5 1,402.1 1,473.6 1,572.5 1,695.9 3.9
Infrastructure 2,169.7 2,410.3 2,725.0 3,157.4 3,694.1 4,452.7 15.5
Outsourcing
Systems 6,430.1 6,332.2 6,588.0 7,064.1 7,678.4 8,431.1 5.6
Integration
Other 8,092.4 8,289.5 8,567.2 8,956.3 9,452.8 10,068.2 4.5
Total 31,005.3 31,508.8 32,998.0 35,261.2 38,143.6 41,853.6 6.2
Source: IDC - Worldwide and U.S. Offshore IT Services 2009 – 2013 Forecast: A Transforming World
Table 7.1.2 highlights the worldwide BPO spending forecast, which for 2013
will increase to US$ 171.7 billion at a five-year CAGR of 9.1%. Customer Care
continues to dominate the BPO spending with a projected spend of US$92 billion
at a five year CAGR of 9.3%. This contributes to 53.6% of the total BPO spend.
However, Procurement services leads in growth (16%) compared to the other key
horizontal services.
Table 7.1.2: Global BPO Service Spending by Business Functions
Worldwide BPO Services Spending by Business Functions, 2005-2013 ($M)

2008 2009 2010 2011 2012 2013 2008-13
CAGR (%)
Key Horizontal Services
Customer 58,983.6 62,766.8 68,635.3 75,379.4 83,650.6 92,051.4 9.3
Care
Finance and 25,208.3 27,369.0 29,863.4 32,720.8 35,894.9 39,442.6 9.4
Accounting
Human 17,696.6 18,896.1 20,388.8 22,303.4 24,423.9 26,571.4 8.5
Resources
Procurement 2,112.3 2,471.8 2,891.0 3,349.1 3,852.4 4,429.9 16.0
Sub-Total 104,000.8 111,503.7 121,778.4 133,752.8 147,821.88 162,495.3 9.3
Other
Training 7,381.9 7,443.9 7,893.6 8,430.2 8,872.5 9,283.7 4.7
Total 111,382.7 118,947.6 129,672.0 142,182.9 156,694.4 171,779.0 9.1
Source: IDC Worldwide and U.S. Business Process Outsourcing Services 2009-2013 Forecast

7.2 Outcome Based Pricing
The two prominent delivery models in use today are the Fixed Price Model and T&M.
Both these models suffer from the common drawback that in each case, the risks are
unequally divided between the providers and the clients. Also given the high employee
turnover that is characteristic of the IT/ITeS industry, we see the client delivery team
frequently changing rarely giving the client a chance to get a comfort feel out of the
service provider team. Hence we are increasingly seeing scenarios today where the
clients insist on an in-house support training component with the project contract.
Given the rising inflation coupled with the fact that the incremental benefits of
individual innovation is not being harnessed sufficiently, the margin increments in these
models comes at a high operating cost that further erodes the competitive nature of
the organization. The way forward would be to build non-linear capability that would
allow maximum returns by minimizing overheads.
An alternative non-linear model that can be used is an Outcome Based Pricing Model
that seeks a partnership between the customer and provider in which both parties
align their objectives and work with a shared vision and a shared risk-reward structure.
This is done by ensuring pricing and penalties based on milestone outcomes achieved.
In short this would be a combination of the Fixed Price and T&M models where both
sets of stakeholders would have a proportional share in the success of the enterprise.
At the same time, this would also allow providers with greater freedom to decide on
optimal delivery mechanisms while opening up collaboration channels with clients for
innovation and deeper engagements.
Outcome Based Pricing (OBP) allows providers to sell the “business value” of the
project for the customer and take the responsibility for the delivery while clients can
get a better surety on the success of the venture. Hence, if well managed, this model
can also effectively cut down on the competition trying to reach out to the client.
After having said that, Outcome Based Pricing in software development is a difficult
paradigm to overcome and represents significant challenge and risk.
There are numerous variables that influence the outcome of a software/operations
service. It would be disastrous to commit to an OBP model without understanding
how these variables will play on the quality of the service delivered. The key step in
ensuring a successful OBP strategy would be to clearly define the outcome. This has
to be done in consultation with clients ensuring clearly defined accountabilities and
milestones. The critical factor, in setting the initial scope, is a deep appreciation of the
client’s business model, operations and industry nuances. In the absence of this clear
initial definition, scope creep comes across as a major stumbling block.
Another key factor to note is the method of calculation of penalties, rewards and
pricing variables. All formulae, variables, reports, data that will be used to compute
these parameters on an on-going basis must be thoroughly discussed and
documented prior to signing the contract. Otherwise, even minor “data interpretation
and definition” issues can derail these calculations. Moreover, during the course of
execution of any project, there will be external developments like change in leadership,
change in teams, regulatory changes etc. that could substantially impact the
engagement. Hence both parties need to involve experts to analyze these variables
and arrive at a weight-based system to calculate pricing/penalties, during the contract
negotiation stage. The aim being to maximize clarity of outcome by limiting the
influence of external variables to the extent possible. Higher the unhandled external
variables, lower would be the possibility of success.
Significant considerations that must be taken into account before considering OBP
are:
• The OBP model would generally be used for risky and high pressure endeavors
whose success is critical for the client. Providers need to take this into account
before entering into any agreements.
• With the contractual structure for such services still not evolved enough to cover
all possible eventualities and given the high stakes involved, the nature and
chances of disputes are high.
• Clearly demarcated control parameters need to be set up along with support
requirements in terms of speedier decisions from clients, etc.
• Regularly making the best project / programme managers available to be
engaged in such projects can often be a challenge.
• For service providers, a good qualification criterion needs to be in place to give
clients the confidence in the success of the outcome.
During the pre OBP negotiation stage, the following aspects should be kept in mind:
• Extreme caution and care should be taken when penning down the Service Level
Agreements (SLA) in these projects. Making sure that the expectations are set
clearly and both the parties are on the same page is essential.
• Frequent communication both email and oral is essential. Whatever is discussed
orally should be written down and confirmation should be obtained from the
other party.
• Also all the parties involved in the project should be aware of the agreement
signed upon and requirements defined.
• Objective Third Party Review Mechanisms should be set up in order to ensure
objective monitoring of milestone outcomes and mitigate disputes
And finally during the scope of an OBP project, care should be taken to ensure that:
• There should be a high level of trust between the clients and providers with
regard to the capabilities of both sides and the interest in the ultimate success of
the project. Both parties should be focused on the overall outcome / milestones
and trust the other side to get their job done in the best manner possible
• Scoping issues are managed especially when multiple service providers are
involved. For example, the application development service provider may have
done its bit to help the buyer achieve the outcome but the infrastructure service
provider may not have, because of which desired result is not achieved. It would
be challenging for buyers to handle such situations from a time and success
perspective.
• Service providers are not too accustomed with large projects turning ‘red’ while
clients are desperate for the success of the project. The resulting high pressure
and focus both ends might lead to serious conflicts which should be sensitively
managed.
• With so many stakeholders, and contractors too involved, at times sharing the
reward / distributing the penalties at the service provider’s end can become a
challenge. This has to be handled sensitively.

A significant 59% of the clients are not in favour of OBP while around 47% of
service providers are open to engage with clients on an OBP model.
Interesting we also see that the larger clients and service providers (turnover >INR
500cr) are more resistant to move to an OBP model than their smaller counterparts.
We infer that this could be because of the high switching costs both in terms of
effort as well as mindset that might be the reason for this. Also OBP involves the
adoption of a different company culture than that already in place and for larger
organizations whose cultural context has been set over the years, this change might
be difficult.
Also the overall results show that smaller service providers are hungry for business
and willing to walk that extra mile to engage with the clients as compared to their
larger counterparts. Also, the market still seems to be loaded in favour of clients
with Providers seeming to be little more open to adopting Outcome Base Pricing
(47%) compared to the End-users (33%). However, the End-Users expect around
33% of the IT spend to be from Outcome based pricing and the Providers expect
around 22% of their revenues to be from Outcome base pricing in the next couple
of years. Hence though OBP is being recognized as a tangible reality, there is still
a long way to go before it is accepted. This could also be indicative of the fact that
clients would still like to keep their options open with regard to service providers.
7.3 Creating High Value Intellectual Property (IP)

In the past, most of the Indian software activity was at the entry level in the value chain
of the global industry’s business. Programming at a client’s workplace with on-site
delivery required technically educated people, but it did not result in the creation of
much new knowledge or a paradigm shift in the operating model. It was not advanced
software development. The basis for competing was low-wage skilled workers who
produced software services at lower cost and equal or better quality than US firms did.
With a view to facilitate the creation of IP, the government of India set up the Indian
Patent Office to administer the law concerning protection of inventions in the country
by way of grant of limited monopoly to the inventors or their assignees or legal
successors. The Patent Office is currently functioning from its four branches located at
Kolkata, Chennai, Mumbai & Delhi. Kolkata Office is the Head Office. The Patents Act,
1970(as amended) governs the grant of patents. Some key milestones that India has
achieved on Intellectual Property Rights (IPRs) are:
• Online filing of the Patent applications introduced on 20th July 2007
• The first phase of the modernization project entrusted to NIC completed
successfully under which the various modules have been developed in order to
help in processing the patent applications electronically and also to simplify the
procedures.
• WIPO declared Indian Patent Office as International Searching Authority (ISA) as
well as International Preliminary Examining Authority (IPEA) and provided a time of
one year to start functioning.
• A record number of patents (15261) granted during 2007-08 as compared to
previous years.
• A number of patent examiners sent for training in the European Patent Office,
United States Patents and Trademarks Office and Japan Patent Office. Apart from
this, some senior officers went abroad to conduct research studies in the field of
intellectual property.
The results have been encouraging so far:
• 35,218 applications for patents filed in 2007-2008 as compared to 28,940
applications in 2006-2007 representing an increase of about 22 % in the filing.
The number of applications for patents which originated in India were 6,040
contributing approximately 17% of the total number of applications filed during the
year.
• Out of the applications, which originated in India, Maharashtra accounted for the
maximum number, followed by Karnataka, Delhi, Andhra Pradesh, West Bengal
and Gujarat.
• 15,261 patents granted during the year out of which 3,173 were granted to Indians.
• 29,688 Patents in force as on 31st March 2008. Of these 7,966 patents are from
Indians.
• 2,052 grants awarded to applications related to Computer/Electronics industry
These trends point to the fact that albeit slowly, the Indian industry is surely moving
towards a culture of creating home-grown IP which can definitely justify premiums in
the market going forward. However, we also see that the big Indian IT/ITeS players
spend much lower on R&D when compared to benchmarks set by global behemoths
like Microsoft (13.5 % of sales), Oracle (11.9% of sales), Adobe (18.5% of sales), SAP
(14.1% of sales) etc.
Though it can be argued that the global players mentioned above are predominantly
product companies, we need to come to terms with the fact that the transition and
maintenance model are not as profitable as they used to be. Having established
benchmarks of excellence, the evolved models of delivery can be used as engines for
home-grown IP. By marrying India’s cost arbitrage with value generation, we should
move towards a “Value Arbitrage Revolution”, possibly on lines of other economic
paradigm change agents like the “Green Revolution”, “Operation Flood” and “IT
Revolution”.

Over 87% of Indian IT/ITeS service providers feel that Intellectual Property
Development is critical for the sustainable growth of the industry into the future.

7.4 Branding and Differentiation
Statistics presented at the 2009 NASSCOM event showed that the revenue per person
of the Indian IT industry had remained constant over the past four or five years. One of
the primary reasons for this has been the inability on part of the Indian IT/ITeS service
providers to command a sustainable premium amidst perceptions of commoditization.

Clients have found the “Brand of the service provider” to be of utmost importance in
the areas of Package Implementation (67%) and Infrastructure Management (60%).
Smaller client companies seem to consider the importance of Brand in the area of
Application Maintenance (62%) as well.
Interestingly a majority (58%) of smaller provider companies find that branding drives
the premium, while only 33% of larger players find this to be the case. Hence clearly
a strong brand is an aspirational attribute till a critical mass is reached after which, it
ceases to add any specific advantage from the client’s point of view.

Around 90% of the clients plan to go in for Green IT primarily to reduce costs (74%)
and improve productivity (63%). Also 67% of the clients see this as a regulatory
requirement that needs to be complied with.
Interestingly, we see that the larger clients are more concerned with Green IT than their
smaller counterparts. Also, we see that over 60% of smaller companies see Green IT
as a differentiator that would help enhance their reputation and brand value.
Though we do have the offshore providers, particularly the larger players moving up
the value chain of IT services from basic technical support to systems integration
and outsourcing, the term offshore still drives the perception of using low-cost, labor-
based resources. It is this perception which still is likely limiting offshore providers from
gaining top-level recognition as front runners in IT services. As long as this scenario
continues, we will have predominantly buyer driven markets where competition among
companies with skilled resources doing work at increasingly lower costs would lead to
a price war that would be unsustainable in the long run.
8.0 Key Insights
1. Favourable outlook: The growth rates of global GDP and India’s net software
earnings have been observed to move in sync with each other. The recent upward
revisions to global growth for 2010, including the significant improvements in the
growth forecast of the advanced economies (US, UK and the Euro Area) along
with the favourable GDP outlook for the Indian economy are likely to strengthen
the growth prospects of the Indian IT sector, benefiting both export and domestic
revenues.
2. Small is Large: The Small and Medium players will continue to be an integral part
of the IT/ITeS growth story. They will emerge as winners if they focus on the right
markets, develop niche offerings, increase operational efficiencies, tap appropriate
capital and improve talent management.
3. Harvesting the Cloud: Though adoption of cloud computing involves dealing with
fundamental changes in the traditional business operation and outlook, this model
has the potential to improve agility while streamlining costs through centralization
of resources and multi-tenancy. This would be a boon for companies looking
to expand their delivery reach and scalability while maximizing their operational
economy.
4. Emerging Consumption centres: While momentum has to be maintained with
innovation and climbing up the value chain to grow the large markets of US and
UK and protect them from growing competition, Indian providers have to make
investments to tap emerging overseas consuming territories like China and Latin
America. The Indian domestic market is poised to be a significant growth driver, in
addition to delivery capacities, providers should also invest in sales and account
management structures for the India geography.
5. Shifting centres of Delivery: It is becoming imperative for Indian providers to
expand their delivery presence beyond India. While some of them have started
making investments, we believe this process has to accelerate accompanied by
intake of local human capital. This would enable them to ramp up to speed and
establish a presence across both the demand as well as the supply end of the
business thus increasing client proximity while mitigating risks
6. Thought Innovation: The need for creation of high value IP to sustain growth is no
longer a luxury. Having established the global benchmarks, the delivery engine
should now be the channel to bring Indian IP to the clients
7. Partnering with Clients: Service Providers need to align themselves with client and
market requirements and become one-stop Solution Providers for their clientele.
For this purpose, they would increasingly need to use non-linear models (OBP) and
services (SaaS) to maximize returns on investment
8. Green Apple Strategy: Indian IT/ITeS service providers need to differentiate
themselves from the pack. The focus should be to avoid being perceived as a
commodity services provider through a combination of niche markets and services
and differentiated branding and marketing. The explosion in social networking also
gives a great platform to reach out to prospective clients and employees.
Pradyumna Sahu, Premraj Pillai,

Associate Director - Technology Sector, Manager - Markets and Industries,
PricewaterhouseCoopers PricewaterhouseCoopers

References
1. 2009 ORN Service Provider Survey Report by PwC and Duke University
2. Presentation on IT by Indian Brand Equity Foundation
3. Information Technology – Annual Report 2008-09. GoI – Ministry of
Communications and Information Technology – Department of Technology
4. India Information Technology report – Q4 – 2009: BMI
5. World Economic Outlook (Apr’09, Jul’09, Oct’09) – International Monetary Fund
6. Macroeconomic and Monetary Developments Second Quarter Review 2009-10 –
Reserve Bank of India Publications, Mumbai
7. Second Quarter Review of Monetary Policy 2009 -10 – Reserve Bank of India
Publications, Mumbai
8. Press Releases on Index of Industrial Production – Ministry of Statistics and
Programme Implementation, Government of India
9. Press Releases on National Accounts – Ministry of Statistics and Programme
Implementation, Government of India
10. NASDAQ -100 Technology Sector Index Data – NASDAQ Market Indices
11. CNX- IT Sector Index – NSE Market Indices
12. IT Services Update – Crisil Research November 2009
13. IT Services Annual Review – Crisil Research July 2009
14. Centre for Monitoring Indian Economy Pvt. Ltd. ( CMIE) Database
15. Indian High Tech needs to get with IT – Business Week Online (4/15/2009)
16. Impact Evaluation studies on STPI scheme in Tier 2 and Tier 3 cities (other than
metros) – Frost & Sullivan
17. Small Scale Industry and Technology in India – Hans-Peter Brunner
18. IDC Report on Worldwide and US Business Process Outsourcing Services 2009-
2013 Forecast.
19. Worldwide and U.S. Offshore IT Services 2009–2013 Forecast: A Transforming
World – IDC
20. The State of Development Of The IT Services Global Delivery Model(Forrester,
2007)
21. Eleventh 5-Year Plan 2007-12, Vol III – Planning Commission, Govt. Of India
22. 36th Annual Report Relating to Patents under Section 155 of the Patents Act
1970 (as amended) – Office of Controller General of Patents, Designs and Trade
Marks including GIR and PIS/NIIPM (IPTI)
23. Global Services Location Index – AT Kearney
24. Top 50 Emerging Global Outsourcing Cities – Study by Tholons
25. Security Implications of Cloud Computing June 2009 – Information Security
Forum
26. Newspaper quotes and Public data sources
About
Confederation of Indian Industry (CII)
The Confederation of Indian Industry (CII) works to create and sustain an
environment conducive to the growth of industry in India, partnering industry and
government alike through advisory and consultative processes.
CII is a non-government, not-for-profit, industry led and industry managed
organisation, playing a proactive role in India’s development process. Founded
over 115 years ago, it is India’s premier business association, with a direct
membership of over 7800 organisations from the private as well as public
sectors, including SMEs and MNCs, and an indirect membership of over 90,000
companies from around 385 national and regional sectoral associations.
CII catalyses change by working closely with government on policy issues,
enhancing efficiency, competitiveness and expanding business opportunities
for industry through a range of specialised services and global linkages. It also
provides a platform for sectoral consensus building and networking. Major
emphasis is laid on projecting a positive image of business, assisting industry
to identify and execute corporate citizenship programmes. Partnerships with
over 120 NGOs across the country carry forward our initiatives in integrated
and inclusive development, which include health, education, livelihood, diversity
management, skill development and water, to name a few.
Complementing this vision, CII’s theme for 2009-10 is ‘India@75: Economy,
Infrastructure and Governance.’ Within the overarching agenda to facilitate
India’s transformation into an economically vital, technologically innovative,
socially and ethically vibrant global leader by year 2022, CII’s focus this
year is on revival of the Economy, fast tracking Infrastructure and improved
Governance.
With 65 offices in India, 9 overseas in Australia, Austria, China, France, Germany,
Japan, Singapore, UK, and USA, and institutional partnerships with 221
counterpart organisations in 90 countries, CII serves as a reference point for
Indian industry and the international business community.
Confederation of Indian Industry

Northern Region
Block 3, Dakshin Marg
Sector 31 A, Chandigarh
Tel. : 0172-5083099, 6510188
Fax : 0172-2606259, 2614974
Email : chairman.specialevents@cii.in
Website: www.cii.in
Reach us via our Membership Helpline: 00-91-11-435 46244 / 00-91-99104 46244

CII Helpline Toll free No: 1800-103-1244

About
PricewaterhouseCoopers Pvt. Ltd. (www.pwc.com/india) provides industry -
focused tax and advisory services to build public trust and enhance value for
its clients and their stakeholders. PwC professionals work collaboratively using
connected thinking to develop fresh perspectives and practical advice.
Complementing our depth of industry expertise and breadth of skills is our sound
knowledge of the local business environment in India.
PricewaterhouseCoopers is committed to working with our clients to deliver the
solutions that help them take on the challenges of the ever-changing business
environment.
PwC has offices in Ahmedabad, Bangalore, Bhubaneshwar, Chennai, Delhi NCR,
Hyderabad, Kolkata, Mumbai and Pune.
Contacts
Hari Rajagopalachari
Executive Director & Leader, Technology Sector
Email: hari.rajagopalachari@in.pwc.com
Pradyumna Sahu
Associate Director, Technology Sector
Email: pradyumna.sahu@in.pwc.com
Acknowledgements
This report would not have been possible without the commitment and
contribution of the following individuals:
Pradyumna Sahu
Kanwal Gupta
Premraj Pillai
Sarah Koshie
Rajendran C.
Jibendu Narayan Mazumder
Pragati Chakraborty
Arnab Deb
Roshith Mohan
Prashant Bansal
Malvika Singh
Nandini Chatterjee
We also thank Mr. Pikender Pal Singh, Mr. Ajay Dhyani, Mr Kunal Walia and
Ms. Nidhi Tomar of CII for getting the survey underway.
pwc.com/india

Indian It/Ites Industry: Evolving Business Models For Sustained Growth

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Confederation of Indian Industry

Indian IT/ITeS Industry

Jairaj Purandare Ambarish Dasgupta

Box 1.0.1: CII-PwC IT/ITeS Survey

6 Indian IT/ITeS Industry: Evolving Business Models for Sustained Growth

Figure 1.0.1: CII-PwC IT/ITeS Survey Respondent Profile

Source: CII-PwC IT/ITeS Survey

Hari Rajagopalachari Shovon Mukherjee

2.1 Key IMF Projections

8 Indian IT/ITeS Industry: Evolving Business Models for Sustained Growth

2.2 India’s Software Earnings and Global Economic Activity

Source: IMF, CMIE

2.3 Growth Trends of GDP and Technology Indices: Rising

Box 2.3.1: IT based Initiatives driving World Recovery

Figure 2.3.1: Trends in Growth of GDP and Technology Indices

Source: NSE, NASDAQ, IMF, Government of India

10 Indian IT/ITeS Industry: Evolving Business Models for Sustained Growth

Box 3.0.1: The Indian Technology Sector – A Profile

Figure 3.0.2: Component-wise breakup – Exports and Domestic

12 Indian IT/ITeS Industry: Evolving Business Models for Sustained Growth

Source: Nasscom, CMIE

Figure 3.0.4: Offering-wise split up of Revenues for IT Services segment

Figure 3.0.5: Geography-wise split of India’s IT Exports

14 Indian IT/ITeS Industry: Evolving Business Models for Sustained Growth

16 Indian IT/ITeS Industry: Evolving Business Models for Sustained Growth

Figure 4.0.1: SMP in IT/ITeS Segment Contribution

Source: Frost & Sullivan

Figure 4.0.2: SMP in IT/ITeS Segment Contribution by Employment (00’s)

Source: Frost & Sullivan

18 Indian IT/ITeS Industry: Evolving Business Models for Sustained Growth

Table 4.0.1: SMP Segmentation for the Indian IT/ITeS Sector

Niche Service Providers Multi-Domain Players Consolidators Solution Providers

Figure 4.0.3: IT/ITeS SMP Contribution to Exports

Source: STPI, And the 11th five-year plan (2007-2012)

20 Indian IT/ITeS Industry: Evolving Business Models for Sustained Growth

Box 4.0.1: CII-PwC IT/ITeS Survey

Box 4.0.2: CII-PwC IT/ITeS Survey

22 Indian IT/ITeS Industry: Evolving Business Models for Sustained Growth

Currently in spite of a slowdown in the mature IT markets, we see growth potential in

Box 5.0.1: Cloud Computing

Cloud computing encompasses computing services being delivered to users

24 Indian IT/ITeS Industry: Evolving Business Models for Sustained Growth

Platform as a service (PaaS) - Hosted application environment for building and

Software as a service (SaaS) – Applications built on other cloud services are

Figure 5.1.1: Reasons for Favoring SaaS (IT/ITeS Providers)

Source: CII-PwC IT/ITeS Survey

26 Indian IT/ITeS Industry: Evolving Business Models for Sustained Growth

Source: CII-PwC IT/ITeS Survey

What new capabilities/models will IT gain?

28 Indian IT/ITeS Industry: Evolving Business Models for Sustained Growth

Learn (Concept Realization)

Pilot (Knowledge Realization)

Transform (Benefits Realization)

30 Indian IT/ITeS Industry: Evolving Business Models for Sustained Growth

For Cloud Computing Service Provider

Figure 5.2.1: Reasons for Adopting Cloud Computing (Clients)

Source: CII-PwC IT/ITeS Survey

32 Indian IT/ITeS Industry: Evolving Business Models for Sustained Growth

Box 6.0.1: CII-PwC IT/ITeS Survey