How To Grow The Global Knowledge Services Outsourcing Market

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2 Note To Reader Dear Reader, Big Data and analytics are the in-demand sectors at the moment. Industry estimates suggests that in 2009 alone enough data was created to fill stack of DVDs to reach to the moon and back, and data is only expected to grow further. With the increasing volume, velocity and variety in the data, the ability of organizations to derive meaningful insights from this knowledge base is getting diminished. In a tough economic environment, the ability to make smart decisions will be the difference between being a leader versus being a laggard. This is where Data Analytics makes its mark. Harnessing Big Data in conjunction with data analytics capabilities provides an opportunity for industry leaders to consolidate positions, and for the laggards to regain lost ground. The ability to model and predict business outcomes with a certain degree of confidence is a concept that has always fascinated decision makers, but the concept is seemingly becoming more accessible and meaningful. Especially in an environment where storage costs have diminished tremendously while data generation has witnessed explosive growth and businesses are connecting with their consumers in a new and increasingly digital world. However, our interactions with industry professionals and the analysis of available secondary data seems to suggest that the offshore data analytics services sector is still in a nascent stage of development - with significant headroom for growth. The absence of clear market leaders offers in its wake tremendous growth opportunities as well as hurdles that are inherent in any industry where the concept is still seeking broad-base acceptance. Keeping the above in mind, we thought a report on this segment would be timely and topical. In this report, we have tried to capture insights and trends in the data analytics services market. We hope that you will find this report useful and look forward to your feedback and continued patronage. Warm Regards, Amit Singh Executive Director Avendus Capital 2

3 Disclaimer This note is distributed by Avendus on a strictly confidential basis. It has been prepared exclusively for benefit and internal use of recipient and does not carry any right of reproduction or disclosure. The information and projections contained herein can not be disclosed, reproduced or used in whole or in part without express prior written permission of Avendus The information contained in this note has not been independently verified by Avendus. No representation or warranty is given by Avendus as to the achievement or reasonableness or completeness of any idea and/or assumptions presented here. None of the company or its respective affiliates shall have any liability (including liability to any person by reason of negligence or negligent misstatement) for any loss arising from use of this note and its contents (express or implied) This note does not claim to contain all information that recipient may require. Recipient should not construe any information contained herein as advice relating to business, financial, legal, taxation or investment matters. Recipients are advised to consult their own business, financial, legal, taxation and other advisors regarding the industry and its constituents Where this note summarizes provisions of other documents, recipient should not rely on the summary and the relevant document must be referred for any conclusion 3

4 Executive Summary High Growth Market BFSI, Retail And Health Driving Vertical Demand Global knowledge services outsourcing market is estimated to grow at a CAGR of 24% between 2010 to 2015 to reach USD 7.9 Bn. India will remain the largest provider of these services with ~70% market share during this period Global data analytics outsourcing, a subset of the global knowledge services outsourcing market, represented a USD ~ Mn market opportunity in 2010, out of which India delivered USD 375 Mn Though the market has been around since the early 2000 s, the exponential growth in data generation, significant decrease in data storage cost and increased need for companies to make decisions based on actionable insights, has increased the demand for data analytics One of the earliest adopters of knowledge services, the financial services industry accounts for the highest share of the analytics industry BFSI, retail, health and pharma sectors are the most penetrated verticals with ~75% of the vendors catering to these segments 1 Greater availability of transactional data in financial services, retail and CPG compared to other verticals is driving the analytics demand within these segments Huge Talent Supply Gap Anticipated Estimates suggests a talent shortage of 140, ,000 professionals with analytical capabilities in the US by 2018, representing ~40% of the total demand This talent supply gap expected to boost demand for analytics outsourcing services, and represents a USD 20 Bn offshore opportunity 1 Fragmented Business No Established Leadership Attractive Investment Opportunity Highly fragmented market large number of vendors due to absence of critical mass and most vendors with revenues less than USD 10 Mn 1 Large proportion of vendors with India presence talent shortage coupled with the cost advantage has made offshoring a requirement Lack of scaled up vendors indicates few inorganic growth opportunities with significant scale in this space Fragmented internal analytics practices at end clients are being mirrored by service providers as well Lack of established industry leaders, which should lead to consolidation as players attempt to establish such a position At an early stage of its industry life cycle, analytics vendors reflect strong growth opportunities and significant upside potential Multiple adjacent supplier categories and lack of scaled players will make pure-play providers more likely to emerge as market leaders Fragmented market and lack of industry leaders provide an opportunity for analytics services vendors to adopt an acquire a core and then grow strategy IT / BPO vendors are trying to reposition themselves as transformational partners to clients using analytics as a beachhead With increased demand for assets of reasonable scale, analytics services providers can command a valuation of 2.0x 4.0x EV / Revenue multiple, with scaled up players being on the higher end of the spectrum Source: (1) Avendus Estimates 4

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7 Knowledge Services Outsourcing One Of The Fastest Growing BPO Segments Knowledge Services Outsourcing Market Global Market (USD Bn) CAGR: 22% CAGR: 10% CAGR: 41% E Indian Knowledge Services Outsourcing Market 1 (% of global market) India Others 31% 29% 69% 71% E Knowledge services refer to business services that are based on tacit as well as explicit knowledge of the provider and usually can not be quality checked at the point of delivery. Knowledge Services are typically judgment based as opposed to being rule based Global knowledge services industry grew at CAGR of over 41% between India contributed 70% of the global knowledge services outsourcing market in 2010, employing 70,000+ professionals 1 While the North America remains dominant market for service providers (~65% share), growing demand from UK and continental Europe is expected to reduce the market share of North America from 65% to 55% by Highly fragmented industry with most players being subscale Growth Drivers For Knowledge Services Outsourcing Demand Side Growth Drivers Acceptance of outsourcing of core business activities like clinical trials, market segmentation etc. - Outsourcing demand shifting from the mature segments (IT, contact centers) to complex judgment based knowledge services Increased and changing requirements for regulatory compliance - Evolving buyer needs are driving innovation and leading to a higher degree of alignment with vendors thus also fuelling competition Inability of even large end-user companies to attract and retain highly skilled talent especially in non core areas Supply Side Growth Drivers Proliferation of vendors due to absence of critical mass and specialized nature of services Increased availability of low cost employees with specialized skills in developing countries like India and China Availability of diverse talent pool including statisticians, lawyers etc. enables knowledge services outsourcing vendors to offer high quality services - Complex nature of work and judgment based nature of services provides strong career path for employees. This attracts talent towards the pure-play service providers Source: (1) Nasscom, Indian Knowledge Services Outsourcing Industry Creating Global Business Impact,

8 Knowledge Services Outsourcing Data Analytics To Lead The Market With 2x Average IT / Knowledge Services Outsourcing BPO Industry Growth Rate Data Analytics To Lead The Market With 2x Average IT / BPO Industry Growth Rate Data Analytics And LPO Services Are Expected To Drive Growth In Knowledge Services Market 18% 21% 2010 = USD 2.0 Bn 19% Indian Offshore Knowledge Services Market 1 44% 23% 17% 2015(E) = USD 5.6 Bn 21% 39% LPO Data Analytics Business Research CAGR % ( ) 29% 25% 20% Business research accounts for the largest share of the knowledge services outsourcing market in India Despite its strong growth, business research is expected to lose market share due to growth in other segments Data analytics and legal process outsourcing services expected to emerge as the fastest growing segments primarily driven by organisations seeking data driven decision making Business Research Data Analytics Legal Process Outsourcing Others Note: Others include data management services and market research Knowledge Services Outsourcing Market Components Services 1 Market Research Business Research Data Management And Reporting Data Modeling And Analytics Legal Process Outsourcing Others Research design and project planning Data collection and survey programming Data validation and processing Data analysis and report writing Market assessment Competitive intelligence Business partner identification Financial research Newsletter and updating databases Best practices identification Data entry Data processing Data conversion Data warehousing Data cleansing Data reporting CRM analytics Sales & marketing analytics Risk analytics Equity research and financial analytics HR analytics Supply chain analytics Contract management Litigation support Compliance management Document management E-discovery Segments Expected To Lead Growth Social media research Marketing and sales support Procurement services Mature Segment High Growth Segment Nascent Segment Source: (1) Nasscom,

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10 Overview Of Data Analytics Outsourcing Services (1/2) Strong 25% CAGR Till 2015 Led By Increased Analytics Adoption India Data Analytics Services 1 (USD Mn) 375 1, E Data Analytics as % of Total Indian Knowledge Services Outsourcing Market (2015) 21% 79% Data Analytics Others Data analytics is the science of examining raw data for the purpose of drawing business related conclusions about the information and for modeling and predicting business outcomes Data analytics services market share of the total knowledge services outsourcing market is expected to increase from 18.5% in 2010 to 20.6% in 2015 Lack of inhouse talent, increased acceptance of outsourcing of core business activities, high margin pressures and explosion in data generation are primary drivers for increased demand Research and analytics as a segment has significant headroom for growth with current penetration at less than 10% of the total addressable market 2 North America is likely to remain the largest market for analytics offshoring - contributing 65% of demand 3, Demand from other nations in APAC is expected to increase with financial services leading the demand Analytics Services - High Billing Rate And Higher Margin Business Requirement For Specialized Skills Revenue Per FTE Per Annum (USD 000) EBITDA Margins (%) BPO % Knowledge Services % LPO % Average revenue per FTE for analytics outsourcing services is amongst the highest within the BPO and KPO services at USD 50,000-70,000 per employee per annum EBITDA margins for reasonable sized assets in the analytics business are comparable to that of large established KPOs. As the vendors move higher up in the value chain, margins from analytics services is expected to increase further Data Analytics % Source: (1) Nasscom, Indian Knowledge Services Outsourcing Industry Creating Global Business Impact, 2011 (2) Everest Research (3) HfS, 2011 (4) Avendus Estimates, Industry Research High Medium Low 10

11 Overview Of Data Analytics Outsourcing Services (2/2) India To Continue As Major Analytics Services Supplier India dominates the supplier landscape, catering to a large part of the total demand Given its headstart, mature delivery models and domain expertise, India would maintain its dominance in the near to medium term Poland Buyers of services are expected to mitigate concentration risk and leverage local expertise of other emerging centers like China, Philippines, Eastern Europe, Latin America Costa Rica Chile Argentina Romania China India Philippines Sri Lanka South Africa Mature Competitors Emerging As the industry matures, Indian analytics service providers will move towards providing more complex services like model development, services based on proprietary IP, consultative offerings and expand offerings beyond traditional verticals India was ranked 2 nd (3.9 Mn graduates in 2010) after China (6.3 Mn graduates in 2010)1 in terms total annual graduates. However, India will retain its attractiveness as the outsourcing destination due to its large talent pool with process expertise and knowledge of English language India was ranked ahead of other offshoring destinations like China, Philippines, Sri Lanka on the security of intellectual property index by AT Kearney in its Global Services Location Index, Security is a key determinant for growth in such businesses Clients concerns regarding data security could lead to setting up of onshore delivery teams along with offshore delivery India Scores Above Competing Nations On Critical Parameters Industry Maturity Spectrum Of Services Talent Availability India China Philippines Eastern Europe Latin America Source: (1) Nasscom Strategic Review 2011 High Medium Low 11

12 Why Now? Increased Relevance Of Data Analytics Exponential Increase In Data Generation Amount of data generated has increased exponentially over the past few years and is expected to maintain strong growth momentum Adoption of ERP, CRM, SCM is allowing companies to capture trillions of bytes of information about customers, suppliers and operations Integration and analysis of this vast amount of data is boosting demand for analytics Exponential Increase In Digital Data Generated (Zettabytes) Increased Affordability Of Data Storage In The Last Decade Decrease in data storage cost encourages companies to store more data, which in turn increases the desire to unlock the value of the data through technology platforms and usage of manpower With cloud computing s demonstrated track record of cost savings and efficiencies, the cost of data storage is expected to further decrease Proliferation Of Smart Phones Coupled With Increase In Unstructured Data IBM estimates that by 2015 there will be 20x more mobile data and content and 40x more mobile transaction spending as compared to year 2010 levels Increased data generation due to expansion in social media, smartphones adoption and increased multimedia content provides strong growth opportunity in the analytics market Significant Reduction In Data Storage Hardware Cost (USD / Gigabytes) Worldwide Mobile Subscriber Base 5 (Bn) Basis Of Competition And Growth For Individual Firms Demonstrated benefits of predictive analytics has lead to wider adoption of analytics across organizational functions Increased competition for same customer spend has led to greater need for companies to create differentiation by leveraging analytics and to make decisions based on customer insights 11.5% 64.0% % 7.50 According to IBM s survey, organizations agreed that the use of business information and analytics differentiates them within their industry making them twice as likely to outperforms peers Shortage Of Skilled Analytics Professionals By 2018, US is expected to face a shortage of K analytics professionals, representing ~40% of the total talent demand 3 this shortage represents a USD 20 Bn offshore opportunity (5) Source: Marketresearch.com; percentage indicates worldwide mobile penetration Source: (1) IDC, McKinsey Global Institute. 1 Zettabyte = 1012 Gigabytes (2) Estimate based on cost s of 30.0 Gigabytes Maxtor Hard Drive in August 2000 and 1.0 Terabyte Seagate Pipeline Hard Drive in August 2010 (3) McKinsey Global Institute May 2011 (4) Assuming a billing rate of USD 60 / hour 12

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14 Data Analytics Value Chain Phase 1 Phase 2 Phase 3 Phase 4 Phase 5 Data Collection Data collection from primary source CRM, customer feedback etc. Data collection from secondary sources through following steps: - Problem Definition - Research Design Formulation - Data collection from primary and secondary sources - Data verification Data Integration, Validation And Storage Integrating data from multiple sources Extraction, transformation and loading Data warehousing Data de-duplexing Data validation and cleansing Data Analysis and Reporting Advanced Analytics Presentation and Action OLAP Ad-hoc query Statistical modeling MIS reporting Structured reports Customized dashboards Developing scorecards Predictive analytics Behavioural analytics Risk analytics Sales & marketing analytics Social media analytics Web analytics Analyzing and interpreting results Consulting services to clients Policy making based on insight Operational or tactical decision making Complexity Level Of Analytics Services Mix Research And Data Collection Includes research services and collection of data from primary, internal and external sources Data Storage And Filtering Includes data cleaning, maintenance and actual entry Low-end service with limited revenues potential Constitutes a major proportion of KPO-centric analytics work Simple Analytics Includes running models generating insight based on simple statistical analysis, dashboards, alerts and ad-hoc reports Communication Skills Database Handling Statistical Analysis Advanced Predictive Analytics Advanced level of analytics Create predictive model to build advanced models to create actionable insights Requires application of highly specialized skills Advanced Mathematical Skills And Modeling Consultative Solutions Deliver value to clients through building partnership and providing consultative offerings High-end offerings to create client stickiness Typically involves decisions that might require long term commitment from the client Deep Domain Knowledge And Business Understanding Source: (1) HfS 14

15 Data Analytics Value Chain Services Providers As Integral Part Of Value Chain Big Data Generation Big Data Management Big Data Analytics Internal Data Sources External Data Sources Processing Storage Mining Analytics Market Research Data Market Research Data Filtering Reporting Big Data generation through internal and external data sources Enterprise Data Sources Big Data management through storage, processing and filtering of data to turn data into actionable information Data Warehouse Providers / Data Aggregators Big data consumers including data scientists who creates predictive / statistical models by leveraging data analytics software and solutions Data Analytics Services Providers (Onsite And Offshore) Social / Unstructured Data Sources Data Integration, Data Discovery And Data Visualization Software Vendors Data Analytics Software Solution Providers Secondary / Market Research Data Sources Note: Trademarks and logos are proprietary of the respective companies Representative list of vendors 15

16 Data Analytics Value Chain Key Industry Verticals Deep Domain Nature Of Services Require A Vertical Centric Approach To Analytics Services Major Verticals Financial Services Retail, CPG Healthcare, Pharma Telecom Manufacturing Claims And Renewal Analytics Demand Forecasting Evidence Based Medicine Collection Management Demand Forecasting And SKU Rationalization Sales Force Analytics Marketing Mix Analytics Drug Treatment Effectiveness Subscriber Profiling Media ROI Optimizations Collection And Recovery Scorecards Performance Analysis Clinical Analytics Churn Management Assortment Planning Portfolio Analytics Category Management Average Length of Stay Revenue Assurance Route And Distribution Optimization Portfolio Management Trade Promotion Optimization Key Opinion Leader Analysis Customized Offerings And Up-Selling Vendor Performance Management Pricing And Risk Analytics Customer Loyalty Analytics Initial analytics demand was primarily driven by large financial services companies, which was catered to by in-house and offshore captives centers Greater availability of transactional data in financial services, health, retail and CPG compared to other verticals have played a critical part in driving analytics demand in these segments BFSI, retail, health and pharma estimated to be the most penetrated verticals with ~75% of the vendors catering to these segments 1 As the industry matures telecom, media and entertainment and travel will emerge as strong long term growth opportunities with large volume of data generation Emergence of Big Data and new channels of client connection like social media would further fuel growth in mature as well as emerging verticals Source: (1) Avendus estimates HfS, 2011 Mature Verticals Emerging Verticals 16

17 Horizontal Functions Data Analytics Value Chain Key Horizontals In A Largely Vertical Centric Industry Major Analytics Domains Risk Risk based pricing, fraud detection and prediction, recovery management, loss forecasting, risk profiling, portfolio stress testing Sales & Marketing Supply Chain Segmentation, marketing mix optimization, competitor analysis, channel analysis, sales performance analysis, campaign analysis, sales pipeline reporting and, channel analysis Supply and demand analysis, strategic sourcing, quality control, inventory analysis, order fulfilment analysis Customer Analytics Loyalty analytics, customer life time value, propensity analytics, churn analytics, customer segmentation, up-sell / cross sell Web Analytics Click analytics, customer lifecycle analytics, social media analytics, sentiment analysis, online traffic analysis, conversion analysis Human Resource Recruitment analytics, compensation analytics, talent analytics, training analytics, retention analytics, workforce analytics Risk And Sales & Marketing Are The Two Biggest Domains Driving Demand For Analytics Analytics Domain Demand 1 (%) Others 10% Risk and sales & marketing dominate the demand with ~90% of the total analytics application and are expected to drive the analytics demand going forward as well Risk And Sales & Marketing 90% From traditional domains like risk and sales & marketing, scope of data analytics application has spread to other domains like supply chain management, logistics, operations, HR analytics and web analytics Overlap of talent requirement, sharing of best practices and certain intrinsically similar business needs would lead to the emergence of a few horizontal specific players Source: (1) Primary Research HfS, 2011 Mature Domains Emerging Domains 17

18 Key Trends In Analytics Services Adoption (1/2) Increased Adoption Of Analytics Due To Benefits Offered By Software-as-a-Service (SaaS) Models Business Analytics SaaS Market (USD Mn) 1 1,692 A Analytics Challenges B SaaS Benefits 1,344 1, E 2011E 2012E 2013E High upfront capital requirements Installation is complex and time consuming Onsite installations with infrequent updates of the software and processes Requires large commitment to IT budgets and dedicated analytics manpower Requirement to update software systems according to organizational change and changes in data sources + Reduces large initial CAPEX, shifting the lowered costs to OPEX No requirement to install applications due to SaaS delivery model Hosted model allows for greater uptime and frequent updates Reduces dedicated IT and analytics manpower SaaS business analytics market is expected to grow at CAGR of 24% between Post deployment customization and concerns regarding data security and privacy have been major hurdles for SaaS adoption. Such concerns are progressively diminishing Leveraging Unstructured Data Through Text Analytics Shift Towards Text Analytics Due To Large Volumes Of Unstructured 2 And Real Data Structured Data 25% Unstructured Data 75% Unstructured data i.e. typically text heavy data which is not part of predefined data models or tables constitutes ~75-80% of the total data generated Text analytics uses analytical tools to annotate and extract information from unstructured data sources to identify and predict trends Deriving insights from unstructured data, generated through multiple sources like websites, customer contact, social media, blogs, claims etc. and which represent real time data. Going forward, data is expected to play a critical role in organizational decision making Gartner estimated text analytics software market at USD 835 Mn in 2010, representing only 8% of the USD 10.5 Bn BI, analytics and performance management software market. This presents a significant headroom for the future growth of the text analytics business Source: (1) Source: Accenture (2) SAS Whitepaper

19 Key Trends In Analytics Services Adoption (2/2) Mobile Analytics Expected To Unlock Significant Value For Organizations Mobile / Personal Data Could Provide USD 100 Bn Potential Revenue Opportunity Over The Next Decade Proliferation of mobile and smart phones provides significant business opportunity from mobile analytics and revenue generation based on mobile, personal and location based data According to IBM estimates, by 2015, there will be 20x more mobile data and content and 40x more mobile transaction spending as compared to 2010 levels GPS Navigation People Tracking, LBS, entertainment etc Remote Personal Car Safety Geo-targeted Mobile Advertising Toll Collection Total (USD Bn) Not restricted to a single vertical, mobile analytics is expected to create business value across industries leveraging mobile generated data to provide new, better and targeted offerings Other Key Trends Increased Focus On Predictive Analytics Shift from simple reporting and statistical analysis to advanced analytics which predict future events, behaviors or outcomes Historical events are of less interest as companies focus on forecasting future trends Predictive analytics and data mining software market to reach USD 1.8 Bn size by Social Analytics - Utilizing Social Network Data For Decision Making With Analytics Social analytics refer to analyzing insights trapped inside social networks data such as emoticons, tweets, text messages, call center notes, blogs, online posts etc. With increasing popularity of social networks, focus on deriving customer insights based on online behaviour is receiving significant attention from CXOs Real Time Analytics Real time analytics refer to dynamic analysis and reporting, based on real time data Real time analytics could facilitate better and quicker decision making by providing up-todate information in areas like CRM, pricing, risk etc. Integration Of ERP And Analytics Software Most G2000 organizations have some form of transactional system (ERP) and CRM systems in place The next growth of enterprise application expected from BI solution implementation Large amount of data generation necessitates integration of the two key sides of the business decision making data generation and data analysis Estimates suggests that 60% BI implementations fails to realize the envisaged value due to inadequate integration with the business requirements Source: (1) McKinsey Global Institute, Big Data 2011 (2) Forrester Research 19

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21 Demand Drivers For Analytics (1/2) Demand Side Analytics Drivers Exponential Increase In Data Generation Exponential Increase In Digital Data Generated (Zettabytes) Explosion in data generation has highlighted the need for advanced analytics capabilities to leverage the same for business benefits Enterprise wide adoption of ERP, CRM, SCM tools leading to high data generation has laid the foundation for use of BI solutions Amount of digital data generated is expected to increase by more than 44 times in the next 10 years Integration and analysis of this vast quantum of data has been the key demand driver for analytics services including outsourced services Insights To Drive Business Decsions 2 Demonstrated Advantage Of Analytics 45% Top Performers 20% Use insights to guide future strategies Lower Performers 53% 27% Use insights to guide day-to-day operations CXOs are keen to shift from intuition based decision making to datadriven actions Profitable leveraging of data analytics by industry leaders such as Amazon and Google is a testimony to the power of analytics A survey by IBM indicates that organizations that use analytics are twice as likely to outperform peers Survey Suggests Only 1/3 rd Of Respondent Companies Are Prepared To Compete Based On Analytics 3 Increased C-Suite Attention Company Not Prepared 13% Company Prepared 36% Company Neither Prepared Nor Unprepared 51% 50% of respondents in an IBM survey accorded top priority to improvement of information and analysis Top-performing organizations show a 5x higher usage of analytics as opposed to low performers 2 Despite C-Suite acknowledgement of importance of analytics, most of the organizations are still not equipped to completely realize benefits from data analytics Source: (1) IDC (2) IBM (3) July 2010 Information Week Financial Services Analytics Survey of 220 financial industry professionals 21

22 Demand Drivers For Analytics (2/2) Demand Side Analytics Drivers Competitive And Margin Pressures Top 3 Organisational Challenges (% Of Respondents) 1 61% Innovating To Achieve Competitive Differentiation 50% 46% Growth Reducing Costs And Increasing Efficiencies Analytics is fast moving from a discretionary spend category to an integral tool for competitive differentiation Achieving competitive differentiation, growing revenue and cost reduction emerged as the top 3 challenges faced by organization in a recent IBM survey Organizations that proactively use data generated insight appear to identify and predict trends better and are quick to adopt industry practices thus giving them a competitive edge Increased Regulatory Compliance Requirements Top 5 Drivers For BI And Analytics Implementation For Banks 2 35% Reporting 32% Cost Reduction 29% 28% 26% Risk Management Better View Into Financial Data Regulation Compliace Increased pressure for regulatory compliance and greater transparency in sectors like banking, insurance and healthcare is expected to increase the demand for analytics Inadequacy of in-house and centers to adapt to complex risk compliance norms like Basel III and Solvency II, could led to greater demand for third party services An IDC survey suggests that reporting and regulatory compliance requirements is amongst the top drivers for BI and analytics Source: (1) IBM (2) IDC Financial Insights Based on survey of 6,000 IT and budget decision makers from 280 banking firms 22

23 Acute Talent Shortage Coupled With Cost Savings Driving Demand Offshore Capabilities Are Becoming A Necessity Supply Gap For Talent With Deep Analytical Skills Expected In US 1 (000 s) Knowledge Intensive Employment Additional Supply 2018 Supply Talent Gap 2018 Projected Demand Significant Cost Advantage Through Offshoring Analytics Services 2 100% 30% 70% Analytics services require employees with advanced educational qualifications along with relevant domain knowledge Talent Shortage According to Mckinsey report, by 2018 US will face a shortage of 140, ,000 people with deep analytical skills representing ~40% of the total talent demand Offshore analytics service providers can bridge this talent gap to provide skilled employees across geographies. - Employee costs account for 60%-70% of the total cost for analytics projects 2 - Off-shoring provides a significant cost arbitrage with respect to salary costs Typical Analytics Project Cost Cost Savings 45% Actual Cost 55% Globalization Required In order to bridge the talent gap providers will need to set up offshore centers where additional talent exists Total Cost Other Costs Labor Cost Shortage Of Analytics Professionals Represents A USD 20 Bn Offshore Opportunity 3 Source: (1) McKinsey (2) HfS (3) Assuming a billing rate of USD 60 / hour 23

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25 Service Provider Landscape Mix Of Services Providers Pure Play 1 Salient Features Challenges 2 Pure Play Analytics Vendors Domain and/or vertical expertise as go to market strategy Leverage expertise and technological platforms to provide specialized services and establish leadership position in niche Provide greater level of service, competitive pricing and service depth Fragmented segment with majority of players lacking scale Lack of funds hinders technological innovation KPOs Salient Integrated provider of a wide range of services Captives Analytics Service Providers KPOs Features Forward integration generate new business through selling services to new and existing clients Use analytics to improve margins Challenges Build capabilities and acquire scale to win new clients 3 IT / BPO Vendors IT / BPO Vendors Salient Features Attempt to leverage client base to cross sell analytics services Reinforce positioning as end-to-end solution provider Create value-added differentiator through providing capabilities in high-value analytics services Enhance analytics capabilities to better serve clients and move up the value chain Challenges Ability to acquire and retain requisite expertise and build an internal culture of innovation needed in analytics 4 Captives * Representative Vendor List Shift from captives dominated market to proliferation of third party vendors The market structure is a mix of service providers like captives, IT / BPO players and pure play analytics providers Salient Features Emerged as early providers of knowledge services Matured captive centers now operate as strategic partner providing higher value propositions to parent through services expansion Challenges Remain competitive with evolving technology and cost pressures Providing attractive career path to employees Source: (1) Tholons, Market Research And Analytics, 2008 (2) HfS Trademarks and logos are proprietary of the respective companies 25

26 SECONDARY FACTORS PRIMARY FACTORS Critical Success Factors For Analytics Services Providers Vertical And Domain Expertise Deep industry vertical expertise and client relationships at CXO levels are critical for market penetration Strong focus on visualization techniques to make the presentation of analytics findings more intuitive Strong Talent Pool Analytics services require high degree of domain knowledge along with reasoning, interpretation and judgmental capabilities unlike the primarily rule driven and repetitive work of BPO services Attracting strong talent pool with specialized skills remains the critical success factor to meet client demand for analytics services Technology Know-how Non linearity of revenue by leveraging domain understanding and technology platforms also create entry barriers for new entrants Increasing trend towards automation of services for more routine type analysis Infrastructure And Data Security Concerns around data security is one of the biggest hurdles in adoption of offshore analytics services. The data being seen as a source of competitive differentiation by most clients Service providers are implementing strict data security standards and employee training programs and policies are geared to address these concerns Client Partnership Model Shift from project based engagements to outcome based delivery models ensures recurring stream of revenues and long term client relationships Focus on higher value add services, consultative approach and embedding of proprietary IP to deliver services lead to higher client stickiness Process Maturity Ability to maintain consistent service quality and high levels of client satisfaction are essential for success as the services are high impact in nature unlike normal back office operations Scalability Given its specialized nature of its service and talent requirement, scalability is a big hurdle and vendors are addressing it through a combination of long term engagement with premier educational institutes, automation and technological interventions and advanced inhouse training programs Unlike typical services companies, this segment has greater capital requirements and hence access to capital is critical to scale as well 26

27 Time Future Trends Long Term Horizon Short Term Horizon Increased demand for analytics services from Asian countries Emergence of 4-5 large pure play analytics vendors (>USD 500Mn) Critical Success Factors Off-shore delivery base with 1,000+ employee strength, along with onshore and nearshore presence Evolved large scale project management capabilities Significant management expertise and relationships within the market Market expansion and penetration into new domains and verticals Potential listing by few large analytics vendors Critical Success Factors Current Focus/Priority Sizeable employee base (>500+) along with off-shore delivery base Scalability to execute large projects Increased focus on building onshore and near shore capabilities Consolidation in the fragmented industry Management bandwidth to drive sales & marketing efforts Build proprietary IP to gain sub segment leadership Existing suppliers to scale up the business Critical Success Factors Build capabilities through hiring and training talented workforce Sales & marketing focus to acquire clients Strengthen data security and privacy policy to build client confidence Entry of new players via Organic and inorganic route Industry Maturity 27

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29 Market Maturity And Growth Evolution Of Indian Offshore Analytics Industry Shift From Captive Domination To Third Party Providers Captives Were Early Movers Growth Of Third Party Vendors Strife For Market Leadership Growth in Indian analytics market triggered by setting up of captive centers Early movers included GE, Citibank, JP Morgan, UBS, American Express etc. Initial focus on verticals with large data generation and high growth like financial services, retail etc. Vendors were vertically aligned Smaller size of market and hence fell below the radar of established IT / BPO players Strong demand growth for financial analytics services Emergence of specialized service providers Proliferation of third party vendors, mostly with small business size but strong growth trajectory like MarketRx, SMS, Marketics, PharmArc Entry of large IT / BPO company into analytics space through organic and inorganic growth route (Cognizant acquired MarketRx, WNS acquired Marketics etc.) Expected growth of data analytics (25% CAGR ) to outpace Indian knowledge service outsourcing demand (23% CAGR ) Few scaled suppliers like MuSigma and Fractal Analytics are expected to emerge as market leaders with strong base and services offerings Emergence of new areas like HR analytics, supply chain analytics etc. Service providers increasingly moving towards platform / SaaS based delivery models Wipro s acquisition of Promax, IBM s acquisition of RedPill Focus on global delivery capabilities India is expected to remain preferred destination despite strong competition from Philippines, China etc Year Source: (1) Nasscom, Indian Knowledge Services Outsourcing Industry Creating Global Business Impact, 2011 HfS,

30 Indian Offshore Analytics Industry Following The Path Of Prior Outsourcing Segments Mature Phase Start-up Phase Patni, TCS, HCL and Satyam, Infosys founded Driven by short-term revenues mainly on-site 1989: GE Medical Systems pilots a software development project located out of Bangalore OFFSHORE IT SERVICES Inflection Point: Y2K resulting in the need for a large and skilled workforce coupled with lowered cost of connectivity Early adopters begin outsourcing a large portion of their IT spend Post 2000 Evolution of a more holistic view on global sourcing Market consolidation, importance of scale Multiple players over USD 1Bn in revenue Captives set up by British Airways (BA), American Express (Amex), GE Performed non-core / call center activities OFFSHORE ANALYTICS Growth in Indian analytics market through setting up of captive centers Proliferation of third party vendors, predominately small and limited scale OFFSHORE BPO SERVICES Inflection Point: Liberalization of the telecom sector resulting in affordable bandwidth 3rd party BPOs emerge and captives are spun off Enhanced focus of corporations on efficiency/cost Emergence of technology capabilities and frameworks that enable the processing of Big Data on low cost platforms Benefits realized by early adopters resulting in wider adoption and exponential growth Post 2008 Emergence of leaders in the space Genpact, EXL WNS, Firstsource, Sutherland, Intelenet Offer end-to-end services and become strategic partners with clients Multiple players with USD 500 Mn in revenue Potential for 5-7 large pure play vendors with over 250 Mn in revenue to emerge as leaders in the analytics space Public market listings or strategic acquisitions by leading ITO/BPO companies 30

31 Benefits To Vendors Evolving Delivery Model Shift From Ad-hoc Projects To Partnership Based Models Delivery models are still evolving in the rapidly expanding analytics market Increased preference towards long-term / retained capacity (FTE) based models ensure recurring revenue streams Consultative approach, end-to-end service execution (analysis to execution), automation and gaining shares are increasingly becoming key differentiators for services vendors Highly specialized nature of services and requirement for close collaboration with the clients will lead to increase in the onsite presence of the service providers - Onsite requirement for analytics services providers expected to be at 20-25%, which is in line with onsite effort mix for leading outsourced IT services providers Project Based Engagement Ad-hoc project engagements without any ongoing commitment Initial capability assessment to evaluate fit for a deeper relationship Least attractive to vendors due to uncertain revenues and low returns FTE Based/Flexible Services Model FTE based delivery constitutes the largest share of the total delivery contracts Cost-effective alternative to expanding internal team Allows effective employee career path due to larger size of vendor teams as opposed internal captives Vendors brings domain and vertical expertise Client Involvement Outcome Based Model Compensation linked to achievement of specific objectives Partnership approach towards client engagement Gain-sharing increases vendor s accountability and also encourages innovation Risk loaded against vendor $ Analytics Center Of Excellence (ACE) Create analytics centers for clients, staffed with consultants that work with clients on a dedicated basis Leverage vendors expertise, technology and platforms to benefit from industry best practices High client involvement and value addition through consultative approach Vendor as strategic partner instead of a pure low cost provider 31

32 Growth Capital Needs Of The Fragmented Analytics Industry Presents An Attractive Investment Opportunity CURRENT MARKET SITUATION Highly Fragmented Market, High Capital Requirement, Need For Increased Funding EXPECTED FUTURE TRENDS Emergence Of Market Leaders With Scale, Range Of Service Offerings And Technology And Platforms High growth nature of the business has resulted in the emergence of many players in this space The offshore analytics industry is currently highly fragmented with most vendors with revenues lesser than USD 10Mn 2 Realization among vendors for the need to expand portfolio of offerings through addition of new verticals and domains and to achieve scale to win and execute client projects and build technology and platforms need for additional funding Few large vendors are expected to emerge as market leaders with a strong employee base, global delivery capabilities, a multitude of services offerings and technology and platforms Demand from newer market segments due to greater competition and lowered cost of storing information for end clients Large players would acquire smaller companies as the Indian analytics vendors scale up and mature Potential listing by top 2-3 vendors Translating Into An Attractive Investment Opportunity For PE Funds ATTRACTIVENESS OF ANALYTICS TO PE INVESTORS Opportunity to invest in an established but high growth sector with sub-scale vendors and no clear market leaders Ability to scale operations through productization of offering and expansion of global delivery capabilities Diversify operations to emerge as an end-to-end solutions provider for clients service portfolio expansion and adding new domains and / or verticals to the offerings portfolio Leverage fragmented market for inorganic growth Sale to a strategic or IPO provides typical exit routes RECENT PE INVESTMENTS IN THE ANALYTICS SPACE 1 Target Investor Capital Invested USD 108Mn December, 2011 USD 25Mn April, 2011 USD 84Mn September, 2011 Source: (1) Mergermarket (2) Avendus Estimates Trademarks and logos are proprietary of the respective companies 32

33 Vertical Focus Value Chain Analytics Offerings Focus On Inorganic Growth Pure Play Vendors KPO Vendors IT / BPO Players Multi Vertical High value Analytics High Acquisition Focus Niche Niche Multi Domain Domain Focus BPO / KPO Low Operations Scale High Low Low Geographic Diversification High Inorganic Growth Drivers Inorganic Growth Drivers Inorganic Growth Drivers Inorganic Growth Drivers Service portfolio expansion and adding new domains and / or verticals to the offerings portfolio Emerge as a niche leader through deeper domain expertise Scale-up through client addition and new delivery capabilities Expand into analytics delivery services Build scale and compete with niche players Expand volume in the existing space (more coverage, newer markets), add more and complex processes Acquire technology and platforms Offer high end services and move up the value chain to a fast growth and profitable market segment Diversify operations to emerge as endto-end solutions provider for the clients Acquire new clients Strengthen nearshore capabilities Acquire technology and platforms Analytics services is an area of need for most large IT/BPO firms IT / BPO Firms Facing Challenges In Analytics Market Falling margins due to increasingly commoditized nature of core business is resulting in firms trying to build high margin analytics capabilities Firms are trying to reposition themselves as transformational partners to clients using analytics as a beachhead In-house attempts have been largely unsuccessful in developing requisite capabilities with firms restricted to providing lower end services High end analytics services (predictive/behavioural analytics) are hard to replicate because of the specialized domain expertise required Pure play analytics vendors have an inherent advantage while recruiting talent due to targeted market positioning Lack of scaled up vendors has resulted in an acquire a core and then grow strategy Current Positioning Expected Positioning 33

34 Transactions In Data Analytics Outsourcing Services Segment Date Target Description Country Deal Type Acquirer / Investor Deal Value (USD Mn) Jun-12 Coalition Development UK based company that provides research analytics and business intelligence solutions for the financial services sector UK M&A CRISIL 45 Jan-12 PharmARC Life sciences focused company providing sales & marketing analytics solutions to global pharma and healthcare companies India M&A US NA Dec-11 Mu Sigma Analytics outsourcing company that provides decision science and analytics services US Funding General Atlantic NA Nov-11 Copal Partners Provider of consultative research and analytical service UK M&A Moody's Corporation NA Sep-11 Opera Solutions Provider of BI and predictive analytics services within BFSI, healthcare and government services US Funding SilverLake Sumeru, Accel-KKR NA Sep-11 EmPower Research US based integrated media and business research company with strong capabilities in social media research, media monitoring and measurement US M&A Genpact NA Feb-10 SMS Provider of technology-enabled marketing services and solutions US M&A Genpact 43 Sep-09 Redpill Solutions Provider of advanced customer analytics services to businesses in diverse industries Singapore M&A IBM 12 Oct-07 MarketRx Provider of analytics, web based solutions, market research and software services for pharma and biotechnology companies US M&A Cognizant 135 Mar-07 Marketics Technologies Provider of offshore analytics service to enhance marketing effectiveness India M&A WNS 65 Industry trends suggests that EV / Revenue multiples for analytics services providers have ranged between 2.0x 4.0x, with scaled-up players at the higher end of the spectrum PE funds have paid higher multiples for analytics services providers, demonstrating the confidence in the ability of scaled up asset to provide strong growth and higher returns Source: Mergermarket Representative list 34