Strategic Review 2014

The IT-BPM Sector in India

NaSSCOM Strategic Review 20143

The last few years have been a challenging period for the technology and services industry. A period of rapid change, technology and business

disruptions have created a maelstrom of uncertainty. Socio economic, business and technology megatrends are disrupting existing opportunities, at the same time creating new ones.

In FY2014, the Indian IT-BPM industry is estimated to account for revenues of USD 118 billion, cementing its leadership position in the global sourcing arena, and highlighting its increasing importance in the domestic market. With a large, multicultural and highly aspirational workforce of over 3.1 million employees, the industry today is the largest private sector employer in India. Past investments by service providers into disruptive technologies are now bearing fruit, as exports are set to grow by an estimated 13 per cent in FY2014, to touch USD 86 billion, driven by the ability of the industry to offer solutions that integrate SMAC based offerings with traditional services.

With an industry comprising over 16,000 firms, including 3,000+ software product firms, imbibed with the ability to provide coverage of all technology engagements further reinforces India’s unique position as the only country from where you can do everything. Industry offerings have evolved into bundled, IP-centric solutions which have helped transcend providers from a vendor to a partner role. As a result, India today has developed into the very epicentre of the global technology industry, with other emerging destinations working in tandem to deliver high levels of customer satisfaction and stakeholder returns.

Domestic IT-BPM revenue is expected to grow at 9.7 per cent to gross ` 1,910 billion in FY2014. The domestic IT-BPM market growth this year has been affected by an environment of delayed decision making perpetuated by declining levels of economic growth, and looming general elections. However, the potential of technology to transform business by increasing competitiveness and transform India by fostering inclusive growth around areas healthcare, public services, utilities and education is well recognised, and we expect a spurt in IT investments as the year progresses.

Today, we are on the cusp of a new era. Technology can change the world and empower people and organisations to do amazing things. The next decade will witness an increasingly software powered world, with technology becoming even more cognizant, sentient and ubiquitous – an inextricable part of not only our environment, but ourselves.

NASSCOM reaffirms its commitment to partner with the Indian IT-BPM industry as it embarks on its next phase of growth – the digital age. This report is a compendium of facts, figures and trends that define the current state of the Indian IT-BPM industry, and its future directions. We trust you will find the report useful and we welcome your feedback and comments.

Foreword

R Chandrashekhar President

NaSSCOM Strategic Review 20144

“The greatest glory in living lies not in never falling, but in rising every time we fall.” ― Nelson Mandela

The last five years have been a protracted battle for the technology industry. On one hand global upheavals continued

to abound, while on the other hand there were seismic shifts in customer expectations and requirements. As such the

warrior ethos that emphasises placing the mission first, not accepting defeat, and being disciplined physically and mentally has

served the industry in great stead. The world around us is rapidly changing, with socio-economic, business and technological

megatrends presenting an altered business landscape, and creating significant new opportunities. Global boundaries are rapidly

disappearing, and as a result competition for the same set of consumers is intensifying. Winners in this hyper competitive world

are increasingly defined by their ability to go digital i.e., leverage data to the fullest to transform into innovative, responsive,

agile, creative and customer focused organisations. Client, employee and partner demands are increasingly converging, resulting

in new dynamics and in today’s business environment, volatility is the new normal.

Technology will fuel business transformation and determine how clients engage with customers, the speed at which they

deliver services, their innovation capabilities, their resiliency and reliability of operations. Technology providers are increasingly

being measured by their ability to help create digital enterprises for clients. Technology itself has journeyed from hardware

to enterprise software to SMAC and artificial intelligence, while at the same time, it has become an integral part of every

industry in an increasingly multi-device connected world. Smart machines, cognitive computing and internet of things

narrowing divide between humans and machines, and creating exciting new applications in a world of cognizant computing

where technology will take decisions for humans

based on historical data and preferences. Hence,

technology is rapidly moving from an enabler of

improved efficiencies for clients, to revenue and

business value driver. vendors seek new ways to gain

customer influence, and are starting to use big data

analysis tools as it gains enterprise wide acceptance.

As a result, increasing use of business intelligence

and marketing automation will move from enterprise

sector into SMEs.

Global IT spending grew by 4.5 per cent in 2013,

driven by rapid shifts in customer landscape –

lines of business owners, CMOs, SMBs, emerging

geographies and verticals driving IT adoption. Overall

global sourcing market grew by 8.5 per cent in

2013, driven by large, bundled contracts. Given the

tumultuous environment, firms struggled to define

strategic roadmaps, as a result M&A activity reduced

by 12 per cent over 2012, and number of offshore

delivery centres established in 2013 was 50 per cent

lower than 2012.

India performance

Given that the environment in 2013 was decidedly uncertain, nobody exemplified the spirit of the warrior more than the

Indian IT-BPM industry. In a year where the global sourcing market grew by USD 11-12 billion, India accounted for over 90 per

Executive Summary

Global IT-BPM spend: Grew 4.5% driven by rapid shifts in customer landscapeUSD billion

2013*

USD 2.2 trillion*

BPM

159

168

Packaged software

370

392

IT services

655

636

eR&d

1,375

1,390-1,400

Hardware

951

996

2012 2013

NaSSCOM Strategic Review 20145

cent of the incremental growth, in the process increasing its market share from 52 per cent in 2012 to 55 per cent in 2013.

Overall industry revenues are estimated to touch USD 118 billion in FY2014, growing by 8.8 per cent over FY2013. The sector

is expected to provide direct employment to

over 3.1 million people, and indirectly employ

an additional 10 million. As a proportion of

national GDP, the sector revenues have grown

from 1.2 per cent in FY1998 to over 8.1 per

cent in FY2014.

IT-BPM exports are estimated to cross USD

86 billion in FY2014, growing at 13 per cent.

A gradual revival in consumer confidence

leading to return of discretionary spending

and increased demand from US and Europe

is helping drive exports. At the same time,

the ability of the industry to suggest solutions

that customers need, in addition to offer what they want has been a crucial factor in the rise. A combination of solutions around

disruptive technologies such as SMAC, artificial intelligence, platforms, embedded systems, etc. in addition to lights on service

offerings around application development and system integration have become the life-force of the industry. While US continues

to be the largest geographic market for India, accounting for ~62 per cent, the highlight for the year was revival in demand

from Europe, which grew at ~14 per cent in FY2014. BFSI continues to be the largest vertical segment, accounting for over 41

per cent of industry exports; however, emerging verticals such as retail, healthcare, utilities are estimated to grow faster.

At 14.3 per cent, IT services is expected to be the fastest growing segment in FY2014, generating exports of USD 52 billion,

driven by collaboration, communication, business intelligence projects, and integration of SMAC services with traditional

offerings. BPM exports today is likely to be a USD 20 billion industry in itself – emergence of BPaaS/cloud based services and

analytics leading to strategic shifts in traditional servicelines with increased focus on non-linear growth, platforms and analytics.

Er&D exports are estimated to grow by an estimated 11.1 per cent in FY2014 driven by domain-specific solutions focusing

on convergence, customisation, efficiencies and localisation; M2M technology is creating new opportunities. With over 3,000

firms, India is emerging as a hotbed for software products with SMAC and a supportive ecosystem creating successful stories;

industry exports expected to grow by 8.8 per cent to reach USD 1.7 billion in FY2014.

At an estimated ` 1,910 billion, the IT-BPM domestic market is likely to grow by 9.7 per cent in FY2014, at the slowest pace

in last 12 years. Slowing economic growth, inflation, rupee volatility, and looming national elections has created an uncertain

environment and prompted delayed decision-making from customers, thus impacting IT spending. Hardware revenues are

estimated to grow 9.2 per cent, driven by demand for storage and mobile computing devices. IT services growth is likely to

be at 9.7 per cent, slowed down considerably as large enterprises exhibit cautious spending pattern; driven by technology

upgrades in BFSI, telecom and state governments, and compliance MIS investments. BPM services growth could be at

11.9 per cent in FY2014 boosted by demand from select customers reverting to outsourcing business process, especially from

the BFSI, automotive and retail sectors. Software products growth of 9.5 per cent due to increased demand for vertical-specific

and SMAC-based solutions. With the advent of cloud, the next big opportunity is India’s 47 million SMBs – who are able to

rapidly bridging the technology adoption gap as they seek to accelerate growth, and increase competitiveness.

FY2009

HardwareSoftware products

& Er&D

BPM

IT services

FY2013 FY2014eDomestic Exports

47

68

109118

2032 32

7686 13

18

23

64

NaSSCOM Strategic Review 20146

The India value proposition

25 years of outsourcing experience has helped the Indian IT industry move from a vendor to a partner role, with expertise

in designing best practices across services helping clients effect significant topline growth, business and operational

improvements. India continues to maintain leadership position in the global sourcing arena, and reinforce its unique position

as the only country in the world from where you can do everything. Key to India’s dominance in global sourcing is the fact

that the industry has never stayed stationary – constantly expanding its service offerings and adding capabilities, evolving its

business models, exerting tight control over operational parameters to ensure high customer satisfaction and high stockholder

returns. As a result, India has become the epicentre of the global technology industry with 40-50 per cent of total headcount

of global MNCs, 70-80 per cent of headcount of Indian

IT-BPM firms, and 20-30 per cent of total headcount

of technology r&D firms present across the country.

India is thus the global hub of the sourcing industry,

taking the lead in developing best practices and leading

the way in helping customers adopt new technologies;

other emerging destinations to be leveraged as spokes,

working in tandem with India.

The Indian supplier landscape is diverse – consisting

of over 16,000 firms. This unique diversity gives ample

opportunities for organisations and providers to choose

what size they want to be, what model they want to

adopt, and what partnerships to create. Additionally,

India is home to a new breed of startup firms focused

on high growth areas such as eCommerce and SMAC,

and vertical-specific solutions – these firms are

creating new markets and driving innovation. The agile,

opportunistic start-up ecosystem has impacted large

enterprises too – the need to be nimble has prompted

larger IT firms to re-organise and empower SBUs with

advanced decision-making capabilities, while the need

to offer innovative, unmet needs has led to them

building partnerships with other firms.

India continues to lead in cost competitiveness. Flat

entry level salaries, flattening employee pyramid, Tier

II/III service delivery, alternate talent pool hiring and fast career growth helping India stay 7-8X cheaper than source locations

and 30 per cent cheaper than the next nearest low-cost country. India is the world largest supplier of employable human

capital – 5.3 million graduates in FY2014, second highest number of English speakers in the world, and a large multicultural

and highly aspirational workforce enabling versatility and agility for customers. Stringent customer focus has ensured 100 per

cent coverage of all outsourcing engagements, creation of an IP-centric and thought leadership approach rather than capacity

centric, innovating to transform client businesses and enhancing user experience.

Fortune 500

CustomersGlobal presence

countries>75% 78

Large enterprises, SMBs, Governments, Consumers, Others

USA, UK, Europe, APAC, Others

Verticals portfolio

Player landscape

verticals serviced firms>25 ~16,000

Aero, Auto, BFSI, Hi-Tech, Telecom, Utilities, Others

Tier I/II/III firms, Emerging, Start-ups, GICs, Others

OwnershipFull gamut of services

Indian firms, MNCs, GICs, Hybrid, Others

IT services, BPM, SMAC, Er&D, Sw. products, OSPD, Others

USd

billion revenue118

ISPs

65%MNCs

>30%of exports

NaSSCOM Strategic Review 20147

With presence in over 78 countries, and 600+ offshore delivery centres, and leadership in adoption of security (physical and

information) best practices, India today demonstrates its scalability and security proposition, allowing clients to be closer to

customers, de-risk business in addition to build solutions for local markets. India’s ecosystem has always been supportive, with

rapidly improving infrastructure, and over 50 delivery locations ready for technology services delivery.

The way forward

2013 was a year where the Indian IT-BPM industry wholeheartedly

accepted changing business paradigms, and transformed its business

models thoroughly to embark on the growth path of the future. India

itself is a fast growing digital economy – 900+ million telecom subscribers

and 200 million people connected to the internet, and an exponentially

growing eCommerce industry. With stability returning in political circles,

commodity prices, and inflation, 2014 promises to be a positive year, and

global tech spending is forecast to improve in 2014. Decisive elections

in India expected to slingshot the IT investment cycle in the country.

The industry imperative is to help CIOs unprepared for digitisation, go

digital – Digital customers are redefining business, raising expectations,

and demanding high levels of satisfaction – technology spending will be

focused on enhancing customer experience. Given the pace of digital

disruptions, lines of business led technology decisions will only increase. While cost and operational efficiency will be given

expectations from providers, customers will increasingly demand services and technologies that can help understand, and

acquire new customers.

While the industry is on target to achieve its long term targets of USD 175 billion in exports and USD 50 billion in domestic

revenues, the nexus of forces (SMAC) will continue to drive change and create new opportunities. In FY2015, the industry

exports are projected to grow between 13-15 per cent, while domestic market revenues are expected to revive post elections,

and grow by 9-12 per cent.

Internet of things, smart grids, hybrid and personal clouds, software defined networking and storage, 3D printing, and multi-

channel consumer connect will drive key client investments. Germination of new service offerings, shift from a globalised to

glocalised delivery model, existence and acceptance of a differentiated pricing regime, focus on talent quality over quantity,

and transformational outsourcing (value, technology, innovation and cost) will drive client spending. Entrepreneurship

will continue to drive innovation, fuel the nation’s imagination and attract funding. At the same time, challenges around

protectionism, increased competition, currency volatility, wage inflation, and inconsistent levels of customer confidence will

have to be addressed by joint stakeholder action.

Indian IT-BPM revenue to grow 12% in FY2015USD billion

Exports Domestic

76

9-12% growth

13-15% growth

21-2397-100

NaSSCOM Strategic Review 2014118

InternationalYouthCentreTeenMurtiMarg,ChanakyapuriNew Delhi 110021, IndiaT 91-11-23010199 F 91-11-23015452research@nasscom.inwww.nasscom.in