Achieving sustainable growth_IT

1. CONFIDENTIAL
Achieving Sustainable
and Inclusive Growth
Through Global
Sourcing of Services
Barnik Chitran Maitra
McKinsey and Company
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outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey
& Company during an oral presentation; it is not a complete record of the discussion.

2. TOPICS
Perspectives on the IT/BPO
Offshore industry
The transformational role of the
IT/BPO industry
Concluding remarks
1

3. PERSPECTIVES ON THE IT/BPO OFFSHORING OUTSOURCING
INDUSTRY
Significant latent demand for BPO&O; less than 15% of
the $450 billion plus addressable market penetrated yet
Adoption of offshore IT/BPO expected to accelerate given
high client satisfaction, strong business case for
offshoring
While many specialist destinations emerging, India
continues to lead with around 65% and 46% shares in IT
and BPO respectively
2

4. SIGNIFICANT “HEAD-ROOM” FOR FURTHER GROWTH ESTIMATES
1
OF THE OFFSHORE IT/BPO/R&D SERVICES INDUSTRY
Others*
Addressable markets for offshore IT/BPO/R&D India
exports is at least US $450 billion
Global offshore IT & Engg exports, Global BPO exports**,
FY 2008*** FY 2008***
US$ billion US$ billion
~220-250 ~160-190
4-5x 7-8x
55 24
25.5 13
29.5 11
Current size Addressable Current size Addressable
market market
* Includes Philippines, China, Russia, Eastern Europe, Ireland, Mexico
** Includes addressable markets in currently offshoring industries;
*** India revenues indicated refer to estimates for FY2008. Global numbers indicate 2007 year-end estimates
Source: McKinsey Outsourcing & Offshoring practice; McKinsey Global Institute; Gartner 2005 database; IDC; NASSCOM Strategic Review 2008 3

5. SIGNIFICANT INCREASE IN ADOPTION EXPECTED IN
2
OFFSHORE SERVICES-INFRASTRUCTURE IT SERVICES
CIO response to question - What fraction of your infrastructure is offshored?
Per cent of respondents
2006 CIO survey 2007 CIO survey
Today In 3 years Today In 3 years
Per cent of Per cent of Per cent of Per cent of Per cent of Per cent of Per cent of Per cent of
infrastructure respondents infrastructure respondents infrastructure respondents infrastructure respondents
offshored offshored offshored offshored
76-100 0 76-100 0 76-100 2 76-100 10
51-75 1 51-75 7 51-75 10 51-75 3
26-50 11 26-50 13 26-50 15 26-50 23
1-25 17 1-25 19 1-25 37 1-25 29
0 40 0 25 0 5 0 3
Average* 10 Average* 19 Average 27 Average 34
* Estimated Weighted average of budget offshored
Source: McKinsey CIO survey 2006 and 2007; McKinsey Analysis 4

6. BPO AND IT SERVICES INDUSTRY CONTINUES TO DELIVER
2
STRONG PERFORMANCE
CLIENT SATISFACTION LEVELS WITH
Percent
Back office operations Offshore IT operations
85 86 73 81
Application
Basic data development
78 81 70 80
Rules-based Application
data maintenance
85 85 74 83
Package
Basic voice software
2007 2008 implementation 2007 2008
Source: McKinsey P3600 benchmarking 5

7. PERFORMANCE ON BASIC METRICS CONTINUES TO BE
2
STRONG
COMPLIANCE ON CONTRACTUAL OBLIGATIONS
Percent
SLA Compliance Delivery compliance
Proportion of time SLAs are met Proportion of project completed on schedule
94 95 80 83
Application
Basic data
development
91 93 79 84
Rules-based Application
data maintenance
86 88 76 87
Package
software
Basic voice
2007 2008 implementation 2007 2008
Source: McKinsey P3600 benchmarking 6

8. 2 RATIONALE FOR OFFSHORING WILL REMAIN STRONG
US$/FTE/Hour
Other direct costs
Direct people costs
89.0
Key assumptions 6.0
• Offshore salary costs at 84.0
each level increases based 6.0
on historical growth rates
• No changes in delivery
pyramid (ratio between 76.5
developer, analysts, PL, 73.2
PMs) 83.0
• Other costs include all 78.0
physical infrastructure costs
(e.g., facilities, equipment)
• No increase in G&A costs 12.5
10.8
for both India and US based 2.3
2.3
units 8.5 10.2
India based US based India based US based
unit unit unit unit
2008 2010
Source: Watson Wyatt; NASSCOM-Hewitt Compensation Benchmarking; Project360 metrics database for offshore units; team analysis 7

9. LABOR COST ARBITRAGE WILL CONTINUE FOR SEVERAL
2
YEARS, EVEN WITH OFFSHORE INFLATIONARY PRESSURE
Real wage cost for skilled workforce in India vs. US - CAGR
Indexed wage
US India
differential
• Despite wage
• Despite wage
inflation, leading
inflation, leading
Indian BPO
Indian BPO
2005 100 14 86
providers have
providers have
20*% actually lowered
actually lowered
operating costs
operating costs
2010 110 46 65 7 to 11% (2006 -
7 to 11% (2006 -
2007)
2007)
2%
• 5% wage
• 5% wage
2015 122 74 10**% 39 inflation "lock-
inflation "lock-
in" not un-
in" not un-
common in
common in
2020 135 120 11 vendor contracts
vendor contracts
* Assumes aggregate inflation of 20% from 2005-2010 based on local skilled worker wage inflation and historic rupee inflation
*** Assumes future wage inflation of 10% based on Oxford Economics forecast
Source: McKinsey Outsourcing and Offshoring Practice, Oxford Economics 8

10. INDIA HAS INCREASED IT’S SHARE OF THE GLOBAL
3
OFFSHORE BPO INDUSTRY & HAS A 50% OVERALL SHARE
ITES BPO
Share of global offshore industry Share of global offshore industry
Per cent Per cent
100% = US$8.5 bn US$55 bn 100% = US$2.3 bn US$24 bn
Others* 38 46
Others* 61 54
India 62 54
India 39 46
2001 2008 2001 2008
* Includes Philippines, China, Russia, Eastern Europe, Ireland, Mexico
Source: NASSCOM Strategic Review 2008; McKinsey Global Institute 2005; neoIT; press articles 9

11. DRIVEN BY ITS SUPERIOR SUPPLY OF SUITABLE LOW
3
WAGE TALENT
Aggregate suitable* graduate talent pool for offshore IT and BPO industries
15% 100
3% 1,175
4%
4% 232
4% 308
5% 324
355
6% 408
7% 473
13% 586
8,043
13% 1,020
1,084
26%
2,078
18 other Total
Low-wage supply of
India*** Russia China Philippines Turkey** Poland Brazil Thailand** Mexico Indonesia countries suitable
low-wage
talent (28
countries)
* Graduates with skills for direct employment (does not consider willingness and accessibility of talent)
** Number derived via extrapolation
*** As of 2007
Source: HR interviews; country labour and graduation statistics; McKinsey Global Institute 10

12. TOPICS
Perspectives on the IT/BPO
Offshore industry
The transformational role of
the IT/BPO industry
Concluding remarks
11

13. OFFSHORE IT AND BPO INDUSTRIES HAVE THE POTENTIAL TO
TRANSFORM INDIA OVER THE NEXT 10 YEARS
What IT/BPO industry can do for India
Contribution
Economic growth engines to GDP
US$ billion Per cent
Potential size of
India’ offshore IT and 120-180 12-15
12-15
BPO industries
Taiwan’s engineering
and electronics 53 17
17
industry (2004)
Saudi Arabia’s Oil 116 45
45
(2004)
Source: SAMA; EIU Viewswire; CMIE; Goldman Sachs; global Insights; Deutsche Bank; World Bank; Energy Information Administration (EIA) 12

14. THE IT/BPO INDUSTRY IS ON TRACK TO ACHIEVE IT’S MEDIUM
TERM ASPIRATIONS
US$ billion in export revenues IT/BPO industry expected to have significant impact
on India’s economy
IT/BPO exports expected to GDP growth
continue strong growth
Estimated 17% of India’s
17% incremental GDP growth over
60.0 the five year period (2005-
2010)
25.0 Export growth
8x
Over 80% of the growth in
exports between 2005 to 2010
17.2
35.0
5.2
BPO 7.3 Employment creation
1.5 12.0 Estimated 10 million total
IT 5.8 employment by 2010, equaling
FY 2002 FY 2005 FY 2010 E planned employment creation
from all special programs in the
10th plan of Planning
Commission
Source: NASSCOM McKinsey 2005 Report 13

15. OFFSHORE IT AND BPO INDUSTRIES IS A PRIME ESTIMATES
EMPLOYMENT CREATION ENGINE
Net impact on employment in India
Million jobs, 2010 >6.5 >9
>2.8x
2.3
Direct Indirect and Total
employment induced employment
employment generated
Source: Monthly Review of Indian Economy (Centre for Monitoring Indian Economy (CMIE)); National Council of Applied Economic Research (NCAER),
National Sample Survey Organization, McKinsey Global Institute 14

16. UNPARALLELED IMPACT ON INDIA’S ECONOMY: SIGNIFICANT
CAPACITY BUILDING IN HIGHER EDUCATION AND URBAN
EMPLOYMENT GENERATION
Impact on higher education in top 6 states that dominate
technology/ business services exports Employment impact of different growth engines
Incremental No. of institutions Incremental jobs in million created during 1994-2005
exports share added % of total
(1998-2007) (1998-2007) 8.7*
urban jobs
US$ billions # of institutions per Per cent
state
Top 6 states 42-63
3.6-5.5
(Karnataka, ~15 110
AP, NCR, TN,
Engineering Maharashtra)
education 2.5**-4.4** Indirect 30-51
Others
(21 states + ~1 16-18
6 UTs) 6x
1.1 Direct 12
Total urban Technology/
Top 6 states
jobs business
(Karnataka, ~6 500 services
Non- AP, NCR, TN,
engineering Maharashtra) Technology/business services industry
education Others has contributed to 42-63% of incremental
(21 states + ~0.3 90-100 urban jobs between 1994 and 2005
6 UTs) 5x through direct and indirect employment
* Total urban jobs in 1993-94 was 81.8 million and in 2004-05 was 90.5 million
** High multiplier effect; for every direct job created 2.5-4 additional jobs created in indirect employment
Source: Institute of applied manpower research; CRISIL–NASSCOM report Employment and Output Linkages, 2007 15

17. THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-IMPROVED
QUALITY OF TALENT
Increase capacity of
higher education
system*
Develop a three Improve
pronged approach willingness to
to improve join the offshore
willingness to join
the BPO industry
IT and BPO
Encourage creation industries
of self regulating
associations of 1
private higher
education institutes Pilot and roll-out
6
“industry-owned”
2 integrated skill
development program
Introduce an output- 5
based ranking of 3
colleges to raise 4
performance standards Implement faculty
in the higher quality and coverage
education system improvement
Develop
initiatives through
scalable e-
four specific
learning
programs
programs for
IT/BPO skill
development
Improve suitability of
graduates for IT/BPO jobs
* Not a priority to sustain leadership 16

18. THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-QUALITY
COMMERCIAL REAL ESTATE DEVELOPMENT
From . . . Fromto. .
... . . . . to
75-80% of total Class A
office space demand in
India is from the IT/BPO
industry
17

19. THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-WORK
ENVIRONMENT
From . . . Fromto. .
... . . . . to
Improved work environment
with all modern facilities
18

20. THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-HIGHER
CONSUMPTION WITH RISING DISPOSABLE INCOME
From . . . Fromto. .
... . . . . to
Starting salaries at IT/BPO
units (>US$ 300 per month)
exceeds retiring salaries of
the previous generation
19

21. THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-CITIZEN
SERVICES
From . . . Fromto . .
... . . . . to
Improved citizen services
(e.g., registrations,
payments etc.) through
e-governance
20

22. THE IT/BPO INDUSTRY HAS TRANSFORMED INDIA-QUALITY
INFRASTRUCTURE
From . . . Fromto. .
... . . . . to
Airports at major cities
(Mumbai, Delhi, Hyderabad,
Bangalore) being
modernized
21

23. TOPICS
Perspectives on the IT/BPO
Offshore industry
The transformational role of the
IT/BPO industry
Concluding remarks
22

24. PERSPECTIVES ON THE IT/BPO OFFSHORING OUTSOURCING
INDUSTRY
We are only at the start, and not at a mature state, of the
offshore industry evolution
The pace, breadth and depth of offshore services is rising
Global demand will exceed near-term suitable talent supply in
every country
It is not “India or” but “India and”
The IT/BPO industry has the potential to transform a nation
Can trigger fundamental changes in basic areas (e.g.
education, infrastructure, capabilities of players)
Powerful engine to drive sustainable and inclusive growth
23