ITES/BPO Opportunity to move up the value chain?January 13, 2004January 13, 2004This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey it is not a complete record of the discussion.Presentation at Presentation at iTECHiTECH 2004 2004Source:Gartner; Dataquest; Aberdeen group; McKinsey analysisSupply-side enablersSupply-side enablers Telecom costs down by 90% in the last 3 years; world-class reliability Over 2.5 million low-cost talented workers in countries such as India and Philippines Emergence of a credible vendor community0.00.20.40.60.81.01.21.41.61.82.019921993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003EBPO total revenues- India example* $ billionCONTEXT: BUSINESS PROCESS OFFSHORING HAS EXPLODED IN THE LAST FEW YEARSEncouraging track record of early movers Demanding U.S market environment Successful track record of I/T offshoringDemand side forcesDemand side forces2030918 Offshoring workshop v2“Tech jobs leave U.S. for India, Russia. Whos to blame?” July 2003“Is your job next?” February 2003BUT HAS ALSO CREATED GREAT ANXIETY IN PRIMARY MARKETS “American legislators are accusing India of stealing jobs” June 2003“Americas pain, Indias gain” January 2003“3.3 million U.S. service jobs to go offshore by 2015” November 2002“Can America Lose These Jobs and Still Prosper?” July 2003U.S. House Sub-business Committee3IN THIS CONTEXT, SEVERAL DOUBTS HAVE ARISEN ABOUT THE FUNDAMENTAL LONGEVITY AND EVOLUTION OF BPO AS AN INDUSTRYWill the BPO phenomenon plateau out in the next few years?Even if it survives, moving up the value chain will be difficult and will take several years?Value chain moves will be the domain of captives because the trust required is too high?4IN THIS CONTEXT, SEVERAL DOUBTS HAVE ARISEN ABOUT THE FUNDAMENTAL LONGEVITY AND EVOLUTION OF BPO AS AN INDUSTRYWill the BPO phenomenon plateau out in the next few years?Even if it survives, moving up the value chain will be difficult and will take several years?Value chain moves will be the domain of captives because the trust required is too high?50.33*Estimate based on historical U.S. reemployment trends Source:McKinsey Global Institute1. OFFSHORING ACTUALLY GENERATES GREATER VALUE FOR THE GLOBAL ECONOMYTaxes ($0.04) Revenues ($0.20) Local suppliers ($0.09). . . delivers value to India . . .0.67Cost savings ($0.58) Goods sold ($0.05) Profits from Indian ventures ($0.04). . . brings returns to U.S. . . .1.45-1.47. . . and makes the global pie that much bigger0.45-0.47. . . creates new value from re- employing U.S. labor* . . .$1 previously spent in U.S., now offshored to India . . .$1.0060.030.330.100.090.100.01Profits retained in IndiaINDIA CAPTURES 33 CENTS FROM EACH DOLLAR OF SPEND OFFSHORED BY THE U.S.Value accrued from $1 of U.S. spend offshored1 Dollars; 2002Central govern- ment3State govern- ment4Total value accrued to IndiaLaborSuppliers2Offshoring sector1 Estimated using the India offshored services industry case2Includes revenue accrued to the supplier industries less sales taxes, income taxes to employees and corporate taxes 3Includes income tax from labor employed in the offshored services sector and the supplier industries and corporate tax on the supplier industries 4 Includes sales tax on the supplier industries and revenue from the sale of power to offshored service providers Source:McKinsey Global Institute7JOBS OFFSHORED WILL BE A SMALL FRACTION OF THE SHORTAGE IN ELIGIBLE WORKERS Number of workers Millions, 2000-2015 Source:U.S. Census; McKinsey Global Institute Jobs projected to go offshoreDecline in working population due to aging8JOBS OFFSHORED ARE A FRACTION OF ALL MASS LAYOFFS1Bureau of labor statistics defines mass layoffs as job loss actions leading to the displacement of 50 or more workers by a given establishment during a 5-week period 2Average 1996-99 3Average 1989-2000 4Average 2003-13 Source:NBER; BLS; Kletzer; McKinsey Global InstituteAverage annual mass layoffs1 Millions All mass layoffs2Offshoring projection4Trade- related layoffs39Economic value of off-shoring realOff-shoring creates 40-50% greater value for the global economy India captures 33% of every off- shored dollar while the US retains 67% and the incremental 40-50% value creation Off-shored jobs small fraction of expected retirements/lay-offs THEREFORE, BUSINESS LOGIC WOULD INDICATE THAT BPO HERE TO STAY BUT WILL REQUIRE HANDLING CUSTOMER CONCERNS WITH COMPASSIONNegative emotional impact at the customer equally realReal people and communities are effected Re-training takes time Manufacturing hang-over still felt10IN THIS CONTEXT, SEVERAL DOUBTS HAVE ARISEN ABOUT THE FUNDAMENTAL LONGEVITY AND EVOLUTION OF BPO AS AN INDUSTRYWill the BPO phenomenon plateau out in th