Transcript NASSCOM 2002
Lessons from the downturn, and the road ahead.
NASSCOM 2002 Nandan M. Nilekani
Managing Director, President and Chief Operating Officer Infosys Technologies Limited Bangalore, India
The story of IT is of the semiconductor revolution: price and performance improvements…
Moore’s Law – Number of transistors and performance of processor (measured in MIPS) doubles every 18 month Today’s computers have 66,000 times computing power, at the same cost, as the computers of 1975
Improvements in communications and death-of-distance
Gilder’s law – Doubling of communications power every six months • due to advances in fiber-optic network technologies The cost of transmitting a trillion bits of information from Boston to Los Angeles has fallen from $150,000 in 1970 to 12 cents in 2000 Sources: UNDP, World Bank and The Economist
Metcalfe’s Law: The network effect
The usefulness, or utility of a network equals the square of the number of users Utility The more people use a particular software, a network or a book the more valuable it becomes ,and the more new users it attracts , increasing both its utility and the speed of adaptation by still more users. Utility=Users 2 Users
Law of disruption: The network effect
Law of disruption
Years to reach 50M users: Radio= 38
– Until a critical mass of users is reached, a
120
change in technology only affects the
90
technology.
60
– Once critical mass is attained, social,
30
political, and economic systems change
0 TV= 13 Cable= 10 Internet = 5 Radio TV Cable Internet ‘22‘30‘38‘46‘54‘62‘70‘78‘86‘94‘02
Source: Morgan Stanley.
Source: UNDP 2001
…Led to more information at a lower cost
The dot-com boom and bust
Internet revolution fuelled corporate tech spending …
US-based IT spending as a share of business capital equipment spending 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% PC Introduction Commercial Internet Note: Information technology spending includes purchases of information processing and related equipment (including office, computing, and accounting machinery), computers and peripheral equipment, communication equipment, instruments, and photocopy and related equipment.
Source: U.S. Department of Commerce.
Source: Morgan Stanley
… And increased funding for startups
US technology funding (US$ billion)
$140 $120 $100 $80 $60 $40 $20 $0 IPO proceeds of tech companies VC funding to tech companies
The highpoint in funding
Technology statistics for 1999 and 2000 as a percentage of total for last 21 years 70% 62% 56% 54% Source: Morgan Stanley Venture capital financing IPO financing Follow-on financing M&A (dollar volume)
...Leading to the boom in the year 2000
US IT Spending Hit a Record $532 Billion – Growth of 23% Over 1999 – 51% of Its Capital Equipment Spending Since 1960, There Have Been Only Three Years When Annual IT Spending Growth Exceeded or Equaled 23% – All Previous Instances Occurring Prior to 1980 on a Much Smaller Base
Technology wealth creation (US) as on Jan 31, 2000
3.8
0.4
Technology companies that IPO'd between 1980 and 1999 0.792
0.147
The Internet sector Market value creation Technology wealth creation
… And also opportunities for new categories of companies
B2B providers Business reengineering verticals Online commerce companies Content and aggregation providers Internet software providers Internet Infrastructure Cisco and UUNet Netscape 1994 1995 America Online and Yahoo!
1996 Amazon.com 1997 eBay 1998 Ariba and Freemarkets 1999 and 2000
The genesis of the boom? The 1996 Telecommunications Act
Required Bell companies to open their local networks to competitors Stipulated that Bells could enter the long distance market upon proving the existence of sustainable local competition – Verizon Communications (formerly Bell Atlantic) was the first Bell to be granted entry into the long distance market in New York State in December 1999 Granted additional spectrum to TV broadcasters to deploy advanced services Provided a framework under which cable television could be deregulated Created new funds for the development of telecommunications services in rural and underserved areas. – $5 billion Universal Service Fund Gave the FCC authority over deregulating the voice business Led to Competitive Local Exchange Carriers (CLECs)
Effects of the Telecommunications Act
Increasing share of CLECs Decreasing prices
Source: FCC reports and Bear, Stearns & Co
The telecom sector witnessed strong growth...
Increased Investments And New Entrants Accelerated Innovation and Infrastructure Expansion
Telecom Boom
Increased Bandwidth Demand Improved Utility, Price Performance and Profits
And cheap capital led to the telecom exuberance
Equipment companies aggressively financed the vendors during 1995-1999 – At the end of FY 2000 $25.6 billion worth of loans on books of nine telecom giants: Alcatel, Cisco, Ericsson, Lucent, Motorola, Nokia, Nortel, Qualcomm and Siemens Total vendor financing by 5 North American companies in the above group equalled 123% of their FY 1999 pre tax earnings Typically, these loans were at uneconomical terms and for companies with no cash flow promise – 35-40% of the $25.6 billion credit disbursed at risk
Combined with other drivers of growth in bandwidth supply
DWDM advancements
350 300 250 200 150 100 50 0 160 8 Past 32 Present Future
Numbe r of w a ve le ngths
Increase in investments and new entrants – Carriers increased capex Increase in bandwidth demand – Dot-com boom Improvements in technology – Dense Wavelength Division Multiplexing (DWDM) Sources: CSFB and Kaufman Bros 320
Which was not sustainable
Leading to excess bandwidth
5 percent of the 39 million miles of glass fiber in US networks is 'lit' – 1 percent of the installed fiber of 39 million miles is used
Decline of telecom
Sources: CSFB and Kaufman Bros
The bust after the boom
Technology IPOs since 1980 lost more than $ 1 trillion by Dec 31, 2000 – Despite additional investment of $300 billion through new IPOs in 2000
Technology w ealth creation (US)
Source: Morgan Stanley 3.8
Market value creation Invested amounts 2.5
0.7
0.4
Technology companies that IPO'd betw een 1980 and 1999 as on Jan 31, 2000 Technology companies that IPO'd betw een 1980 and 2000 as on Dec 31, 2000 0.79
0.15
The Internet sector as on Jan 31, 2000 0.22
0.24
A s on Dec 31, 2000
The impact of the downturn
Short term impact of the shifting paradigms
Global Economy Traditional IT Markets in Recession “Old “Economy The Old and New Economy Converge “New” Economy Short-term demand tightening Focus on ROI / business benefits Lengthening decision cycles Downsizing – throwing out the baby with the bath water Less willingness to rush into e-business Carefully evaluating IT initiatives and choosing to work with larger, more stable vendors Widespread carnage among dot-coms and e consultants Survivors looking to newer, more cost-effective business models
Long term impact of the shifting paradigms
Global Economy Traditional IT Markets in Recession “Old “Economy The Old and New Economy Converge “New” Economy Increased customer interest in IT and business process offshoring, Loss of talent – weakening ability to bounce back Look to integrate a wide variety of disparate systems, applications and business processes Look to outsource non core business and IT processes to a reliable cost effective vendor Survivors look at sustainable business models with a stronger customer value proposition
Technology will continue to be a key driver of businesses worldwide
Impact of technology
Online organizations Companies that deal in technology Companies that are directly affected by digitization Traditional companies that use technology to improve productivity
eBay – the future of online business models?
Trends in market capitalization Growing at twice the rate of overall e commerce sales
Amazon eBay Yahoo
Source: Goldman Sachs, Yahoo Finance eBay a powerhouse on Internet – Largest marketplace and community with diverse range of products – Liquid market place – Diverse Revenue streams: international and domestic auctions, fixed price listing, advertising etc – High ROIC (estimated to be 87% for FY 2001) • No investment in warehouses or distribution centers • Neither side of the transaction controlled – Growth opportunities furthered by International expansion, Acquisitions and innovative price and listing formats
Digitization will influence companies to embrace IT – e.g. Kodak
Traditional film business hit by digital technologies Introduced EasyShare cameras starting at $ 200 – Features include easier-to-download images and longer battery life – In a December 2001 survey, 50% of retailers mentioned Kodak as their best-selling brand Worldwide digital camera shipments (MM) Purchased Ofoto, online photo service for $58 million – Online imaging products and services. Document Imaging – Capturing and archiving images – Purchased Bell & Howell ’ s imaging business for $135 million.
Source: SG Cowen 2001 and Merrill Lynch
Traditional companies will continue to use technology in numerous ways
Corporations will use technology to improve internal processes
Intranet Corporations will use technology to closely integrate with vendors and suppliers Corporations will use technology to be more customer friendly
CRM
Computer Integrated Manufacturing
SCM / ERP
Extranet
Electronic Delivery Channels
Office productivity tools
EDI / Intranet
Teleworking
Global call center
Electronic markets
Electronic markets
Video conferencing
Boeing launched myboeingfleet.com which gives airlines web access to maintenance information for their fleets – Boeing saves on paper, printing, and postage – Airlines benefit by not having to manage paper work Source: BusinessWeek September 18, 2000
Technology in banking
Transaction Costs (Banking)
Net transactions cost far less than transactions through traditional channels $1.20
$1.00
$0.80
$0.60
$0.40
$0.20
$0.00
Investment for a commercial bank to reach 10M potential customers – Bricks & Mortar: $900M – Internet: $1M Source: Booz Allen Hamilton.
Moreover, technology enables outsourcing in both old economy and new economy firms
A firm expands until the cost of performing a transaction inside the firm exceeds the cost of performing the transaction outside the firm – Search costs – Contracting costs – Coordinating costs Forces defining level of integration of the firm
Lowering in-house costs Lowering transaction costs fueled by outsourcing companies In-house cost Transaction cost Increasing levels of integration
Earlier optimal size of firm Reduced optimal size of firm Optimal size of firm due to interplay of two forces
Building durable organizations in these challenging times
Business will remain cyclical
Forecasts of the upturn vary – V shaped recovery • A sharp upturn – W shaped recovery • A sharp upturn followed by a downturn and then by another upturn – U shaped recovery • A slow upturn
Imperatives before us: Shift from a supply constrained to a more challenging, demand constrained environment
Clients have become more demanding: – Increased long term interest in offshoring but continuing short term volume and pricing pressures – Demand for end-to-end capabilities – Understanding of clients ’ critical business and domain Companies have realized the merits of offshoring: – Big 5, other e-consulting firms looking to expand offshore operations – Large telecom and software product majors looking at India as R&D base
The road ahead
Consolidate and build organizational strengths Be prepared to capitalize on the upturn – People – Processes – And infrastructure Look beyond current short term considerations and build durable organizations Focus on cost control – Manage under low visibility • Budget on a more regular quarterly basis – Link salary hikes to company performance
The road ahead: Competence building
Implement meritocracy – Strengthen performance orientation – Performance improvement program for low performers – Promotions based on match of skill sets and organizational need Build next generation of leadership Ensure employee loyalty through good times and bad – ESOPS
The road ahead: Enhance client relationships
Enhance footprint w.r.t client ’ s IT needs Bring out your best in all client interactions Develop high touch and high quality relationship Create a client first mindset within the organizations New service initiatives – Larger, longer term contracts – Improves predictability of revenues – Can possibly lead to more “ follow on ” business
The road ahead: Build new drivers of growth
Create new services and strengthening existing services – Systems integration – Business process outsourcing – Consulting / package implementation business
The road ahead: Explore new avenues
Expanding into new verticals and geographies – Look at stable, recession proof verticals • Utilities and healthcare – Build presence closer to customer – Strengthen presence in Indian market
Finally, our learnings
A strong, de-risked business model helps succeed in both growth and recessionary environments Openness and adaptability to change is key Cut costs but focus on sustaining growth even in difficult times Capitalize on opportunities thrown up by the turbulent environment – Offshoring opportunities – Change in competitive landscape
Thank you