International Trade Competition in HighTech Heaven Kim Shruti

International Trade & Competition in High-Tech Heaven Kim Shruti Yadav Eric Chin Adam Schindla Florent Heidet October 31 st, ‘ 07

IT Service Industry : Overview CAGR 7% Source: IDC • 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 Fragmented market

IT Service Industry : Value Chain – Current Supplier Software Service/Product Vendor Pure Play • SAP • Oracle • Infosys Enterprise Customer IT Consulting Pure Play • Accenture End-to-end Service Provider • IBM • EDS • CSC • Cap Gemini IT Department (CIO, CTO, COO) Business Users Large Enterprises • Insurance, banking, & financial , 30% • Telecom, 20% • Manufacturing, 13% • Retail, 8%

IT Service Industry : Value Chain – Emerging Supplier Saa. S Software Service/Product Vendor • Salesforce. com • Sugar. CRM Web 2. 0 Internet Service Provider • Google • Microsoft Customer IT Department (CIO, CTO, COO) Business Users Small/Medium Businesses IT Department (CIO, CTO, COO) Business Users Individual Users

IT Service Industry : Transformation Experimen -tation Convergence Trigger Disruptive After the Dot. Com Crash Business Models 1 Change in Technology 2 Change in Customer Needs 1 Off-shore Biz Model (incl. GDM) 2 Saa. S (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!) • Traditional enterprise application packages • Homogeneous infrastructure • More demanding in ROI • Get more out of tech investment • Rapid adaption /modification • Specific point solutions • 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 1980 s and 90 s 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 Lower Risk 4 Measurable Innovation to Meet New Customer Needs

Infosys Technologies – Business Performance CAGR 45%/30% CAGR 43% EBITDA Margin % 33% 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 Flat organizational Domain structure knowledge Right reward system (stocks, career visions) Cost & quality advantage coming from GDM and low-cost labor

Infosys Technologies – Sustainable? : vs. Current Competitors On-shore Incumbents • Trying to adapt GDM while maintaining their existing business model & organizational structure • Adding more off-shore 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… • Infosys’s 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 Infosys 42% 26% Wipro 33% 19% TCS 46% 22% USD (Mil)

Infosys Technologies – Sustainable? : vs. Potential Competitors They are disruptive not only to incumbents but to off-shore players Saa. S • Significantly easier & faster implementation • Very low up-front capital investment • User-focused, not buyer-focused : self. Web 2. 0 service IT • Very cheap or free funded by Ad model Infosys’s competitive advantages no longer sustainable • No need to have expensive IT service providers • Very low entry barrier • Force incumbents to change product & pricing

Infosys Technologies – SWOT Analysis Strengths M • Operational excellence to deliver GDM H • Capability to attract & keep talents L • Strong financial M • Strong relationship with Large Corporations H • More cost/speed conscious customers M • Market growth M • Higher awareness on off-shore model Opportunities Weaknesses • Over-reliance on US economy M • Limited position in value chain (i. e. No presence or relationship with consulting business) L H • Wage inflation due to competition on talents (15+% / year) H • Newer disruptive business models (i. e. web services, web 2. 0) Threats Significance of Impact H High M Medium L Low

Infosys Consulting – Company Background Started in April 2004 with initial investment of $20 M 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 “ 1 -1 -3”combined with GDM Customer Value Lower blended 1 rates 2 3 Faster Implementation Integration

Infosys Consulting – What are the Competitive Advantages? Large supply of low -cost IT/process resources Unique, blended model Access to Infosys Technologies clients Strong operational skills “ 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 off-shore 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 • High double-digit year on year revenue growth • Approximately 2/3 rds of revenue from the United States • Key industries: Retail, Transportation, High Tech, Banking, Energy/Utilities • Reflects steady growth in number of clients: • 25 clients in FY 05 • 54 clients in FY 06 • 89 clients in FY 07

But Increasingly Dim Profitability Results • 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

Infosys Consulting vs. Current Competitors Operational Scale & Performance On-shore Incumbents Other Off-shore Players 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 Weaknesses M • Unique blended model H • Low brand equity M • Access to Infosys clients H • Inexperience with M • Strong in operations consulting relationships M • Challenge attracting top consulting talent H • More cost/speed conscious customers M • Market growth M • Open up new segment of market Opportunities M • Easy replicability of model • Increasing IBM/ACN M presence in India • Culture clash with H Infosys Technologies Threats Significance of Impact H High M Medium L Low

Infosys Consulting: Cost or Profit Center? What is ICI’s place in the Infosys Technologies Portfolio? Key Challenges Needed Responses • • 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 • • 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