International Trade & Competition in High-Tech

Heaven Kim Shruti Yadav Eric Chin Adam Schindla Florent Heidet October
31st,

07

IT Service Industry : Overview

On-shore incumbents are still larger: IBM, Accenture Off-shore players growing : TCS, Wipro, Infosys Technology 47% Annual growth (2003 vs. 2004) Still 0.8% market share

CAGR 7%

Source: IDC

Fragmented market

IT Service Industry : Value Chain Current

Supplier Enterprise Customer

Software Service/Product Vendor

Pure Play

IT Consulting

IT Department (CIO, CTO, COO)

Business Users

Pure Play

Large Enterprises

SAP Oracle Infosys

Accenture

End-to-end Service Provider

Insurance, banking, & financial , 30% Telecom, 20% Manufacturing, 13% Retail, 8%

IBM EDS

CSC Cap Gemini

IT Service Industry : Value Chain Emerging

Supplier Customer

SaaS

Software Service/Product Vendor Salesforce.com SugarCRM

IT Department (CIO, CTO, COO)

Business Users

Small/Medium Businesses

Web 2.0

Internet Service Provider Google Microsoft

IT Department (CIO, CTO, COO)

Business Users

Individual Users

IT Service Industry : Transformation

Experimen -tation Convergence

Trigger

Disruptive After the DotCom Crash Business Models

1 Change in 2 Change in
Technology Customer Needs

1 Off-shore Biz Model (incl. GDM) 2 SaaS (Software as a Service) 3 Enterprise 2.0

IT Service Industry : Transformation

Change in Customer Needs Change in Offerings

Invest in new technologies on faith and without strong links to ROI measurements (Over-purchase!)
More demanding in ROI Get more out of tech investment Rapid adaption /modification Specific point solutions

Traditional enterprise application packages Homogeneous infrastructure

Off-shore IT services SOA (Service-oriented Architecture) & Web services Applications as services

Infosys Technologies Company Background

Started in 1981 for $225 Built up in 1980s and 90s through customized software solutions, developed in offshore (Indian) development centers Also develops and markets software products Flagship product is Finacle, a modular banking solution for retail, corporate and banks Grew mostly through new business contracts, acquisition of smaller IT service providers, and alliances with larger companies.

Infosys Technologies Business Model

Global Delivery Model
Definition The process of breaking projects down into their logical components and then distributing those components to locations (onsite, nearshore, or offshore) where they can be delivered at maximum value. Vehicles 38 global development centers 20 in India 18 in the US, the UK, Australia, Canada, China, Mauritius and Czech Republic. Modular Global Sourcing Framework Customer Value Lower Cost 2 Faster Implementation
1 3 4

Lower Risk
Measurable

Innovation to Meet New Customer Needs

Infosys Technologies Business Performance

CAGR 43%

CAGR 45%/30%

EBITDA Margin %

33%

33%

32%

32%

Infosys Technologies Business Performance

Revenue by Industry Revenue by Geographic Market

Infosys Technologies What are the Competitive Advantages?

India
Abundant supply of Infosys Technologies low-cost scientists Excellent training and engineers program Brand/ reputation

Global Delivery Model Open/transparent Global development & performancecenters driven culture Right Talents

Customer relationship

Cost & quality advantage coming from GDM and low-cost labor

Flat organizational Domain structure knowledge Right reward system (stocks, career visions)

Infosys Technologies Sustainable? : vs. Current Competitors

On-shore Incumbents Trying to adapt GDM while maintaining their existing business model & organizational structure Adding more offshore workforce through M&A or expansion However Other Off-shore Players Can NOT completely migrate to GDM because It can jeopardize existing businesses There is fundamental organizational difference (i.e. Hierarchic vs. Flat) which would make it hard to attract right talents for GDM

Infosys Technologies Sustainable? : vs. Current Competitors

On-shore Incumbents Already offering the same services by copying the tangible part of business model 24/7 services Global offices Competing for the same talents However Other Off-shore Players Still behind Infosys in terms of operational excellence because Infosyss core competency is People and supporting system to attract/keep talents Intangible assets and congruence of the whole system are hard to copy (e.g. Culture, HR, reputation)

Infosys Technologies Sustainable? : vs. Current Competitors

On-shore Incumbents Other Off-shore Players
Performance Comparison Gross Margin Net Income Margin 26% 19% 22%

USD (Mil)

Infosys Wipro TCS

42% 33% 46%

Infosys Technologies Sustainable? : vs. Potential Competitors

They are disruptive not only to incumbents but to off-shore players Significantly easier & faster implementation Very low up-front capital investment Infosyss competitive advantages no longer sustainable No need to have expensive IT service providers Very low entry barrier Force incumbents to change product & pricing

SaaS

User-focused, not buyer-focused : selfWeb 2.0 service IT Very cheap or free funded by Ad model

Infosys Technologies SWOT Analysis

Strengths
M Operational excellence L

Weaknesses
Over-reliance on US economy M Limited position in value chain (i.e. No presence or relationship with consulting business)
H Wage inflation due to

to deliver GDM H Capability to attract & keep talents L Strong financial M Strong relationship with Large Corporations
H More cost/speed

Significance of Impact

H High
M Medium

conscious customers M Market growth M Higher awareness on off-shore model

competition on talents (15+% / year) H Newer disruptive business models (i.e. web services, web 2.0)

Low

Opportunities

Threats

Infosys Consulting Company Background

Started in April 2004 with initial investment of $20M Chose a wholly-owned subsidiary model Led by former leadership of Deloitte Consulting India Focused on the Global Delivery Model (GDM) and more cost-competitive consulting rates Integrating the business consulting and technology implementation lifecycles Engagements sourced from parent company and existing client base of Infosys Technologies

IT Consulting Market Context & Structure

Subset of overall IT services market Projected single-digit growth of 5% Largely fragmented market with 2 key segments: On-shore consulting and IT services players (Accenture, IBM, Capgemini, EDS) Off-shore IT services players (Wipro and TCS) Largest shares held by Accenture and IBM

Infosys Consulting Business Model

1-1-3 Model
Definition Integrate the business consulting and technology implementation lifecycle. 1-1-3 model gives one client one ICI resource onsite, one Infosys Tech resource onsite, and 3 Infosys Tech resources offshore. Vehicles On-shore management consulting talent On-shore liasons Off-shore resources Customer Value Lower blended 1 rates
2 3

Faster Implementation Integration

1-1-3combined with GDM

Infosys Consulting What are the Competitive Advantages?

Large supply of low-cost IT/process resources
Access to Infosys Technologies clients

Strong operational skills

Unique, blended model

1-1-3 Model Blend on/off shore Cost efficient

Easier to integrate offshore with onshore

Cost & speed advantage coming from 1-1-3 and GDM model

Infosys Consulting ICI vs. Current Competitors

On-shore Incumbents Trying to adapt GDM while maintaining their existing business model & organizational structure Adding more offshore workforce through M&A or expansion However Other Consulting Players Can NOT completely migrate to GDM/1-1-3 because It can jeopardize existing businesses May be brand equity erosion

ICI Experiencing Revenue Growth

Revenue (USD Mil)
$60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $0.00 FY05 FY06 FY07E $5.30
Reflects steady growth in number of clients: 25 clients in FY05 54 clients in FY06 89 clients in FY07

$54 $36

High double-digit year on year revenue growth Approximately 2/3rds of revenue from the United States Key industries: Retail, Transportation, High Tech, Banking, Energy/Utilities

But Increasingly Dim Profitability Results

Net Income & FCF
$0.00 ($5.00) ($10.00) ($15.00) ($20.00) ($25.00) ($30.00) ($28.20 Net Income (Loss) ) FY05 ($8.10) FY06 FY07
Infosys still deems Infosys Consulting to be in investment phase. Potential causes: cheaper blended rates expensive on-shore resources Learning curve in managing consulting business economics

($9.40)

Infosys Consulting vs. Current Competitors Operational Scale & Performance

On-shore Incumbents

ICI Revenue ($M) Employees

Accenture IBM BCS $54 $11,856 N.A. 209 126000 60,000

Other Off-shore Players

ICI Revenue ($M) Employees WCS $54 N.A. 209 TCS N.A. 5,000 34,000

Still a marginal player vis.a.vis consulting units of both the on-shore as well as off-shore majors.

Infosys Consulting SWOT Analysis

Strengths
M Unique blended model M Access to Infosys clients M Strong in operations

Weaknesses
H Low brand equity H Inexperience with

consulting relationships
M Challenge attracting

Significance of Impact

top consulting talent

H More cost/speed M Easy replicability of

H High
M Medium

conscious customers M Market growth M Open up new segment of market

model Increasing IBM/ACN M presence in India Culture clash with H Infosys Technologies

Low

Opportunities

Threats

Infosys Consulting: Cost or Profit Center?

What is ICIs place in the Infosys Technologies Portfolio?
Approaching profitability or break even Collaborating effectively with Infosys Technologies Impending replication of ICI business model by others Find firm, differentiated place in industry value chain

Key Challenges

Needed Responses

Revisiting pricing and/or cost structure Integrate client management with Infosys Technologies Use ICI to monitor client trends & the next big thing. Capitalize Infosys flat world aura to achieve positioning

Moving forward : Infosys Strategy

Infosys should leverage ICI , 1) To strengthen its position in current market, and 2) To prepare for further industry transformation ICI
More Value from Existing Customer Base Strategic Alliance with Emerging Competitors More wallet share from current customers Integration rather than expansion Antenna to sense changes in the market Influence customers strategic moves Relationship building with emerging players

Infosys Technologies
Stronger relationship through involving higherlevel decision making Provide more agile and customized solutions Acquire them as customers or partners Develop capabilities to offer right services/products in the long-term