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Strengthening the human resource foundation of the Indian IT enabled services/ IT industryReport by KPMG Advisory Services Private Limited in association with NASSCOM under the aegis of the Department of IT, Ministry of Information Technology and Communications, Government of India

National Association of Software and Service Companies

India

PrefaceDeveloping India's human resource is key to our progress. The most visible and successful demonstration of this is our IT industry. In this sector, human resources comprise both the raw material and the 'technology', and is therefore of prime importance. Availability of a sufficient number of high quality manpower is a key requirement to ensure the on-going and sustainable growth of India's IT industry. It is in this context that NASSCOM was particularly delighted when the Department of IT initiated a Task Force on 'strengthening the human resource foundation of the Indian ITeS / IT industry. We at NASSCOM felt that this was not to be just one more of those reports, particularly as the Task Force comprised representatives of some of the leading ITeS and IT companies in India, in addition to representatives from various government bodies and educational institutions. NASSCOM, as the overall representative of the Indian ITeS / IT industry, decided that the best way to support the Task Force was by providing industry inputs and past research, while leveraging its relationship with KPMG to look at present and future needs. The study aims at covering a vast and seemingly unconnected range of areas including humanpower requirements for R&D, IT services and IT-enabled Service. NASSCOM, with able support from the team at KPMG as well as the co-operation shown by various industry players, managed this within a short time. The report has been prepared under grant-in-aid received from the department of IT, Ministry of Communications & IT and is aimed at supporting the Task Force's deliberations on recommendations. The level of detail adopted for this study is exemplary and indicates the focus on implementation as maintained by the Task Force and the project team throughout its deliberations. Implementing these will however be another challenge, considering the nature of change required and the multiplicity of stakeholders involved. NASSCOM, however, is committed to supporting the implementation of these recommendations. The first step in this context is to establish this report as a common source of reference and mobilization amongst policy-makers, industry players and potential employees. The next step is to concretize specific, actionoriented pans with definite responsibilities and timeframes. These need to be implemented and monitored with appropriate correctives based on feedback.

Kiran Karnik President, NASSCOM

National Association of Software and Service Companies

This document, prepared by KPMG Advisory Services Private Limited in association with NASSCOM, focuses on strengthening the human resource foundation of the Indian ITeS/ IT industry. A special thanks goes to the Department of IT, Ministry of Communications and Information Technology (Government of India), who have supported the production of the publication under a special grant.

ContentsGlobal IT sector growth trends during 2002-12 Gap between demand and supply of manpower for IT / ITeS industry and share of the market for India Strategy to enhance institutional capacity (formal and non-formal) to generate requisite manpower Emerging areas in the knowledge domain for India to pursue and strategy to reinforce status as ITeS / R&D hub Design of standards and common test for ITeS skills based on industry requirements Measures for optimizing deployment of non-IT personnel in ITeS and R&D Fiscal policy measures to maximize private sector participation in HRD for IT / ITeS Comprehensive action plan for HRD in IT / IteS 1 12

32

43

58

67

75

81

Global IT sector growth trends during 2002-2012This chapter provides an overview of the off-shore IT / IT business and the potential eS benefits and impact of these services on performance. It also provides estimates of market size and growth for the global ITeS / IT industry by geography, client-industry and solution form.

Companies world-wide are faced with increasing pressures to improve business performance . . .

Business performance

n

Index returns over the last three years for major US stock marke t indices have been 10 per cent to 40 per cent Number of corporate bankruptcies (for companies with assets greater than USD 100 million) during 1998 2002 increased by 150 per cent compared to those in 1993 1997 Even European countries like Germany are facing slowdown in growth to 0.4 1.4 per cent accompanied by stock market index fall of 60 per cent from approx.8,065 (March, 2000) to approx.3,170 (Sept, 2002)

Pressures to improve business performance

n

n

Skills shortage

Rapidly ageing population (e.g. increase in median age in OECD countries from 29.6 in 1970 to 36.5 in 2000) leading to lower labor participation n Even countries like China, with a large population today, could face a shortage of up to 10 million workers by 2020n n

Companies will be unable to make-up for labor shortage through automation (only 13.5 per cent of all service jobs are amenable to automation)

Productivity drivers

n

Business productivity in form output production efficiency (through automation, IT, supply-chain reconfigurations etc.) may be plateau-ing Business productivity growth in the future is expected to be driven more by cost efficiency of inputs (e.g. down-sizing, off-shoring, economies of scale / scope etc.)Source: Press reports. BCG. NASSCOM. KPMG. 2003 -2004.

n

. . . even as overall budgets get reduced

Companies world-wide are faced with increasing pressures to improve business performance, even as they face a looming skills shortage and an exhaustion of standard options to drive productivity. Skills shortage, as reflected by an ageing population in Western countries, would increase pressure on availability of labour force. Automation is also not expected to entirely compensate for the shortage of labour supply.

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Off-shoring offers an option to reduce expenditure while maintaining or even improving performance . . .Illustrative Technical services (IT) cost improvement for a global financial services companyPer cent of cost base

5 5 10

Labor cost differentials

Incr telecom costs

Incr Control / Consolidation Co-ordination and scale costs economies

Process reengineering

Off-shoring benefits

3545

35

1005 5 10 10 20

45

Original cost base

Budget reduction

Support functions restructuring

Process reengineering

Off-shoring benefits

Reduced cost base

Benefits from off-shoring to the extent of 35 55 per cent of original cost base depending on client and process specific characteristicsSource: J P Morgan. NASSCOM. KPMG. 2003-2004.

Note: Numbers for off-shoring benefits are based on experience of companies off-shoring IT services and back-office processing functions to India

. . . and can lead to savings of 3555 per cent on current cost structures depending on specific business process and scale being considered

Off-shoring of business processes and functional activities is one of the options available to a global business to improve business performance. The benefit from off-shoring is through the ability to access relevant skills at appropriate costs such that the savings are much higher than the incremental cost of telecom connectivity and control / co-ordination activity involved. Additional benefits could arise from economies of scale and re-engineering benefits at the off-shore location. Some global companies have seen business benefits to the extent of 3555 per cent savings in relevant costs through off-shoring.

2

Off-shore IT and IT -enabled services include specific services leveraging the potential of Information and Communications Technology . . .The phenomenon of locating IT-services and other business processes. . .-

-

Excludes outsourced manufacturing, product assembly etc. Excludes hardware technology products

. . . into optimal off-shore locations . . .

-

Excludes on-site / in-country support (i.e. primarily directed at exports)

. . . largely enabled through advances in IT and telecommunications . . .

-

Excludes body-shopping services or those requiring physical interactions

. . . to access relevant skills / resources for business performance improvement.

-

Expands role of ITeS / IT beyond mere cost reduction to overall business improvementSource: KPMG. 2003-2004.

Off-shore IT and IT-enabled services include: IT services and other business processes located in optimal off-shore locations, largely enabled through advances in information and telecommunications technology, to access relevant skills and resources for business performance improvement.

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These could include a wide-range depending on the nature of expertise involved . . .Illustrative Back-office data entry / processing Customer contact Corporate support functions Knowledge services and decision-support Research/ Design and development

Increasing complexity of task and skill requirementsNature of workn

Data entry (form filling) Data conversion (translation, transcription) Basic processing (checking / updating) Document management (storage, retrieval)

n

n

Customer services (complaints, inquiries) Tele-marketing (presales, order-taking, catalog sales) Collections support (reminders, payment support)

n

n

Shared corporate function support (HR, Finance / Accounts, HR, procurement) IT support (development, integration, maintenance, helpdesk)

n

Analyst services (legal, financial) Customer analytics (segment profits) Application processing (claims) Risk management (underwriting, structuring) Advisory services (tele-medicine, consultancy)

n

Engineering and design (CAD/ CAM) Content development (animation, web site, graphics) New product design (specifications, pilot testing)

n

n

n

n

n

n

n

n

n

n

Note: List of activities and examples above is illustrative only and not exhaustive

Source: Press reports. 2003.

Off-shore ITeS / IT include a wide range of services with increasing complexity of work from back-office data entry and processing to customer contact services to corporate support functions to knowledge / decision support services to R&D / Development services. As a result, the qualifications and nature of skills required could vary accordingly.

4

IllustrativeBefore off-shoring Different forms of global expansion by companiesWave 3: Global business re-alignment Wave 2: Global production Wave 1: Global export - Spreading-out of product manufacturing - Leveraging global presence to access lowcost skills and spread establishment risks - Spreading-out of business processes and functions

Business processes managed within client country1 2 3 4 5

After off-shoring Business processes conducted only partly within client country . . .2 3 4

Nature of global expansion

- Spreading-out of sales efforts

- Leverage pockets of capital / labor efficiency due to lower costs, economies of scale etc.

Key drivers to expansion

- Attracted by latent / growing demand for products and services in - Produce in specialized new markets pockets to then ship globally / re-assemble - Offer existing goods under existing brand names in new markets

- Run business processes across locations over telecom networks

. . . and partially through remote facilitiesOff-shoring 1 4 5

Business implications

Source: KPMG. 2003.

The first wave of global expansion began with companies reaching out to new markets with existing products and brands the key driver being the increasing demand for new products in growing markets. In the second wave of global expansion, companies actually began shifting entire production activities in order to take advantage of lower cost labour and capital. Off-shoring represents the third-wave of establishing global presence, with the segregation of business processes and functions and their outsourcing to different parts of the world or remote locations.

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Companies are considering off-shoring business processes from across the entire business value chain . . .IllustrativeHuman resourcesn n

Finance and Accounts Product Development Human Resource Management Technology Services

Finance and Accountingn n n

Payroll processing Recruitment and selection support HRIS

Back-office Accounts payable Accounts payable / receivable, fin. reporting Finance accounting Revenue accounting

n

n n

IT services and support

Outbound Logistics

Inbound Logistics

n n n

Systems integration Hosting / maintenance Customer help-desk / support

Customer Service

n

Manufacturing/ Operations

Custom development

Marketing and Sales

Research / Design and Developmentn n n n

Clinical Research VLSI design DSP chip design Avionics research Clinical Research Engineering design services Legal research

Operations / Logisticsn n

Order tracking Order / claims / application processing Payments processing

Sales / Marketing and Customer servicesn n n

n n

Tele-sales Order processing Customer services and complaints Help-deskn

n

n

Source: Press reports. KPMG. 2003.

Off-shoring is no longer restricted to specific primary or secondary activities of a business. All the key business processes across the entire business value chain, as exhibited in the figure above, can potentially be off-shored. A number of companies world-wide have already off-shored business support activities to in-house or third-party service providers.

6

This trend towards off-shoring is being driven by some key developments on the demand and supply side . . .Demand-side characteristics Scope of economic benefits possible - Companies stand to gain 30 50 per cent in cost savings with additional revenue enhancement / service improvement possibilities Comfort with and trust in off-shoring - Companies with established sourcing relationships grow trust in suppliers for BPO - Other companies are getting attracted by others success Access to global resources - Companies with global presence can leverage local resource access to support off-shoring

Key developments driving off-shoring

Supply-side characteristics

Access to trained, cost effective skills - Companies have access to certified / experienced skills at 1/5 1/10 of costs in other locations

Telecom connectivity options - Global telecom connectivity options have increased and costs have fallen under competition and technology

Regulatory support and incentives - No restrictions/ barriers on service trade (duties etc.) have been placed - Host countries even support services export through incentives

Source: Press reports. Merrill Lynch. KPMG. 2003.

The trend towards off-shoring is being driven by specific dynamics on the supply and demand side. Companies are becoming increasingly comfortable with the idea of offshore service provider relationships. With the continuing support from regulatory agencies, availability of low cost infrastructure and the right skills mix, off-shoring could continue to be a large business opportunity over the longer term.

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The American and Europe-Mid East-Africa (EMEA) regions are expected to continue to be the major markets for ITeS / IT although the growth could be faster in the Asia-Pacific regions . . .USD billion2,000 IT ITeS

CAGR (2003-2012) 1,795 1,366 1,0401,218 941 726 313 2006 425 2009 577 2012CAGR (20032012) 11.0 per cent 10 per cent 9.3 per cent

Americas

1,000

697496 201 2002

771546 225 2003

Global ITeS / IT marketUSD billionITeS3,000

0

4,000

CAGR (2003-2012) 3,391 11 percent

USD billion1,000 IT ITeS

917 667 484 306 343194 149 2003 272 212 2006 295 2009 408 2012 372 173 133 2002 509

IT

12 per cent 11.3 per cent 11.8 per cent

2,4972,000

1,838 1,184 1,322881 441 2003 625 2006 864 2009 1,633 1,213

2,198

11 per cent

EMEA

1,000

792 392 2002

0

1,193

12 per cent

0

2012

USD billion1,000 IT ITeS

CAGR (20032012) 14 per cent 14.3 per cent 13.5 per cent

Note: Industry estimates upto 2012 are based on available short-term estimates and would need to be revised periodically based on actual performance

Source: IDC. NASSCOM. KPMG. 2002-03.

AsiaPacific1810 123 58 2002

679 461 208141 66 2003

314215 99 2006

471 208 2012

318 143 2009

Note: Industry estimates upto 2012 are based on available short-term estimates and would need to be revised periodically based on actual performance

Source: IDC. NASSCOM. KPMG. 2002-03

As per estimates by IDC and NASSCOM (2003), the global ITeS / IT market (off-shored as well as domestic) was USD 1,184 billion in 2002 (USD 392 billion for IT services and USD 792 billion for ITeS). This market is expected to grow by a CAGR (2003 2012) of 11 per cent, driven by strong growth across the Americas, Europe-Middle East-Africa (EMEA) and the AsiaPacific market. The American and EMEA markets are expected to continue to be the major markets for ITeS / IT, contributing 80 per cent of the market in 2012 as compared to 85 per cent in 2002.

8

This growth is expected to be driven by the characteristics and needs of specific industries . . . Global IT services requirement projections by industry (does not include IT eS)USD billion354 Banking, Finance and Insurance Services Manufacturing 140 126 262 121 109 136 57 51 109 Telecom equipment 47 42 107 Retail / wholesale trade 47 43 69 19 16 52 Utilities 20 18 45 Transportation 19 17 35 15 13 30 12 11

CAGR (2003 2012) 10.9 per cent 9.0 per cent 10.2 per cent 9.8 per cent 9.6 per cent 15.5 per cent 11.2 per cent 10.2 per cent2012 2009 2006 2003 2002

Offshore-ability (preference and ability)

Government

Telecom services

High growth potential due to underpenetration

Healthcare

10.2 per cent 10.2 per centSource: IDC. Gartner Dataquest. NASSCOM - McKinsey. KPMG. 20022003.

Education

Note:

indicates high degree of offshore -ability (preference and ability) indicates low degree of offshore -ability (preference and ability)

The demand for IT and IT-enabled services across industries would vary by the specific characteristics and needs of those industries. The Banking, Finance and Insurance services industry and the Manufacturing industry have been the largest user of global IT services (2002). They are expected to continue being the largest users even by 2012 due to high offshore-ability (i.e. ability to off-shore and preference to off-shore). However, going forward, other industries like telecom, utilities, healthcare and retail trade are expected to drive growth with a CAGR (2003 2012) of 1015 per cent due to under-penetration despite high offshore-ability.

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. . . within specific functional / solution areas in IT and IT-enabled services . . .Global IT services marketUSD billion1,500 IT education / training Appln Dev and Support* SI and IS consulting 1,000

Global IT-enabled Services (ITeS) marketCAGR (2003-2012) USD billion2,500 Content Development* Administration

CAGR (2003-2012) 2,198219 33711 per cent 10.7 per cent 7.1 per cent 7.0 per cent 9.4 per cent

1,19312 per cent

Customer care 2,000 Finance Payment services 1,500 HR

1,633165 398

864830 580 405 278 182 2006 235 3039.4 per cent 12.9 per cent 9.0 per cent

1,213124 1,000

276 330 306 747 491 400

626500

881 79278 169 88 182 216 178 201 2003

226 274 235 323 31 2006

392245 122

441

500

199 162 171

15.7 per cent 25.0 per cent

135 2003

0 2002 2009 2012Source: IDC. NASSCOM. KPMG. 2002 - 03.

0 2002

55 2009

97 2012

* Support IT services are those that require on -site presence of support staff and are not delivered from off-shore location like ITeS

* Content development services include remote design services for VLSI / embedded systems, security / control systems etc.

Source: IDC. NASSCOM. KPMG. 2002 - 03.

Note: Industry estimates upto 2012 are based on available short-term estimates and would need to be revised periodically based on actual perfor mance

Note: Industry estimates upto 2012 are based on available short-term estimates and would need to be revised periodically based on actual perfor mance

The global IT services market in 2002 was driven by Application Development and support services (on-site and off-shore). The preference of clients to use off-shore facilities for business continuity and cost saving requirements is going to drive the global IT services market. The market is expected to grow at a CAGR (2003 2012) of 12 per cent. The global ITeS market in 2002 was driven equally by administration support services, customer care, finance and payment processing services. Increasing sophistication of the off-shore ITeS delivery model is leading to new business processes being considered for off-shoring by new clients. The ITeS market is expected to grow at a CAGR (2003 2012) of 11 per cent, driven by an increasing demand for finance support, payment processing and HR services.

10

This growth in ITeS and IT industry is expected to usher in a new way of working . . .

n

Means of service delivery

Remote services delivery imply a greater emphasis on agent voice modulation / accent and ability to understand client accents and lower emphasis on grooming Remote services also imply lesser need for agglomeration into urban offices and the move towards SOHO / tele-working Follow-the-sun service expectations imply need to support night shift operations including support for banking, healthcare, food and entertainment, transportation for agents

Impact of ITeS / IT working

n

Night-shifts

n

n

Flexi-timen

In order to manage higher returns from resources, capacity utilization through scheduling becomes critical, leading to flexible working hours Agent preferences for IT / BPO work suggest the need for flexi-time options eS

Average age of employee

n

The average age of the workforce would be around 27 30 as compared to 35 40 in other industries, requiring a different organizational structure and culture as well as facility design

. . . creating pressures on the economic and social systems of various countries to adapt to these changes

This increasing trend towards off-shore ITeS / IT is going to change not only the way business is organized but also the social and economic aspects of employees and potential employees Tele-working and remote support is going to be increasingly common. Night operations, tuned to end-customer service timings are going to increase in demand. Employees on the other hand will be faced with a flexible work-time depending on business cycles as well as peak demands for their respective services. Average age of employees could be much lower as the education employment cycle gets transformed into an education employment reskilling employment cycle.

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Gap between demand and supply of manpower for ITeS / IT industry and share of the market for IndiaThis chapter provides an understanding of Indias key strengths related to the off-shore ITeS / IT industry and target market share. It also provides an estimate of the potential manpower requirement in India upto 2012 to meet the off-shore ITeS / IT market requirements and the potential gap based on numbers expected to be available.

India is emerging as the services-hub of the world with a 24 per cent share (2002) of the off-shored IT / IT -enabled services market . .Global IT / IT-enabled services market (2002)

USD billion8.324.43.7

Domestic0.8 1.7 0.4 0.2

Off-shored

1.9

Russia Ireland1.1

E. Europe3 8.4 1.1

Canada N/A

0.5

Israel China2.4 77 .

N/A

0.3

Mexico India

Philippines

0.02

0.04

2.1

0.4

South Africa

AustraliaSource: McKinsey Global Institute. 2003.

Note: Numbers above indicate total market for off-shored and domestic IT / IT for eS year-ended December 2001 or March 2002. Eastern Europe includes Poland, Hungary, Romania and the Czech R epublic

. . . however Indias share of the global ITeS / IT spend was still low at 0.8 per cent (2002), suggesting significant growth potential

Indias revenues of USD 7 billion in 2002 correspond to 24 per cent of the off-shored .7 ITeS / IT market, establishing India as the services-hub of the world. Some of the world's leading organizations have chosen to have their business operations supported from India through third-party or in-house facilities. This includes a wide range of services from back-office data entry and processing to customer contact services, corporate support functions, knowledge support functions and research and design activities.

12

However, Indias current share of the total global ITeS / IT spend (off-shore and domestic) was still low at 0.6 per cent, suggesting significant future growth potential related to off-shoring.

Indias proposition in this area is based primarily on the availability of a significant pool of appropriately skilled and trained resources at a competitive price . . .

Illustrative

Highest base of employees currentlywithin ITeSIndia106,000 18,000 15,000

Increased customer satisfaction at aU.S-based financial services companyU.S. facility

85 per cent 92 per cent

Skills availability

Ireland Philippines

Quality of work

India facility

Increased accuracy of transaction entryat a U.K.-based retail bankU.K. facility India facility

A graduate base of over 14 millionpeople with over 1 million IT-trained users

95 per cent 98 per cent

Salary levels at 1/5th to 1/10th of thatof equivalent jobs in the U.S.Teacher1/10 1/4 1/5

Reduced trade response time for anEuropean airline services companyEurope facility

18 hrs. 4 hrs.

Cost of manpower

Fin/Acctg Exec Dbase Admin.

Work efficiency

India facility

Increase in transaction processingspeed at a U.K.-based retail bankU.K. facility India facility

100 120Source: NASSCOM. KPMG. 2002-2003.

Note: Indexed to U.S. salary level for equivalent post

Indias proposition for off-shore ITeS / IT support is driven by: availability of appropriately skilled resources; lower costs of manpower (1/5th to 1/10th); and ability to generate better quality of work, more efficiently. There are examples of companies with off-shored services being provided from India which have improved service levels by 510 per cent across different parameters such as customer satisfaction, response time, accuracy, speed etc.

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Based on its initial successes, India is expected to achieve revenues of USD 148 billion in the ITeS / IT area by 2012 . . .Indian IT export services market projections (20022012)USD billionTraining and Education 60

CAGR (2003 2012) 551824.8 per cent 86.6 per cent 26.4 per cent 8.6 per cent 50.7 per cent

Indian ITeS / IT market projections (2002 2012)USD billion CAGR (2003 2012)160

Outsourced support IT Development

40

Consulting, integration, installation

2820

10 24

Domestic IT services ITeS exports

148035.0 per cent

14 62002

72003 2006 2009

120

IT exports

2012

80

64

6221 55 282009 2012

31.0 per cent 44.2 per cent 24.8 per cent

Indian ITeS market projections (20022012)USD billionContent Development 60 Administration Payment services 40 HR Finance Customer care 20

40

27 1028

64

CAGR (2003 2012)44.2 per cent 23.4 per cent 24.9 per cent

12

0 2002

7 152006

2003

Note: Market share estimates assume the same concessions and efforts in place as currently. Industry estimates upto 2012 are based on available short-term estimates and would need to be revised periodically based on actual performance.

Source: NASSCOM-McKinsey. BCG. 2003.

21 2 72006 2009 2012

54.8 per cent 101 per cent 33.7 per cent 47.0 per cent

10 2002

2003

Note: Market share estimates assume the same concessions and efforts in place as currently.

Source: NASSCOM-McKinsey. BCG. 2003.

Indias revenues in the IT / IT market grew by more than 25 per cent in 20022003 to eS USD 12 billion by 2003. Going forward, Indias value proposition and an overall shift towards off-shore ITeS / IT are likely to help Indias revenues to grow at a CAGR (20032012) of 35 per cent, reaching USD 148 billion by 2012. The key contributors to this would continue to be IT export services (with revenues estimated to be USD 55 billion by 2012, at a CAGR (20032012) of 25 per cent) and ITenabled services (revenues estimated to be USD 64 billion by 2012, at a CAGR (2003 2012) of 44 per cent).

14

This suggests a significant increase in Indias share of the global IT-enabled services and IT spending to 4.4 per cent by 2012 . . .Indias share of global IT services marketUSD billion 100 percent: 392100% 2.2%

4412.3% 3.2% 4.7%

1,194

Indias share of global IT / IT market eSUSD billion 100 percent: 1,184100% 0.8% 0.9% 1.5%

7 .0%

80%

1,3222.5%

3,391

60% 2002 2003 2006 2009 2012

4.4%

Indias share of global IT market eSUSD billion 100 percent: 792100% 0.2%

80%

8810.3% 0.6% 1.3%

2,1982.9%

Increase in overall market share (IT and ITeS) to 4.4 per cent by 2012

60%80%

2002

2003

2006

2009

2012

60% 2002 2003 2006 2009 2012

Source: NASSCOM-McKinsey. KPMG. 2003 -2004.

Note: Industry estimates up to 2012 are based on available short-term estimates and would need to be revised periodically based on actual performance

. . . Indias share of off-shored services (i.e. not located within the same country) is expected to be even higher

The increase in revenues would correspond to an increase in Indias share of the global ITeS and IT market from 0.8 per cent in 2002 to 1.5 per cent by 2006 and 4.4 per cent by 2012. This is largely driven by an increasing share of the ITeS market as well as the IT market, a lot of which could be in the form of off-shore services based on current trends.

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This translates into a direct employed manpower requirement of 3.7 million personnel for off-shore IT / IT by 2012 . . . eSIndia IT export services (USD billion)Consulting, integration, installation IT Development Outsourced support Training and Education 24 0.5 10 3.9 18 1.8 32012 2002

IT export services employment (000s)274 111

529 58 972

India ITeS export services (USD billion)Customer care Finance HR Payment services Administration Content Development 22.4 0.4 6.2 0.3 18.8 0 9.7 0.1 2.6 0.2 4.3 0.52012 2002

ITeS export services employment (000s)1,030

Total IT and ITeS employment (2012) of 3.7 million

206 690

447 147

197

2,717 Note: Billing rates and productivity assumptions have been based on nature of work and competition for services expected.

Source: Press reports. NASSCOM-McKinsey. Manpower profile of India. BCG. KPMG. 2003.

. . . this is in addition to manpower requirements for domestic and captive ITeS / IT support requirements within India

Based on assumptions of utilization adjusted charge rate of USD 41.5 / Full Time Equivalent / hour for export IT services and USD 17 / Full Time Equivalent / hour for IT.3 enabled services, this market size translates to an estimated manpower requirement of over 3.7 million for export IT and IT -enabled services, compared to 0.4 million in 2003. Additionally, another 11.5 million could be employed in the domestic / captive IT services area (based on current ratios of roughly 1:1), leading to a total manpower requirement of approx. 46 million.

16

The IT export services industry could employ approximately 0.97 million people by 2012 as compared to 0.2 million in 2003 . . .Illustrative2002 Consulting, Integration, Installation Revenues (USD billion) Utilization adjusted charge rates (USD / FTE / hour) Manpower requirement (FTE 000s) Revenues (USD billion) IT development Utilization adjusted charge rates (USD / FTE / hour) Manpower requirement (FTE 000s) Revenues (USD billion) Outsourced support Utilization adjusted charge rates (USD / FTE / hour) Manpower requirement (FTE 000s) Revenues (USD billion) Training & Education Utilization adjusted charge rates (USD / FTE / hour) Manpower requirement (FTE 000s) Total IT export services Revenues (USD billion) Utilization adj. charge rates (USD / FTE / hour) Manpower requirement (FTE 000s) 0.5 30 12 3.9 43 66 1.8 14.5 91 0 20 0 6.2 26.7 170 2003 0.6 30 15 4.7 43 81 2.2 14.7 109 0.0 20 0.4 7.5 26.9 205 2006 2.3 50 34 6.0 55 81 4.8 21 167 0.1 27 3 13.2 34.2 285 2009 8.9 70 93 7 .8 70 82 10.4 27 283 1.0 35 21 28.1 43.0 479 2012 24.3 65 274 9.8 65 111 18.0 25 529 2.7 35 58 54.8 41.5 972 19 per cent 75 per cent 25 per cent 19 per cent 87 per cent 4 per cent 26 per cent 38 per cent 9 per cent(20032012)

CAGR

51 per cent

Note: Billing rates and productivity assumptions have been based on nature of work and competition for services expected. FTE = Full Time Equivalent

Source: Press reports. NASSCOM-McKinsey. Manpower profile of India. BCG. KPMG. 2003.

Assumptions related to manpower requirements for the IT export services industry are provided here: Number of working hours per FTE p.a. assumed as follows: Total hours available Less holidays (35 days) Less training time Less admin. time 280 200 240 720 Utilized hours 1360 (76 per cent) 2080

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The ITeS industry could employ approximately 2.7 million by 2012 as compared to 0.17 million in 2003 . . .2002 Revenues (USD billion) Customer care Utilization adjusted charge rates (USD / FTE / hour) Manpower requirement (FTE 000s) Revenues (USD billion) Finance Utilization adjusted charge rates (USD / FTE / hour) Manpower requirement (FTE 000s) Revenues (USD billion) HR Utilization adjusted charge rates (USD / FTE / hour) Manpower requirement (FTE 000s) Revenues (USD billion) Payment services Utilization adjusted charge rates (USD / FTE / hour) Manpower requirement (FTE 000s) Revenues (USD billion) Admin. Utilization adjusted charge rates (USD / FTE / hour) Manpower requirement (FTE 000s) Revenues (USD billion) Content Dev. Utilization adjusted charge rates (USD / FTE / hour) Manpower requirement (FTE 000s) Revenues (USD billion) Total IT eS Utilization adj. charge rates (USD / FTE / hour) Manpower requirement (FTE 000s)Note: Billing rates and productivity assumptions have been based on nature of work and competition for services expected. FTE = Full Time Equivalent

Illustrative2012 22.4 16 1,031 6.2 22 206 18.8 20 690 9.7 16 447 2.6 13 147 4.3 16.1 197 64.0 17.3 2,717 37 per cent 19 per cent 44 per cent 20 per cent 23 per cent 47 per cent 25 per cent 90 per cent 55 per cent 26 per cent 101 per cent 40 per cent 34 per cent(20032012)

2003 0.7 10.5 49 0.5 13 25 0.0 12 2 0.2 10 14 0.4 9.2 28 0.7 11.5 42 2.4 10.9 160

2006 2.4 12 145 1.1 16 49 0.4 14 18 0.8 12 46 0.7 11 48 1.3 13 72 6.5 12.7 379

2009 8.0 14 420 2.5 21 88 3.5 18 148 3.0 15 143 1.5 13 147 2.5 15.2 85 21.0 15.4 1,004

CAGR

0.4 10 29 0.3 11 20 0.0 9 2 0.1 9.7 8 0.2 8 17 0.5 11.5 29 1.5 10.2 106

47 per cent

Source: Press reports. NASSCOM-McKinsey. Manpower profile of India. BCG. KPMG. 2003.

Assumptions related to manpower requirements for the IT-enabled services industry are provided here: Number of working hours per FTE p.a. assumed as follows: Total hours available Less holidays (35 days) Less training time Less admin. time 280 200 240 720 Utilized hours 1360 (76 per cent) 2080

18

Current manpower resources will not be sufficient to meet the aggressive growth targets even in the medium term (2009) . . .IT manpower gap (2009)Number (000s)IT services exports 460

ITeS manpower gap (2009)Number (000s)ITeS market demand (current productivity) 1,416

Domestic IT services Products and T echnology services Total demand (2009)

520

Industry productivity enhancement (product mix, structural changes)

413

140Total demand (2009) 1,003

Reduction in manpower requirements depending on mix of services offered

1,120Current pool 160

and delivery efficiencies Shortfall: 235 Shortfall: 262581

Current pool Supply expected based on current trends Total supply (2009)

360

525

Supply expected (net of attrition at current levels)

885

Total supply (2009)

741

Total graduate / engineer pool addition of 51 million, discounted for labor force participation (65 per cent) and ITeS employment preference / suitability (1 - 3 per cent)

Note: Manpower supply numbers are based on extrapolation of curr ent trends related to growth in educational institutions, attendance rates, out-turns and labor participation as well employment preferences.

Source: Institute of Applied Manpower Research. NSSO. NASSCOM. KPMG. 2003.

. . . with a shortfall of over 0.5 million by 2009 for IT and IT eS, based on current human resource supply trends

Current graduate output and employment preference trends suggest that in the absence of any corrective interventions, there could be a significant shortfall of manpower required for ITeS / IT, even in the medium term. High-level estimates suggest that this shortfall could be to the tune of 0.5 million people by 2009 , roughly 23 per cent of the industrys requirements of 2.1 million people for IT services and IT-enabled services. The key assumptions used for calculations include: Manpower requirements get reduced due to productivity adjustments brought about by internal changes as well as nature of services provided. This is reflected in the increase in charge rate per FTE per hour. Current pool numbers are based on NASSCOMs estimates of approx. 160,000 employed in ITeS as at end of March 2003. Supply estimates are based on 13 per cent increase in annual graduate supply (as per current trends), 65 per cent workforce participation and 1-2 per cent of these preferring and capable of employment in the IT-enabled services sector, with adjustment for attrition as currently observed (approx. 3040 per cent).

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Not addressing this gap means that Indias target share of the export IT and ITeS market would fall short accordingly.

India will be one amongst other countries with surplus manpower that could possibly be trained and deployed for ITeS / IT requirements . . .Potential labor surplus / shortage in working age group across the world (2020)Million2 X -3 -X -6 2

Surplus Shortfall

Ireland-2 -17

Germany-3

UK-3

Russia-10 19

US5

France4

Turkey

China

Spain Egypt

-9

Mexico

Pakistan47 1

Japan5

India3

Philippines5

Malaysia

Brazil

Indonesia

-0.5

Australia

Note: Working population is defined at the 1559 years age group. Ratio of working population to total population is assumed to be constant. Labor numbers are based on assumptions of no interventions by respective governments.

Source: US Census Bureau. BCG. 2002-2003.

. . . China, Philippines, Ireland and Mexico are some countries that could pose a competitive threat to Indias market share aspirations

High-level estimates, based on population and economic growth, suggest that India will be one among many surplus countries across the world that will have a labor surplus and would be able to meet off-shoring requirements of the world. The issue, however, will be of being able to skill this surplus to be able to meet the ITeS / IT requirements. A number of other countries with marginal surplus (like China, Philippines, Ireland and Mexico) are already making strong efforts to establish the necessary policies, institutions and infrastructure to meet these skilling objectives.

20

Although these countries are currently not as favorably positioned as India in terms of availability of low-cost skills . . .Manpower comparison across countriesAverage salary for graduates (USD per annum, 2001) Total number of graduates per annum (2001)2,100,000India 2,400

India

China

2,000

China

950,000

Philippines

2,900

Philippines

380,000

Mexico

1,400

Mexico

137 ,600

Ireland

19,500

Ireland

43,200

Note: Numbers are for year-ended December 2001 or March 2002.

Source: NASSCOM-McKinsey. 2002 -2003.

. . . they are making significant efforts in improving the quality and quantity of manpower to meet global IT / IT requirements in the future eS

Comparing India to some of the emerging ITeS /IT destinations, one observes the availability of a significantly large human resource pool that can be utilized. India currently has some advantages as compared to these countries in terms of the availability of skilled manpower at competitive costs. However, the efforts by these countries to develop human resources pose a significant competitive threat to India in the long-run.

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Ireland began with an overarching vision to become a knowledge-based economy driven by off-shoring . . .Case studyn Ireland

is one country that has strategically pursued the development of an outsourcing services market. It has developed a business environment that promises upto 44 per cent of savings for companies worldwide and over 1,200 companies have already chosen Ireland as a base. Irelands focus has been on becoming the foremost outlocation service centre.

n Ireland

began with a vision of becoming a knowledge-based economy with a world class infrastructure to promote foreign investment, export earnings and growth in employment. It invested heavily in telecom infrastructure (USD 5 billion over 10 years; IRP 250 million in aTechnology Investment Fund for infrastructure modernisation) and education and training (IRP 75 million to develop technology skills; introduction of tele-service courses; focus on multi-lingual skills) to be able to compete as an outsourcing service provider country. It formulated tax incentives to attract foreign investment and instituted the Investment and Development Agency (IDA Ireland, to promote Ireland as a global ), location for back- end processing services.

n The

success of initial ventures attracted new players leading to intense competition for skilled labour. As a result, wages rose and Ireland lost its low-cost advantage.To boost supply of skills, it invested in its educational system that produces 60,000 English-speaking graduates each year. In order to arrest attrition, the government made efforts to spread development of outsourcing service centres beyond big centers like Dublin. It then leveraged the sophistication in its workforce and technology infrastructure to offer value added services. Outsourcing service providers were encouraged to upgrade their services portfolio. According to the IDA, We dont position Ireland as a low-cost environment. . .[but a place where companies] get quality people with high skills and high productivity. strategy today is to continue to promote inward investment but focus more on development of strategic business areas, clusters of excellence through the converged efforts of academia, business and venture capitalists. Amidst increasing price-based competition from other countries, it has identified its niche of value-added services where ideas are created and used. service centers in Ireland.Source: Press reports. CIIKPMG study on ITeS. 2002.

n Irelands

n Today at least 60 companies have established call centres and at least 30 companies (2001) have established shared ,

Irelands vision to become a knowledge-based economy has evolved based on industry and competitive developments. Once Ireland had established itself as the preferred manufacturing / services destination for a number of European and some American businesses, it decided to focus on highend services to avoid competing head-on with other countries that could boast of better cost structures due to labor cost differences.

22

. . . and is striving to migrate to high-end off-shore support and management through a mix of investments and incentives . . .Case studyCreate right environment Ranked second most-global economy n Initiated Partnership 2000 program to manage wage inflation in off-shoring n Corporate tax rates down from 24 per cent (2000) to 12.5 per cent (2003) n Revamping of copyright and related intellectual property rights law for the comfort of potential investorsn

Co-operation between stakeholders Push towards higher quality education (already ranked #1by IMD, 2001) with multi-lingual skills, teleservice courses n Supporting upgrade plans for current outsourcing centers into high-end offshore support facilitiesn

Commercialize new concepts Investment in off-shored centers started with Whirlpool Europes SSC in Ireland in 1995 n With unemployment rates at 17 per cent, companys were able to attract suitable graduates at lower wages to achieve savings of 10 15 per cent as compared to operating in the UKn

Encourage support industries IRP 250 million invested in telecom infrastructure modernization n IRP 75 million to be invested in upgrading technology skills over four years n Upto 400 per cent deduction on taxable profits for R&D expendituren n

Growth through sharing Use of the Investment and Development Agency (IDA) as a common platform for FDI and offshore attractiveness promotion n Change of focus in 2001, towards setting-up of Clusters of Excellence for specialized off-shoringSource: Press reports. CIIKPMG study on ITeS. 2002.

Ireland focused efforts on creating a world-class education system that attracted and generated skills employable for high-end knowledge support services and then conducted reforms in the enabling infrastructure (e.g. telecom, VC-funding etc.). At the same time, various national agencies coordinated efforts at marketing and positioning through industry interactions and specifically directed policies.

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All the key stakeholders have been involved in efforts to promote Ireland as a cluster for business excellence . . .

Initiatives to promote Ireland as a center for business

Involving government agencies

Clarification on specific enabling regulations related to Copyrights, telecommunications and e-Commerce Identified Foras as a national-level policy body to support and co-ordinate efforts across multiple agencies and geographic regions n Launch of National Spatial Strategy (involving hub-spoke approach) to co-ordinate efforts by various regions to attract investments as per vision and to avoid unnecessary competition n Identification of expert group on future skills needs n IRP 2.5 billion under the National Development Plan (2000 -2006) for R&D including a seven year fund of IRP 635 million under the Science Foundation Ireland for ICT / biotech R&D fundingn n

Involving the industry

Special body under ICT Ireland to promote the development of indigenous ICT companies targeting domestic as well as exports businesses n Strategic Competitiveness program as a forum for local set-ups of 1,100 global businesses already in Ireland to assist with competitiveness and sustainability n Targeting of ambitious clients like Intel Fab 24, Google who were willing to experiment with new forms of organizing business n Prominent business leaders invited to join policy makers in a series of studies addressed to meet quantity and quality of future skill requirements in the IT and other industriesn

Involving the educational institutions

Using feedback from international review committees (e.g. IMD World Competitiveness Report) to ensure fit between educational system and desired output characteristics n Working with local educational institutions to retrain staff in order to meet market requirements (e.g. Prudential Inc. in Letterkenny) n Locating universities based on market demands (e.g. three universities offering courses specific to the requirements of International Financial Service Center in Dublin, within a four-mile radius)n

Source: Press reports. KPMG. 2003.

Irelands stakeholders have worked together across defined boundaries to formulate a national strategy towards establishing Ireland as the preferred choice for knowledge services. This includes efforts at the policy level, efforts at working with the industry to identify opportunities as well as efforts related to guiding the development of human resources for future requirements.

24

China is investing in improvement of existing infrastructure and resources . . .n

Case study

China has already had experience of outsourcing services for the domestic market and has built relations with global clients through outsourced manufacturing. The focus now is to develop the capabilities, institutions and incentives that would propel China into grabbing a large share of the global services market. Comprehensive efforts are already visible across areas of telecom infrastructure, education and global marketing. In order to bridge its capability gaps in the area of English language and technical skills, China has initiated a massive investment programme. USD 5.4 billion were invested in nine universities to revive the domestic IT resource pool. In order to spur English skills, the government plans to start English classes from the third grade and about 60,000 English teachers were invited from other countries to teach English. Success at the Olympic Games 2008 bid and the recent accession to the WTO are other drivers behind the enthusiasm for developing skills in English. Reforms in the telecom industry were seen as critical to the success of this industry and were initiated in phases in 1999. The first phase involved separation of government ownership and operations.The second phase involved attracting new domestic players through active privatization and the third phase is about attracting global players and at the same time enabling domestic players to compete with them. Promoting Chinas advantage in providing outsourcing services has been handled at multiple levels, from repositioning China as an investment location, to projecting Chinas low-cost advantage and the bundling of permissions to access the domestic market with a commitment to invest in China-based outsourcing services.Source: Press reports. CIIKPMG study on ITeS. 2002.

n

n

n

China is leveraging its excellent reputation in the manufacturing sector to attract global ITeS and IT companies. It has developed partnerships with large global giants in the area of manufacturing and is now developing the requisite infrastructure for the ITeS and IT industries. There has been increased focus on imparting English language education to enhance the skills of the potential working population.

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. . . with a structured approach to capture a larger share of the global off-shoring market . . .

Case study

Create right environment Policy geared towards globalization and accession to the WTO n FDI approval for almost all projects at provincial level n Preferential tax rates of 15 per cent (normal 33 per cent) under EPZs and other zones. T refund on capex ax over five yearsn

Co-operation between stakeholders Attract investments from high-tech majors in the form of technology parks n Labor law reform through a single comprehensive framework n Promoting economic co-operation for industrial development in mainland Chinan

Commercialize new concepts Leveraging experience of off-shored manufacturing and outsourced services to offer off-shore services to the global market n Exploiting low cost structure supported by government subsidies, low software / labor costs etc.n

Encourage support industries Phase approach to telecom reforms including divestment, privatization and competition n Import of over 60,000 English teachers to build language capability n New legal framework for lending by Chinese banks to JVsn n

Growth through sharing Use of international fairs and special business promotion events to promote China as an overall destination for investments n Permissions for MNCs to leverage Chinese markets bundled with responsibility for off-shoringSource: Press reports. CIIKPMG study on ITeS. 2002.

The focused approach, as illustrated above, involves a right balance of creating the right business environment and increasing stakeholder co-operation. At the policy level, the government is playing a key role by introducing reforms in telecom policy as well introducing initiatives to encourage new investments. Increasing promotional activities such as international fairs and business promotion events are helping to promote China as an investment location of choice.

26

Philippines is leveraging its economic and geographic proximity to the US to grow its share of the ITeS / IT industry . . .Case studyn

The Philippines government has recognized IT as a key driver to the countrys economy and has identified focus eS areas related to call center services, medical transcription, animation, shared back-office functions, software development and engineering and design. The government aims to achieve revenues of USD 1.65 billion by 2004, largely from call centers services, with medical transcription being the second highest segment. The government has established the Information Technology and e-Commerce Council (ITECC) through private government partnerships to oversee and review the national promotion strategy for e-commerce The ITECC works with the Department of Trade and Industry (DTI) to promote technology-related investment opportunities in Philippines The country has launched the IT 21 plan to transform Philippines into a Knowledge Center for Asia over the next 1025 years Private sector involvement has been sought to devise skill upgradation programs to meet the needs of the contact center industry and the ITECC is working with the T echnical Education and Skill Development Authority to promote employment in call centers Attractive infrastructure development incentives have been planned and the two ex-US air bases at Clark Bay and Subic Bay have been transformed into world-class, ready-to-use facilities for ITeS / IT industrySource: Press reports KPMG. 2002 -2003.

n

n

n

n

n

n

Philippines has had the advantage of significant cultural influence of America on its society, and is using this proposition to a large extent to promote its ITeS / IT industries. The ITECC, a government arm, is carrying out pioneering work to promote the industry by developing public-private partnerships to upgrade the skills of the workforce and cater to the specific needs of the ITeS / IT industries. There is also greater emphasis on developing the infrastructure and help set up world class facilities with all necessary telecom and IT support.

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. . . and is targeting to become the Asia-Pacific regions e-services hub with revenues of USD 1.65 billion by 2004 . . .

Case study

Create right environment ITeS identified as the key economic driver for the country by leading authorities within the country n Income tax holiday for 4 6 years with permanent resident status for medium / large investorsn

Co-operation between stakeholders Collaborating with private sector companies (e.g. TIM, CRC etc.) for skills upgradation through formal and non-formal sectors n Conversion of ex-US air bases into ready-to-move ITeS / IT facilitiesn

Commercialize new conceptsn

Leveraging proximity to the US and low connectivity costs for ITeS, Philippines aims to grow into the EServices Hub for Asia with a focus on call center, animation / design, transcription and back-office operations

Encourage support industries Launch of IT 21 plan to transform Philippines into knowledge center for Asia with HR development n Plans to address telecom sector investments through competition n Incentives for IT infrastructure developers with up to 15 projects being supportedn

Growth through sharing

n

Use of DTI and ITECC to promote ITrelated investments as well as to support skill enhancement

Source: Press reports. CIIKPMG study on ITeS. 2002.

The Philippines government has identified ITeS as a priority sector to drive economic growth. Towards this end, it has formulated a number of incentives and encouraging investment policies. The IT 21 plan has been launched to help Philippines develop into a hub for ITeS / IT in Asia by bringing about rapid human resource development. The focus areas decided by the ITECC include call center operations, animation/design, transcription and back-office operations. Philippines aims to leverage its strengths in these areas and develop long-term competitive advantage.

28

The manpower shortage is already impacting the performance of the Indian ITeS / IT industry today . . .

2000 01

2002 03n n

ITeS / IT health-check indicators

Service billing rates

n n

n n

IT: USD 30 40 per hour ITeS: USD 1 12 per hour 0

IT: USD 15 25 per hour ITeS: USD 4 11 per hour

Competition from captives turning third-party Ease of entry into ITeS / IT

Employee attrition levels

2000 01n

2002 03n

n

ITeS: 1 15 per cent per 0 annum

ITeS: 30 40 per cent per annumn

Competition for talent with MNCs able to afford poaching with salary hikes of 15 20 per cent Over-qualification of labor pool attracted has led to higher wage rate Wage rates increasing with competition Overall margins under pressure with domestic and international competition, regulatory restrictions and large capital requirements

2000 01 Salary costsn

2002 - 03n

ITeS: USD 200 per month (cost to company)

ITeS: USD 330 per month (cost to company)

n

Company profit margins

2000 01n

2002 03n

n

ITeS: 30 40 per cent operating profit margins

ITeS: 1 25 per cent 7 operating profit margins

Source: Press reports. KPMG. 2003-2004.

. . . making the industry as a whole in India less competitive on a global scale and less attractive for potential entrants

The imminent manpower shortage in the IT and ITeS industry in India is already affecting various operational and financial parameters. This makes the industry less competitive in the global market and less attractive to potential entrants. Considering that the next few years will be critical to the overall ramp-up of Indias IT eS / IT revenues, some actions are required to address this issue at the earliest.

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The ITeS / IT industry has indicated concern and the need for an immediate action plan . . .There is a need for a common agency to certify and counsel resources. Efforts at improving resources required being done in pockets . . . in Kerala, AP Karnataka. ,

ITeS / BPO is not seen as a career . . . there is a need to bring respectability to the workn Rising

It is expensive to attract skills above the age of 35 into ITeS.

Functional education to be strengthened to support high-end services.

Career paths are often not made clear to staff . . . leading to attrition issues.

Low hit rates of 1- 5 per cent lead to significant costs related to recruitment and selection of resources

University education needs to be re-oriented to support vocational training for ITeS .

Shifting the BPO employment opportunity to second-tier cities would reduce resource pressures.

Emotional maturity and physical stamina requires at least graduate level of education

attrition, both in industry and out of the industry n Rising wage costs due to scarcity of resources n Impediments to growth plans for various service providers n Lower staff productivity

Even high literacy states like Kerala may have lower awareness of ITeS career options.

Source: Department of IT interactions with IT / BPO industry service providers. Industry interactions. Press reports, KPMG. 20032004.

A number of interactions were held with key stakeholders such as the Department of Information Technology and BPO industry service providers to get a clear understanding of the current issues faced and ways to resolve them. Some of the key concerns raised were related to high attrition, increasing salary costs and low productivity of employees. These concerns are deep-rooted and it is imperative to address them with immediate / concerted action.

30

IT-enabled services and IT services are expected to become significant contributors to the growth of the Indian economy . . .Domestic / Captive IT servicesDirect ITeS/IT employment (million)

5.0

ITeS IT export services

2.2 0.5 0.72003

1.1

Contribution to direct employment2012

Percentage of total employment

2002

2006

2009

0.1 per cent

0.1 per cent

0.2 per cent

0.4 per cent

0.9 per cent

Off-shoring as per cent of GDP Contribution to GDP growth

1.9 per cent2002

2.2 per cent2003

3.4 per cent2006

6.6 per cent

12.3 per cent

2009

2012

Contribution to GDP growthNote: GDP growth assumed as 9 per cent per annum upto 2012

8 per cent

17 per cent

31 per cent 2009 - 2012

2003 - 2006 2006 - 2009

Source: NASSCOM. Institute of Applied Manpower Research. Statistical Outline of India. KPMG. 2003.

. . . actions must be initiated now in order to address manpower requirements for the ITeS / IT industry in the longer term

The ITeS / IT industry could be a significant contributor to the economic growth of the country, considering its long-term growth potential of 25 per cent per annum (compared to overall GDP growth expectations of 8 10 per cent). Benefits from ITeS / IT include a direct employment opportunity of approx. 5.1 billion by 2012, of which approx. 3.7 billion would be for export IT services and IT -enabled services. Comparative numbers for 2002, according to NASSCOM, were 0.5 million. Estimates by NASSCOM-McKinsey and BCG have suggested that the ITeS / IT industry could generate another equal number of employment opportunities in support industries (e.g. transportation, catering, office administration and services etc.). The share of off-shore revenues to total GDP is also expected to grow significantly, with a potential contribution of 12 per cent of GDP by 2012, as compared to 1.9 per cent in 2002. High growth of ITeS / IT revenues implies that it could grow to become a significant contributor to overall GDP growth as well.

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Strategy to enhance institutional capacity (formal and non-formal) to generate requisite manpowerThis chapter provides an understanding of the need to enhance institutional capacity in the formal and non-formal sector. It also suggests other approaches to generate requisite manpower for the ITeS / IT industry.

There is going to be a significant demand for manpower related to the Indian IT export and ITeS industry by 2012 . . .Manpower demand for IT* services (2012)(000s)1000 58 750 500 275 250 0 Consulting, integration, installation IT Development Outsourced support Training and Education Total 111 529 972

83 per cent of requirements in systems integration and support

Manpower demand for ITeS (2012)(000s)2800 2,717 147 447 1400 700 0 Customer Care Finance HR Payment Services Administration Content Development Total 1,031 206 690 197

* Manpower requirements for IT services under domestic / captive operations are in addition to requirements for IT export services shown above.

80 per cent of requirements in HR, payment services and customer care

2100

Source: IDC. NASSCOM. KPMG. 20032004.

. . . requiring upto approx. 3.7 million people for export IT services and ITeS by 2012, up from 0.4 million people in 2003

The demand for IT and ITeS manpower is going to be driven by their requirements in specific solution areas for IT and ITeS. Out of the total requirements for IT export services, as much as 83 per cent could be for systems integration and outsourced support (facilities management) services. Similarly, for ITeS, 80 per cent of the manpower requirements could be in the areas of Human Resources, Payment processing and Customer Care services.

32

Manpower will be required across all levels of the organization in the IT export services and ITeS business . . .Manpower (000s) IT requirements* Senior Manager: 2003 2012 Qualifications Work experience Skill-sets

7

36

n

Graduation / Postgraduation Graduation (+Diploma)

n

6+ years

-

Managerial skills / Crises management Analytical reasoning Client interface and selling skills Domain expertise Supervisory skills / Domain expertise Resource management and utilization Planning and reporting skills Computer proficiency and IT programming Problem solving and analytical skills Team-working

Project Manager / Leader:

26

141

n

n

3 6 years

-

Programmers / Executives:

179

831

n

Graduation / Diploma

n

0 3 years

-

Total: ITeS requirements Manager / supervisor:

212

1,008

-

3

51

n

Graduation / Postgraduation Graduation (+Diploma)

n

5+ years

-

Managerial skills / Crises management Analytical reasoning Client interface and selling skills Domain expertise Supervisory skills / Domain expertise Planning and reporting skills Meeting process targets Language / communication skills Analytical skills Computer proficiency Team-working Customer service orientation

Team leaders:

20

277

n

n

3 4 years

-

Agents / Executives:

140

2,439

n

Graduation

n

0 3 years

-

Total:

163

2,767

* Manpower requirements for IT services under domestic / captive operations are in addition to and roughly equal to requirements for IT export services shown above.

Source: IDC. NASSCOM. KPMG. 2003 2004.

Manpower estimates based on current staffing patterns for the export IT services and ITeS requirements suggest that there could be a significant requirement in terms of experienced personnel at the manager / team leader level. This requires the ability to generate people with relevant skills at least 24 years prior to the actual demand, reinforcing the criticality of requirement for action. For example, by 2012, compared to a workforce of 3.7 million for export IT services and ITeS, there could be a requirement for approx. 0.85 million managerial staff with over 56 years of relevant experience i.e. participating in the workforce since 2006 / 2007. Although the educational capacity in existing / planned institutions to meet these requirements may not be an issue, the specific skills provided as part of the education system may need to be reconsidered.

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Different categories of work at the agent level itself will require specific qualifications . . .Back-office data entry / processing Corporate support functions Knowledge services and decision- support

IllustrativeResearch/ Design and development

Customer contact

Increasing complexity of task and skill requirements Data entry (form filling) n Data conversion (translation, transcription) n Basic processing (checking / updating) n Document management (storage, retrieval)n

Nature of work

Customer services (complaints, inquiries) n Tele-marketing (presales, order-taking, catalog sales) n Collections support (reminders, payment support)n

Shared corporate function support (HR, Finance / Accounts, HR, procurement) n IT support (development, integration, maintenance, helpdesk)n

Analyst services (legal, financial) n Customer analytics (segment profits) n Application processing (claims) n Risk management (underwriting, structuring) n Advisory services (tele-medicine, consultancy)n

Engineering and design (CAD/ CAM) n Content development (animation, web site, graphics) n New product design (specifications, pilot testing)n

Typical qualification for work

n

Graduates

n

Graduates with excellent communication skills

n

Graduates with specialization, diploma/certificate holders

Graduates / PostGraduates in related areas (e.g. Law, Economics, Accounting) n ICWA / CAn

Graduates / Postgraduates in related areas n Design engineers with some work experience n For website / DTP design, diplomas in related areasn Source: Press reports. KPMG. 2003-2004.

Note : List of activities and examples above is illustrative only and not exhaustive. Activities within a category are not necessarily in order of skill levels required

The more complex tasks under ITeS / IT are expected to require post-graduate qualifications or other certification in addition to standard graduate degrees. For example, while a typical back-office data entry/processing employee would need to be a graduate in any stream, an employee in the area of research/design and development would need to be at least a graduate / post-graduate in a specialized area.

34

Even within a function, different levels of work may require specific qualifications . . .IllustrativeBack-office processing-

Corporate functions Customer contact HR Finance IT / T ech Support Knowledge support Research and Design

-

Loan Admin. Card / clainms processing Account reconciliation Data entry, transcription, mining Records management

B.A. B.Pharm. B.Com. B. Sc. - Maths - Statistics - Econ.-

B.A. Inbound customer services B.Sc.

-

-

B.Com.

Payroll / Benefits processing Employee benefits

B.A. B.Sc. B.Com.

Basic

-

Outbound collections Outbound sales / marketing Inbound customer service Loans / processing service

B.A. B.Sc. B.Com. + Vocational Diploma (e.g. Hotel, Tourism)

B.Com. B.A.-

BCA Hardware B.Sc. - Equity research help-desk and - IT (industry / CA / CFA / troublesector / ICWA shooting ITI (Dip.) markets) Software and MBA technical IT course - IPR filings query support (e.g. DoEACC) Network configuration / hardware support and maintenance Software design / programming BCA B.Sc. - IT MCA B.E. Certificate (CCNE, MCSE)-

+-

401 K Pensions Admin. Training

Tax services (planning, preparation, payroll, bookkeeping)

Medium

B. Sc. +-

Diploma in Acctg, Tax laws CA / CFA / ICWA Diploma in Fund Mgmt Stock exchange certificate-

Content development (web-site design, DTP , animation)

Courses in Animation / Fine Art Dip. in Multimedia

-

B.A. B.Sc. B.Com. Query + resolution Vocational Problem solving Diploma (e.g. Hotel, Tourism)

High-end

-

Training & Development Performance Management

Post Grad. In HR / Behav. Science Diploma in Labor Law, HR / IR, Staff welfare

-

-

Acctg services Shareholder services Equity research (industry / sector / markets) Portfolio mgmt Credit rating

-

-

Tele-medicine and advisory services

MBBS

-

Distance B.E. learning Engineering Dip. in design / testing CAD / Product design/ CAM testing Biotech Ph.D. research

Source: Industry interactions. KPMG. 2003 - 2004.

However, people with specific graduate degree qualifications may be better suited for specific functions. For example, a Chartered Accountant / Chartered Financial Analyst maybe better qualified to support remote accounting services or equity research support for a client. The person may also be required to undergo additional certification if required by the regulations of the client country (e.g. FSA in the UK). However, for the data entry support work of maintaining shareholder database or attending queries, a normal B.A. / B.Com. / B.Sc. may be sufficient.

Strengthening the human resource foundation of the Indian IT enabled services/ IT industryNational Association of Software and Service Companies

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These must be supported by some necessary delivery-related skills . . .Data entry / processing Language Skills Spoken English Written English Foreign Languages Accent Understanding Analytical Skills Logical reasoning Problem Solving / Num. ability Comprehension / Creativity Computer proficiency Keyboard skills / Browsing etc. Technical / Programming skills Customer Service Orientation Listening / empathy Initiative/Enthusiasm Team working Multitasking / Time management Behavioral traits Assertiveness and Confidence Integrity / values and discipline Motivation / Drive Sociability / Dependability / ReliabilityNote: : Necessary skills : Desired skills

IllustrativeKnowledge service / DSS R&D and Content Dev.

Customer contact

Human Resources

Finance & Admin.

Tech. Support / IT

Source: Industry interactions. KPMG. 2003-2004.

In addition to standard qualifications, different functions under ITeS / IT often require certain specific skills related to language (comprehension, fluency), analytical (problem solving, reasoning), computer proficiency (keyboard), customer service orientation (team-working, listening) and behavior (confidence, integrity, drive). However, the importance of these could vary depending on the specific function. For example, Listening skills are inherently more important to a customer contact function as compared to knowledge services support, where Reasoning skills may be much more important.

36

In order to meet the ITeS / IT skill requirements, the entire education lifecycle must be considered . . .

Attract

Educate

Certify

Deploy

Re-train

n

Creating awareness about and preference for ITeS / IT as a lifelong opportunity, thereby creating a pull in the market

n

Development of formal and nonformal mechanisms to equip students with requisite skills for ITeS / IT

n

Pre-certification of potential employees through a standard / industry accepted testing body

Counseling and deploying manpower into ITeS/ IT industry n Using industry feedback to drive curricular changes and highlight employment opportunitiesn

n

Re-training ITeS / IT professionals to upgrade skills to meet changing industry requirements

Source : KPMG. 20032004.

One of the key success factors for meeting the manpower requirements of the ITeS / IT industry is to lay emphasis on each aspect of the education lifecycle. While it is important for institutions to provide students with relevant knowledge and skills, it is equally important for students to gain recognition in the industry. Skill recognition can only come about by developing a standard system of testing and certification that is accepted by a formal authority. Students will only be attracted to the ITeS / IT industry by getting good employment opportunities and remuneration. Thus, a virtuous cycle is established between attraction and deployment. It is also necessary to keep track of changes in the industry and specific requirements or opportunities. These should be incorporated into the curriculum as well as used as inputs for re-training employees to face new challenges.

Strengthening the human resource foundation of the Indian IT enabled services/ IT industryNational Association of Software and Service Companies

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A World Bank study (2001) highlighted generic shortcomings in Indias education system to generate quality manpower. . .Weaknesses in infrastructure / institutional set-up-

Policy-

Weaknesses in course curriculum and delivery

Expense allocation is often based on political pressures as against market conditions Lack of adequate quality control in implementation of policy No incentives for financial prudence and efficiency in R&D Excessive controls over finance allocation leads to costly delays

-

Faculty-

Low compensation and lack of clarity on career progression attracts fewer teachers Teachers lack industry rigor, R&D background and exposure to tools Lack opportunity / encouragement for creative thinking Lack of counseling for higher education choices and career decisions Inflexible and rigid curriculum, not exposed to innovation / industry Teaching is exam-oriented without focus on communication skills, problem solving Continuous evaluation is often not systemized Exams are often memory-based and encourage partial studying through ample choice

-

-

Finance-

Students-

-

Administration-

Inefficiencies due to limited mechanization / automation within R&D set-ups Lack of appropriate incentive / reward systems Facilities are poorly maintained, leading to shorter utilized life cycle Little sharing of expensive infrastructure and equipment

-

Curriculum-

-

Infrastructure-

Evaluation system

-

Source: World Bank Study on Science &Technology Manpower in India (2001). Industry / Academia interactions. KPMG. 2003.

A World Bank study highlighted generic shortcomings in the Indian education system, especially in its ability to generate highly-skilled manpower with the inclination and capability of creative thinking in-line with global industry developments. Some of the observations pointed out the inability to maintain and share common infrastructure facilities across institutions, shortage of skilled faculty with industry exposure and rigidities in the curriculum and evaluation system. A study by the Ministry of HRD, Govt of India titled Technical Education Quality Improvement Project, in Oct 2001, also highlighted potential action points (e.g. networking, curriculum changes, faculty development etc.) required to improve the quality of technical education in the country.

38

In addition, the current system has gaps across the entire education life cycle related to skilling for ITeS. . .Attractn

Educaten

CertifyLack of national-level mechanism for precertified pool of resources Lack of understanding of specific parameters to test and certify upon

DeployLack of feedback loop on resource deployment and skills provided Lack of direct placement links between institutions and ITeS industry, especially in Tier-II and smaller cities

People are not aware about employment options, including flexibility offered ITeS perceived as largely requiring IT skills Jobs in the ITeS industry lack esteem Employment not seen as a long-term career option

Key skills required by the industry are not developed through current educational system Lack of a standardized, modular curriculum for ITeS

n

n

n n

n

n

n

n

Source: Industry / Academia interactions. Department of IT. KPMG. 2003-2004.

The current education system lacks specific policy initiatives to help it align to the specific requirements of the ITeS / IT industry. There are also issues related to funding as well as development of institutional and infrastructure facilities. Moreover, there is a strong need for monitoring agencies to assess and correct gaps related to developing and directing skills towards ITeS / IT employment opportunities.

Strengthening the human resource foundation of the Indian IT enabled services/ IT industryNational Association of Software and Service Companies

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Specific changes across the current system of education in India related to skills required for ITeS could be initiated . . .Existing manpower for ITeS / IT are graduates/post-graduates with strong conceptual / theoretical knowledge but lacking in communication and vocational skills

Illustrative

Additional inputs required to make employable for ITeS / IT

PostGraduation

n

Theoretical specialization in subject of choice; gradual shift to applied studies

n

Graduation

n

Students select subjects of their choice and specialize in a particular stream; cross-stream courses rarely availablen

Domain specific training linked to international developments - Insurance certification - Healthcare regulatory standard (HIPAA) - Accounting standards (US GAAP) - Banking standards (Basel II) - Labor / T axation laws (France, Germany) - HR practices (e.g. 401 K) - Alternative languages (e.g. Japanese) Customer service orientation - Listening skills - Time / stress management - Leadership - Team working

Higher secondary

n

Students acquire basic mathematics, language and general awareness skills

Primary / Secondary

Mathematics and English skills are refined. Students get introduced to science and social science subjects n Students acquire basic mathematics, language and general awareness skillsn

Language skills - Written English (Grammar, Comprehension) - Spoken English (Fluency) n Computer literacy - Key board - Internet searchingn

Source: Department of IT. Industry interactions. KPMG. 2003-2004.

The current system of education does not provide some of the necessary skills for ITeS / IT, even at the graduate / post-graduate level. Resources produced may have a strong conceptual / theoretical background but often lack communication and vocation-specific skills and the creative drive or specific regulatory certifications required by clients in foreign countries. This could be addressed through specific modules integrated into the current system of education, right from the primary / secondary education level. For example, a strong focus on Computer literacy could be established at the primary / secondary level, followed by a focus on customer service related skills (team-work, time management) at the higher secondary levels.

40

China has made some significant efforts to develop language and culture skills relevant to global ITeS support . . .Case study: ChinaAttractn

Educaten

Certifyn

Deployn

The government is encouraging overseas and domestic experts to play a major role in strategy formulation for ITeS/IT The government is focusing on increasing urbanization of its premier cities like Shanghai and Beijing (by 2005, over 50 per cent of the Shanghai population would have internet access)

The government is encouraging English language learning in schools and colleges (over 60,000 English teachers brought in) Alliances with prestigious foreign institutions like Yale to set up technology centers and enable student exchange programs English teaching combined with IT training under computer classes

n

The Chinese ministry of science and technology had established the 863 program to develop a highly qualified scientific and technical staff

Upto 53 high quality technology parks have been set up by the government to encourage MNCs to establish offshore R&D and IT centers

n

n

China education and research grid to share IT research efforts across 100 universities n Radio and TV universities have been created to facilitate learningn

Source: Press reports, UN / World Bank report. KPMG. 20032004.

China has taken significant steps across the education lifecycle in order to ensure that its human resources are geared up to tap the opportunities presented by the ITeS / IT industry. A key step has been the promotion of English language in schools, colleges and universities. The government has been quick to realize that learning the language can lead to significantly large business opportunities in the future. Long-term plans are also in place to develop knowledge in core areas of R&D. The 863 program is focused on developing a highly qualified and competent scientific and technical staff. At the same time, a number of infrastructure building activities, such as setting up of IT parks, is underway to ensure effective deployment of trained students in the ITeS / IT industry.

Strengthening the human resource foundation of the Indian IT enabled services/ IT industryNational Association of Software and Service Companies

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Philippines too has made efforts to revamp its core curriculum approach to develop resources more suitable for IT / IT . . . eSCase study: PhilippinesAttractn

Educate Established TESDA as the driving force for changes in curriculum and implementation of better training programs n Greater focus on Maths, Science and English at the primary and higher secondary education level n Training courses for graduates and postgraduates focused on key ITeS areas for Philippines n Use of best of breed methodologies, tools and practices to train students n Training and re-training teachers in formal institutions to develop IT skills

Certify

Deploy

n

Balik IT professionals program to attract overseas Filipino IT professionals and inject actual experience and fresh insights into knowledge workers

Established a unified TVET program registration and accreditation system in consonance with a quality technical and vocational education n Identification of specific certification requirements and dedicated government programs to carry them out in areas like Windows, Unix, Java, SQL, XML, Linux and C++n

n

Development of alliances between educational institutions for students to get onthe-job training and companies to identify untapped manpower pools

Note: TESDA Technical Education & Skills Dev elopment Authority TVET Technical


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