Perspective

2025
NASSCOM Technology Strategy Summit

Shaping the
Digital Revolution
Vikash Daga & Noshir Kaka
McKinsey & Company

October 05, 2015, New Delhi

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company is strictly prohibited
Key messages (1/4)

Over the last decade,

the Indian technology Industry revenues at USD 132 billion in FY15 representing a 6x
and services Industry increase over the decade
has transformed India Over 8% share relative to GDP in 2015, contributed one-fifth of
1 and is on track to total exports
achieve its aspiration of Created over 5.5 million direct and indirect jobs in the last decade,
USD 225 billion largest employer of women in private sector
revenues by 2020

Technology spend as a percentage of total capex in the US

Massive structural shifts increases 3X to ~40% in 3 decades Return on Technology
are underway in the becomes the greatest contributor to RoIC
global customer Digital Innovators disrupt traditional business models capture
2 landscape and the upto 20-25% of incremental revenues in select industries today
technology industry is at Globally, technology is driving massive improvement in labour
the cusp of an inflection productivity, while enabling new job creation within and outside the
technology industry (e.g., ecommerce)
Key messages (2/4)

Significant headroom
for growth with global The overall enterprise spend on technology and business services
will increase from USD 2.8 trillion in 2014 to USD 4 trillion in 2025
enterprise spends at
Enterprise spending on legacy areas is likely to decline by 15-25%
3 USD 4 trillion in 2025;
over the next 5 years
However, nature of
Share of digital technologies (currently at 10%) will increase to
opportunity will be ~35% by 2020 and 60% of total spend by 2025
markedly different

Indian Technology and

Services industry has Industry is expected to grow at 11+% to USD 225+ billion in 2020
and at 10+% to USD 350+ billion by 2025
the potential to achieve
revenues of USD 350 Revenues of USD 350+ billion will likely have International
4 billion by 2025 at 10-11%
revenues of USD 280+ billion and Domestic revenues of USD 70+
billion
CAGR over the next
The next USD 100 billion of revenues will likely add 1.2-2 million
decade by capturing the people to the industry
digital opportunities
Key messages (3/4)

As Indian Enterprises and the Government embark on digital,

Domestic technology domestic technology and business services spend projected to
market will also grow reach USD 70-90 billion by 2025 from USD 34 billion in FY 15.
5 rapidly to USD 70+ Digital India initiatives will catalyze growth of the domestic market;
billion in 2025 spurred Government departments have committed more than USD 16
by Digital India billion to the program for example, special initiatives to drive
smart cities, defense, NOFN

Build a new service catalog for digital and defend existing legacy
revenue streams

Five imperatives for Invest disproportionately in building digital business e.g., higher
S&M spend (15%+) and solution investments
providers of the future
Incubate digital businesses and make design choices on
6 winning players will
structuring sales, pre-sales and delivery for digital
fundamentally transform
Pursue programmatic strategy for M&A and partnerships for scaling
their business models up digital business
Tap new sources and HR practices for recruiting digital capable
talent and re-skill ~50% of existing talent for digital
Key messages (4/4)

Structure: Foster innovation clusters around digital technologies

(e.g., cloud, IOT)

Success will require Capabilities: Design, develop and rollout a massive reskilling
program to train and reskill 3+ million people
concerted effort
Entrepreneurship: Turbo-charge the startup economy through the
7 between industry,
ongoing startup India program
academia, government
Branding: Reposition India as a global Digital and Innovation Hub
and NASSCOM
Regulation: Support the creation of a strong and vibrant domestic
economy for digital services including enabling legislation (e.g.,
strengthening laws for cyber-security)
Appendix
 International
Technology and services has driven Indias revenues
Domestic revenues
economic growth

Growth of the Indian technology and services industry3

USD billion

118
108
101
+19% 88
69 74
63 76 86
69
48 59
37 47 50
41
28 31
21 24
13 18 29 32 32 32
13 16 22 22 24
7 9

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Share of
GDP1 3 3x 8
%
Share of
exports2 15 1.5x 19
%

1 Total revenues as a percentage of nominal GDP

2 Technology and services exports as a percentage of total exports (merchandise exports and services exports)
3 Does not include e-commerce revenues

SOURCE: Department of Electronics & Information Technology, governement of India; EIU World Data
Digital innovators disrupt existing models and have captured 20-25%
incremental revenues in select sectors
CE Retail example Retail Banking example
Incremental revenues N.A. 2012-13, USD billion Incremental revenues 2012-13, USD billion

Incremental Incremental
industry 1.7 industry 29.8
revenues revenues

10 traditional 20 global
2.4 12.1
players banks

3 Digital 6 Digital
6.1 5.9
attackers attackers

All others -2.0 All others 11.8

SOURCE: Bloomberg; McKinsey Global Institute; McKinsey Panorama; Dealerscope; AR; SNL; quarterly reports; McKinsey Global banking pools
Global technology & business services enterprise spend likely to touch
USD 4 trillion by 2025; 60% driven by digital technologies
Digital tech1 Traditional tech2
Global technology and business services spend (USD billion)

3,950 4,100
3-4%

1,170-1,400 3,440-3,550

80% +30%
2,757 -15-25% -450 - -650 35% 60%
10%
100%
20%

15-25% of traditional 80% of new spend

spend saved by going around digital
digital technologies

90%
65%
40%

2014 Traditional spend New service lines 2020E 2025E

evaporates
1 Digital technologies include social media, mobile applications, big data analytics, cloud (IaaS, SaaS, BPaaS) and cybersecurity
2 Traditional technologies include custom ADM, SI, BPO, IMS, hardware, packaged software & telecom services

SOURCE: Gartner (April 2014); IDC; McKinsey analysis; team analysis 9

 Traditional Tech
80% of incremental spend to be around digital
Digital Tech
technologies, resulting in significant shift in mix
Global enterprise technology and business services spend Opportunities
USD billion
1,000- 3,440- SaaS
1,190 3,550 4x increase in
apps

+30% Mobile/Online
Big data/
2,757 -15-25% 111 90%
Digital Analytics
transactions
tech.1 190 290 66 BPaaS
Consulting 2,100
2,300 Big Data /
SI Cloud Analytics
197
(SaaS)
BPO 4x increase
driven by
ADM
Cloud micro use
Packaged 169 cases
(IaaS)
Software
Legacy-Digital
Mobile integration
203
Infra- Social $0.1-1 for every
structure media $1 Digital
59 investment
Cyber
90 security
IoT
2014 Traditional 2020E BAU Digital 2020E 20% Y-o-Y
spend growth in Service growth in
evaporates Traditional Lines software and
Service sensors
lines
1 Digital Technologies include Social Media, Mobile Applications, Big Data/Analytics, Cloud (IaaS, SaaS, BPaaS) and Cyber Security

SOURCE: Gartner (April 2014); IDC; Team analysis

Indian industry revenues could reach USD 225 billion by 2020,
USD 350 billion by 2025
India technology and services revenue pool1
USD billion Digital tech
10%
Traditional tech
350
xx% CAGR 2020-2025

Services revenues
38% on track to touch
5% share of
+11% p.a. global digital USD 225 billion
225 services
by 2020, the next
23% USD 100 billion
118 revenue will need
4% 62% 1.2-2.0 million
77%
96% people

2014 2020E 2025E

1 Includes hardware, packaged software, IT services, BPO and engineering services revenues; excludes e-commerce revenues

SOURCE: NASSCOM-McKinsey Perspective 2025 report

Decoupling of revenue and headcount likely to accelerate over next 5
years
Revenues Employees (million)
Revenues1 (USD billion) Base case Employees
USD billion High case Million
Low case
240 9
Services revenues on track to touch $225
bn by 2020, but will add 1.2-2.0 mn people 8
for the next $100 bn revenue
7

160 6
For the first $100 bn in
revenue, ~3 mn people 5
were added
4

80 3

0 0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

1 Includes revenues (domestic and export) from software products and services, BPM, ER&D and IT hardware

SOURCE: NASSCOM; ICRIER; McKinsey analysis

 IT-BPM Services1
Domestic 2025 Indian opportunity may reach $70-90 bn Packaged software2
Hardware

Break-up of India domestic

Description Factors favoring the case revenues
Outsourcing of IT Increased enterprise focus 70
services to remain at to build stronger internal
current levels of 40% IT functions with more
31
Other technology and capability building and 70 bn
1 Base case operations spend talent management
32
(hardware, software, Enterprises setting up IT
telecoms) to be 100% teams internally to mobilize 15 30
outsourced technology investments 4
13 10
Outsourcing of IT Changing role of CIO in 90
services to grow to Indian enterprises
global levels of 65% CIO to be responsible
Other technology and for creating great IT 49
operations spend ecosystems and not 90 bn
Optimistic
2 (hardware, software, only running IT systems 32
case
telecom) to be 100% efficiently 30
15
outsourced CIO to spot and source 4
the right technology 13 10
partners for enterprise
technology needs 2014 2025E
1 Includes IaaS and BPaaS 2 Includes SaaS licence revenues

SOURCE: Gartner, Nasscom, team analysis 13