Georgian National Investment Agency IT&BPO Sector Research

Transcription

1 Georgian National Investment Agency IT&BPO Sector Research This report has been extracted and amended by the Georgian National Investment Agency from the report prepared by KPMG Georgia LLC on IT&BPO Sector Research in November For the full report, please, contact the Georgian National Investment Agency.

2 Disclaimer Our findings, observations and/or recommendations are those that we could reasonably derive from the procedures or scope of services performed. The specific procedures performed were agreed with Georgian National Investment Agency (the Client) and were performed by us as set forth in the Report. Our work was carried out solely based on the publicly available research data. We have indicated within our Report the sources of the information presented and have satisfied ourselves, so far as possible, that the information presented in our Report is consistent with other information which was made available to us inthe course of our work in accordance with the terms of the Contract. We have not, however, sought to establish the reliability of the sources by reference to other evidence. All recommendations, provided to you with/in this Report that refer to the future have some limitations in the sense that they are based on the assumptions valid on the issuance date. These assumptions could change with time, after the date of this Report issuance, and so could lose their value. References to 'KPMG Analysis' in this Report indicate only that we have (where specified) undertaken certain analytical activities on the underlying data to arrive at the information presented; we do not accept responsibility for the underlying data. We note that this report has been extracted and amended by the Georgian National Investment Agency from the report prepared by us on IT&BPO Sector Research in November For the full report, please, contact the Georgian National Investment Agency. 2

3 Acknowledgment During our analysis we have interviewed a number of CEOs and HR professionals of different companies in Georgia to get their view on the investment climate, talent pool, IT&BPO potential in Georgia. The brief description of these companies is given below: Companies interviewed HR outsourcing company focused on recruitment, training and consulting HR outsourcing company focused on recruitment, consulting and HR function outsourcing, such as payroll maintenance HR company focused on recruitment BPO company focused on call centre Local call center ITO company focused on IOS games and mobile applications ITO company focused on software development ITO company focused on web development and data analysis ITO company focused on web development, hosting and training Largest Georgian IT services company Georgia s Innovation and Technology Agency International real estate company focused on valuation, brokerage, development services and construction services International real estate company focused on feasibility studies, brokerage, valuation and capital markets/investment Local real estate company focused on valuation, leasing and consulting International law firm International company engaged in real estate development International energy company engaged in hydropower plant operation International company engaged in port operation A group engaged in hospitality industry across Georgia Audit, tax and advisory firm Top Georgian Bank (HR and IT departments) Georgian insurance company Georgian healthcare organization Georgian medical centre Business Association of Georgia 3

4 Table of Contents Contents Section 1: Assessment of the Global Market Page 7 Section 2: Top services outsourced Page 21 Section 3: IT&BPO Market Overview in Georgia Page 30 Section 4: Overview of Human Resources and Cost Base in Georgia Page 34 Section 5: Benchmarking of Georgia vs Competitor Countries Page 66 Section 6: Investment proposals - Targeted IT&BPO segments Page 85 Appendices Page 104 4

5 Section 1 Assessment of the Global Market

6 What is the regional demand for offshoring/ outsourcing? North America and Europe continue to generate bulk of the demand for IT&BPO services, with APAC increasing its share in recent times Historical IT&BPO demand (in bn USD) Geography-wise break-up of IT&BPO demand in 2014 (in bn USD) , Rest of EMEA % Central Europe % IT 90.5 BPO 53.4 IT 7% 12.7 BPO IT BPO AMERICAs APAC % 35.6 IT BPO IT BPO % share of the global demand Note: Numbers might not add to 100% because of rounding off North America and Europe together constitute over 80% of demand. APAC is gradually increasing its share of demand, through increased offshoring adoption by countries such as Japan, Australia and New Zealand North America, largest market for IT&BPO grew above industry average, supported by revival of economy and higher technology adoption Source: KPMG Research and Analysis, HFS Global IT and BPO Services Market Report 2013 Note: Central Europe includes Austria, Croatia, Czech Republic, Germany, Hungary, Liechtenstein, Poland, Romania Slovakia, Slovenia, Switzerland 6

7 What is the growth by functional demand expected over the next five years? The global IT&BPO industry is expected to continue an upward trajectory IT&BPO Market Forecast (in Bn USD) IT&BPO CAGR ( ): 4.9% 1, , IT CAGR 4.5% to 5.0% BPO CAGR 5.7% to 6.3% 1, , , , E 2016E 2017E 2018E 2019E 2020E IT Infrastructure Management ADM IT Professional Services Other IT Services F&A BPO CRM BPO HR BPO Industry Specific Note: Industry-specific BPO processes includes sector/ vertical specific activities like: Securities processing, payment processing, mortgage processing in Banking, Health payer, property & casualty admin in Insurance. Welfare benefits administration in Government. Medical records maintenance in Healthcare. Billing in Telecom. Ticketing, reservations management in Transportation Source: KPMG Research and Analysis, HFS Global IT and BPO Services Market Report

8 What is the demand for offshoring/ outsourcing in AMERICAs? AMERICAs have pioneered offshoring in terms of adoption across functions and industry verticals, as well as cost to business value led propositions Demand by function* Key countries for IT&BPO demand 20.0% IT services % 10.7% 20.7% Total Demand Other IT services IT Professional Services ADM IT Infrastructure Management Canada BPO services % 17.3% USA Mexico 15.3% *Demand in 2014 (in bn USD) Total DemandIndustry Specific HR CRM 8.2% F&A USA generates over 90% of the total demand for IT&BPO services in this region IT outsourcing market demand is characterized by increased use of cloud-based and automated services Source: KPMG Research and Analysis, HFS Global IT and BPO Services Market Report 2013 Strong Demand Moderate Demand Low Demand Note: Industry-specific BPO processes includes sector/ vertical specific activities like: Securities processing, payment processing, mortgage processing in Banking, Health payer, property & casualty admin in Insurance. Welfare benefits administration in Government. Medical records maintenance in Healthcare. Billing in Telecom. Ticketing, reservations management in Transportation 8

9 What is the demand for offshoring/ outsourcing in EMEA? EMEA demonstrates continued growth in adoption and is characterized by diverse nature of demand across countries Demand by function* Key countries for IT&BPO demand IT services BPO services *Demand in 2014 (in bn USD) Total Demand % 12.3% Other IT services 4.1% 55.8% Total DemandIndustry Specific 10.0% 36.3% IT Professional Services 0.3% 11.1% ADM CRM EMEA constitutes over 30% of global demand IT Infrastructure Management 0.3% 10.2% F&A Increased demand, driven by cost pressures emanating from sovereign debt crisis, economic challenges and regulatory constraints Note: Central Europe includes Austria, Croatia, Czech Republic, Germany, Hungary, Liechtenstein, Poland, Romania Slovakia, Slovenia, Switzerland Source: KPMG Research and Analysis, HFS Global IT and BPO Services Market Report 2013, news articles HR 2.5% 10.1% 1.3% 16.9% Central Europe Rest of EMEA 6.2% 15.9% Spain UK Czech Republic Germany France Poland Strong Demand Moderate Demand Low Demand IT&BPO market in Russia was estimated at USD 1.9 bn in 2013, growing 15% from Main demand comes from international companies, governmental, trade and financial organisations. IT infrastructure management is the most demanded/developed.segment. Note: Industry-specific BPO processes includes sector/ vertical specific activities like: Securities processing, payment processing, mortgage processing in Banking, Health payer, property & casualty admin in Insurance. Welfare benefits administration in Government. Medical records maintenance in Healthcare. Billing in Telecom. Ticketing, reservations management in Transportation 9

10 What is the demand for offshoring/ outsourcing in APAC? Demand across APAC region has accelerated in recent times, with consolidation and business efficiency as key drivers rather than only wage arbitrage Demand by function* Key countries for IT&BPO demand 20.5% IT services % 9.8% 24.2% Total Demand Other IT services IT Professional Services ADM IT Infrastructure Management BPO services *Demand in 2014 (in bn USD) There is a strong domestic market for IT&BPO services in many of the APAC countries which primary offshoring being done from Australia and New Zealand Language and culture are some of the key barriers for offshoring in these regions % Total DemandIndustry Specific 3.1% HR Source: KPMG Research and Analysis, HFS Global IT and BPO Services Market Report % CRM 6.2% F&A India China Strong Demand Moderate Demand Low Demand Australia Japan New Zealand Note: Industry-specific BPO processes includes sector/ vertical specific activities like: Securities processing, payment processing, mortgage processing in Banking, Health payer, property & casualty admin in Insurance. Welfare benefits administration in Government. Medical records maintenance in Healthcare. Billing in Telecom. Ticketing, reservations management in Transportation 10

11 Vertical trends Financial Services, Manufacturing and Telecom continue to be largest verticals in terms of IT&BPO spend Deal Value (USD billion) Financial Services Insurance Automotive and Aerospace Travel and Logistics Manufacturing Energy and Utilities Pharma and Healthcare Publishing, Media and Entertainment Retail Telecom Others No. of contracts Financial services, Telecom and Manufacturing industries are major consumers of IT and BPO services due to the presence of relatively higher coverage of both horizontal processes and domain-specific work While organizations have explored both captives and service providers across the value chain, each of them have their own set of pros and cons which have been carefully analyzed to decide the sourcing model Source: KPMG Research and Analysis, KPMG Deal Tracker 11

12 Vertical trends Emerging verticals like Healthcare, Retail and Utilities will drive the next wave of IT&BPO market growth Market Demand % by verticals % of users in each industry willing to outsource in the next 12 months* 100% = Total IT&BPO Market Demand 12% Chemicals 6% 31% Telecom 11% 25% Manufacturing Government 14% 18% Healthcare 22% 32% Energy 24% Financial Services Manufacturing Communication & Media Emerging** Retail Pharma 26% 28% Financial Services and Manufacturing contribute majority of the IT&BPO market demand Emerging verticals like Retail, Healthcare, Travel & Transportation and Utilities are the new growth areas for IT&BPO market Source: KPMG Global Pulse Survey 1Q15, NASSCOM Strategic Report 2015, KPMG Research and Analysis Financial Services Demand for outsourcing by Industry *KPMG Pulse survey is a quarterly review of global business services (GBS) market trends with inputs taken from 500+ KPMG sourcing advisors and leading global service providers ** Emerging verticals: Retail, healthcare, travel & transportation, utilities, government and education 45% 12

13 Brief review of the key industries Financial Services (1/2) Industry Overview Financial Services account for 31% of the total vertical spend. The banking sub vertical is the largest segment in this vertical The vertical contributes to more than one third of the market in terms of total employee headcount Nearly 15% of the captive market in terms of number of centers present across the globe is accounted for by Financial Services vertical Key Delivery locations Bengaluru, Mumbai, Metro Manila, Chennai and Singapore are the major locations preferred by Financial Services firms for outsourcing and setting up captives The preference of a location also depends on the functions performed: BPO: India (Bengaluru, Mumbai, Delhi NCR), the Philippines (Metro Manila) and Malaysia (Kuala Lumpur) IT: India (Bengaluru, Mumbai, Chennai) and the Philippines (Metro Manila) Key Drivers for Offshoring in Financial Services Transformation focused Optimization focused Savings/ Efficiency focused Impact on the overall revenues through sophisticated financial analyses and cash management to offer better credit terms to customers, thereby increasing customer base Re-engineering full processes like: Cash management, resulting in higher float Forecasting, resulting in better accuracy of forecast Reduce cost per FTE by offshoring transactional processes: Accounts Payable Accounts Receivable Source: KPMG Research and Analysis 13

14 Brief review of the key industries Financial Services (2/2) ILLUSTRATIVE Services which may be Offshorable/ Outsourceable Product development 50% Marketing 75% Channel Management 75% Business acquisitions 90% Account servicing 90% Transaction processing 80% Treasury operations 50% Control/ compliance 80% Institutional relationships Merchant services 40% % of Activities 25% 25% 10% 10% 20% 20% 10% Retained in business unit / head office 50% 50% This graph indicates the typical percentage of processes split between the offshored/ outsourced organization and the parent organization 90% 60% The Financial services industry is the most mature when it comes to offshoring/ outsourcing and have leveraged the same for many of their industry specific processes. The industry is now pioneering the offshoring of functions like real-time analytics to enhance their capabilities in opportunity identification, risk management etc. Source: KPMG Research and Analysis 14

15 Brief review of the key industries Manufacturing (1/2) Industry Overview Manufacturing along with Financial Services continue to be largest verticals accounting for more than 60% of the total vertical spend Nearly one-fourth of the captive market in terms of number of centers present across the globe is setup by firms in Manufacturing IT services outsourced include application development, maintenance, helpdesk and data center support Key Delivery locations Bengaluru, Chennai, Krakow and Singapore are the major locations preferred by manufacturing firms for outsourcing and setting up captives The preference of a location also depends on the functions performed: BPO: India (Bengaluru, Chennai, Pune), the Philippines (Metro Manila), Poland(Krakow) and Singapore IT: India (Bengaluru, Chennai) and the Philippines (Metro Manila) Key Drivers for Offshoring in Manufacturing Transformation focused Optimization focused Savings/ Efficiency focused Use offshoring to lower the basic cost of the product Penetrate new markets using providers presence in several countries to open up markets Create the optimal environment to support delivery and management of production through effective: Supply Chain Management Logistics Deductions management Warehouse management Achieve direct cost savings by offshoring transactional pieces Benefit Admin Query resolution Accounts payable Source: KPMG Research and Analysis 15

16 Brief review of the key industries Manufacturing (2/2) ILLUSTRATIVE Services which may be This graph indicates the typical percentage of processes split between the offshored/ outsourced organization and the parent organization Marketing 75% Sales and after-sales operations 75% Offshorable/ Outsourceable % of Activities Production operations 10% Logistics 10% Material management 10% Warehouse management 10% Compliance management 20% Quality management 20% Safety management 10% 25% 25% Retained in business unit / head office 90% 90% 90% 90% 80% 80% 90% Offshoring in Manufacturing industry has been largely concentrated on horizontal services with Customer interaction and F&A support being relatively more mature While the level of retained processes will remain the same, HR and Procurement as new areas of opportunity which the sector is yet to explore Source: KPMG Research and Analysis 16

17 Brief review of the key industries Telecom (1/2) Industry Overview Telecom, one of the mature sectors continues to implement large scale outsourcing The vertical contributes to around 6% of the market in terms of total employee headcount Nearly 5% of the captive market in terms of number of centers present across the globe is accounted for by Telecom vertical Key Delivery locations Bengaluru, Delhi NCR, Chennai, Metro Manila and Budapest are the major locations preferred by Telecom firms for outsourcing and setting up captives The preference of a location also depends on the functions performed: BPO: India (Chennai, Delhi NCR), the Philippines (Metro Manila) and Hungary (Budapest) IT: India (Bengaluru, Delhi NCR) Key Drivers for Offshoring in Telecom Transformation focused Optimization focused Savings/ Efficiency focused Move towards advanced capabilities by Allowing greater control over operations Flexibility to change business models when required Ability to bring quickly new products and services into market Improve process accuracy and create operational excellence by creating an optimal environment to support various activities Inbound customer service Customer invoicing Service renewals, up selling and cross- selling Achieve direct cost savings by offshoring Telecom infrastructure into cloud thereby eliminating cost of ownership Professional technical support lowering payroll costs Source: KPMG Research and Analysis 17

18 Brief review of the key industries Telecom (2/2) ILLUSTRATIVE Services which may be Offshorable/ Outsourceable Marketing 75% Fulfilment 80% Assurance 90% Billing 90% Customer Acquisition & Support 75% Network Management 80% Product Development Channel Management % of Activities 10% 25% 10% 20% 10% 10% 25% 20% Retained in business unit / head office 90% 90% This graph indicates the typical percentage of processes split between the offshored/ outsourced organization and the parent organization The Telecom industry is the one of the most mature industry when it comes to offshoring/ outsourcing and have implemented large scale outsourcing A number of players in the industry are now offshoring entire domains like IT, mobile network operations and cable network to service providers Source: KPMG Research and Analysis 18

19 Brief review of the key industries Healthcare (1/2) Industry Overview Healthcare along with retail, government and utilities are the emerging verticals accounting to around 30% of the total vertical spend Within overall captive market, healthcare vertical is small accounting to only 4% of the number of captives across the globe The vertical contributes to only 1% of the market in terms of total employee headcount Key Delivery locations Bengaluru, Mumbai, Hyderabad, Singapore, Cork and Poznan are the major locations preferred by healthcare firms for outsourcing and setting up captives. Majority of the healthcare captives are present in India The preference of a location also depends on the functions performed: BPO: India (Bengaluru, Mumbai, Hyderabad), Singapore, and Ireland (Cork) IT: Poland (Poznan) Key Drivers for Offshoring in Healthcare Transformation focused Increase patient access and usage by lowering cost of healthcare Move towards advanced capabilities, thereby : Reduced medication errors Evidence based medicine Multi-media EMR Consumer & Physician driven portals Optimization focused Improve process accuracy by creating an optimal environment to support patient-focused activities and crossfunctional care Medical records management Patient administration Revenue cycle management Claims denial management Medication errors Savings/ Efficiency focused Achieve direct cost savings by offshoring transactional pieces Customer data acquisition and query resolution Medical transcription Source: KPMG Research and Analysis 19

20 Brief review of the key industries Healthcare (2/2) ILLUSTRATIVE Services which may be Offshorable/ Outsourceable Product development and Business Acquisition 50% New business Policy servicing and reporting 90% Claims processing 90% 75% Revenue cycle management 50% Denial management 50% Healthcare collections 90% Medical records management 90% Eligibility services % of Activities 10% 10% 10% 10% 10% 25% Retained in business unit / head office 50% 90% 50% 50% This graph indicates the typical percentage of processes split between the offshored/ outsourced organization and the parent organization Increasingly dynamic and active regulatory environment and escalating geopolitical risks are some of the key drivers which determine the offshorability of the processes in the healthcare space While many of these industry specific processes have a high degree of offshorability, healthcare captives are found to a minimal extent as compared to other industries Source: KPMG Research and Analysis 20

21 Section 2 Top services outsourced

22 Services outsourced by companies with strong demand for IT&BPO services IT infrastructure support drives the need for offshoring among the top 30 companies Services outsourced % by functions Processes outsourced in each function 100% = Total annual contract value by top 30 companies 5% 1% ADM Application Development Application Testing ILLUSTRATIVE 35% IT Infrastructure F&A 1% 17% IT Professional Services Other IT services Other BPO Services ADM KPO HRO CRM 34% 6% 2% 1% IT Infrastructure and other IT services contribute to almost 70% contract value of the functions outsourced by the top 30 companies IT Infrastructure IT Professional Services Other IT Services F&A HRO CRM KPO Other BPO Services Maintenance & Support Data Management Security System Integration Information Management Software Implementation Network Support Network Security Multimedia Services Finance & Accounting Payment Processing Payroll Management Customer Care Sales & Marketing R&D Product Engineering Services Logistics Facility Operations and Management Services Source: KPMG Research and Analysis, KPMG Deal Tracker 22

23 How much do companies save by outsourcing/ offshoring? Depending on the outsourcing destination, typical cost savings for companies range from 30% to 80% Typical TCO 1 savings between US and captive destinations ; percentage 80-82% 69-71% 56-58% 47-49% 41-43% 29-31% BPO Services 74-76% 65-67% 49-51% 41-43% 41-43% 28-30% IT Services India Philippines China Mexico Poland Brazil 1. TCO (Total Cost of Operations): Indicates total cost incurred by captives in providing support for service delivery. This includes operating cost as well as costs associated with set-up transition and governance of the captive 2. Costs of US destinations corresponds to tier-2 cities, while costs of captive destinations correspond to tier-1 cities Source:: KPMG Research and Analysis 23

24 What are sub-functions/areas likely to be offshored/ outsourced? F&A services with varied complexity across the value chain are being offshored/ outsourced ILLUSTRATIVE Services which may be Offshorable/ Outsourceable % of Activities Retained in business unit / head office Accounts Payable/ Receivable 93% 7% General Accounting 90% 10% Fixed Asset Accounting 80% 20% Tax Management 20% 80% Treasury Management 5% 95% Compliance Management 50% 20% 80% Travel Period Close expenses and Consolidation Business Analytics 50% 60% 40% 93% 7% Payroll 100% This graph indicates the typical percentage of processes split between the offshored/ outsourced organization and the parent organization Low level of Complexity Order Capture, Revenue Accounting Journal Entries, Accounting Policies Cost Accounting, Inventory Accounting Tax Accounting Banking operations Management Reporting and analysis New Product Evaluation Financial Consolidation, Statement Prep Travel & Expenses Payroll services High level of Complexity AP Helpdesk Inventory Accounting Capital planning and budgeting Tax Returns, Transaction Tax Capital Planning & Allocation, Debt Management Internal Audit, SOX project management Decision Support, Performan ce Manageme nt Investor Relations, Regulatory Filings F&A offshoring segment has seen rapid growth over the past decade. A large % of various processes in F&A are readily offshorable Captives/ Service providers are evolving into specialist delivery centers to deliver greater impact to the business in terms of higher value and greater cost savings Source: KPMG Research and Analysis, NASSCOM Strategic Review

25 What are sub-functions/areas likely to be offshored/ outsourced? Multiple HR services are being offshored; however global vs. regional models need to be considered for each sub-function ILLUSTRATIVE Services which may be Offshorable/ Outsourceable % of Activities Payroll Services 87% 13% Benefits Administration 82% 18% Employee Care Services 81% 19% Recruitment Administration 40% Compensation Services 37% This graph indicates the typical percentage of processes split between the offshored/ outsourced organization and the parent organization Workforce Deployment 31% Mobility Services 22% Governance Retained in business unit / head office 60% 63% 69% 78% 100% Low level of Complexity Payroll Processing, Reimburseme nts Health & Welfare Administration Severance Administration, Employee Data Management Offer Mgmt., HR support line Rewards statement, Survey and job analysis Learning Administration, Performance Planning Domestic travel & relocation High level of Complexity Garnishments and liens Claims, Annual Enrolment, Worker s compensation, Safety Administration Executive Sourcing, Background verification Executive Compensatio n, Union Pay management Training Provisioning, Temporary workforce mgmt Expatriate tax compliance, International relocation HR Policy, Labor Relations HR outsourcing is relatively in a nascent stage compared to IT and F&A with selected process being offshored Workforce administration, leave management, payroll & recruiting & staffing are the most offshored functions Captives/service providers play a critical role in providing the bandwidth for HR organization to resolve critical issues HR processes have a strong dependency on organizational and country culture as well as local regulations/ legislations which need to be thoroughly analysed while deciding the sourcing Source: KPMG/ Equaterra survey covering more than 50 HR outsourcing contracts 25

26 What are sub-functions/areas likely to be offshored/ outsourced? Customer Relationship Management support is driven by the need for specific regional market understanding ILLUSTRATIVE Services which may be Offshorable/ Outsourceable % of Activities Retained in business unit / head office Low level of Complexity Planning & Identification 57% 43% Identify revenue opportunities, Data base creation of prospective clients Lead Generation 87% 13% Lead Generation through / phone, Create customer awareness Requirements Analysis & fulfilment 87% 13% RFI process, Identify right solution Finalize solution 60% 40% Coordinate with technical team for implementation This graph indicates the typical percentage of processes split between the offshored/ outsourced organization and the parent organization Delivery Management 38% 62% Reporting/ escalating issues, liaising between internal departments Periodic update & Knowledge session 47% 53% Day to day interaction with leading vendors High level of Complexity Resource requirements, Target Market Understanding Market strategy for lead generation, Market research on client organization Presentation/ proof of concept, understanding customer needs Deal finalization and closure Arrange site visits, coordinate with client representatives Business review with customers once a quarter Organizations are leveraging offshored/ outsourced sales team for hosting live online demos for potential end users, and help them with the product information The key drivers for offshoring sales function are time zone advantage and regional market understanding to penetrate the market The function is gaining importance since customers prefer talking directly to a representative of the parent organization rather than a distributer/ a reseller/ a retailer Source: KPMG Research and Analysis, 26

27 What are sub-functions/areas likely to be offshored/ outsourced? KPO services scope has expanded significantly, driven by adoption across engineering services and analytics ILLUSTRATIVE Services which may be Offshorable/ Outsourceable Legal services 50% Engineering services 75% Content development & publishing 75% Market research & data analytics 90% Financial research & analytics 90% % of Activities Retained in business unit / head office Low level of Complexity 50% Contract Drafting, Patent Search 25% Finite Analysis 25% Writing, editing & designing, Content planning & proofing 10% 10% This graph indicates the typical percentage of processes split between the offshored/ outsourced organization and the parent organization Secondary Research, Report Writing Industry Research, Company Valuation High level of Complexity Legal Research, Coding & Transcription, Litigation support Value Engineering, 2D & 3D modelling Data Warehousing Primary research, surveys Equity Research & Analysis, Due Diligence & Risk Management Knowledge economy, access to specialized skill, time-to-market are some of the key drivers for KPO growth Increasing awareness and the advent of digital economy has shifted the mindset of key business decision makers to use data for competitive advantage through business analytics and intelligence driven KPO functions Source: KPMG Research and Analysis, 27

28 What are sub-functions/areas likely to be offshored/ outsourced? Within IT services, offshoring penetration across sub-functions and organizations continues to increase, besides ongoing delivery model innovation ILLUSTRATIVE Services which Application may be Development & Offshorable/ Maintenance Outsourceable Compliance / Controls Mgmt % of Activities Retained in business unit / head office 60% 40% 25% 75% Data Centre 55% 45% Data Mgmt. 60% 40% End User Services 85% 15% Enterprise Program Mgmt. 40% 60% This graph indicates the typical percentage of processes split between the offshored/ outsourced organization and the parent organization Infrastruc ture 50% 50% IT Governance Mgmt. 30% 70% Mgmt. Support 35% 65% Network 60% 40% Low level of Complexity Low level design, Coding & Review Maturity Assessment Data Centre Support Information Management Desktop Support On Site & On call Risk Management Maintenance & Support, Database Management Policy Monitoring Asset Management Network Support High level of Complexity Business Requireme nt, High Level Design Data Security Data Centre Security, Data Centre Strategy & Architecture Business Intelligence Enterprise Computing Quality Management & Assurance, Performance Management Security, Planning & Design Policy Administra tion Quality Management Network Security Most of IT processes are readily offshorable and IT is one of the pioneering services when it comes to offshoring Captives/ Service providers are evolving into IT shared service centers or delivery centers to deliver greater impact to the business in terms of higher value and greater cost savings IT Outsourcing has over the years been a key focus of process improvement initiatives and overall service delivery excellence Source: KPMG Research and Analysis, 28

29 How is the function-wise adoption changing over time? F&A and IT have the highest preference for offshoring/ outsourcing, followed by HR, Supply Chain Management, CRM and other functions 55% 61% 62% 65% 64% 59% 1Q13 1Q14 1Q15 35% 30% 32% 21% 17% 20% 15% 10% 12% 12% 7% 6% IT F&A HR Supply Chain Management CRM Industry specific IT offshoring/ outsourcing is increasing globally with all pervasive adoption of SMAC** services which will continue over the next few years F&A and Supply Chain Management processes are the low-hanging fruit when Organizations look at offshoring/ outsourcing and these are the functions which drive the BPO growth globally Supply chain and HR are increasingly offshored. While end to end offshoring/ outsourcing is still nascent, companies leverage offshoring for definite cost advantages Source:: KPMG Research and Analysis, KPMG Global Pulse Survey 1Q15 *The interpretation of the graph from the KPMG Pulse Survey 1Q15: 62% of Respondents indicate that the demand for IT will increase in the next 12 months in 1Q15 as compared to 1Q14 when 61% said that there will be an increase in demand ** SMAC refers to the social, mobile, analytics and cloud platforms KPMG Pulse survey is a quarterly review of global business services (GBS) market trends with inputs taken from 500+ KPMG sourcing advisors and leading global service providers 29

30 Section 3 IT&BPO Market Overview in Georgia Current state of Georgian IT&BPO industry Service industry in Georgia

31 Current state Current state of the Georgian IT&BPO market There is no established IT&BPO industry but potential for leveraging experienced talent from other industries Service industry Current state of the IT&BPO industry Existing IT&BPO companies No established IT&BPO industry Few market players Mainly based on one-off factors affecting the decision to establish the business Mostly small scale up to 50 FTE, but few large IT&BPO providers over 100 FTE We estimate total employed in IT&BPO sector at FTEs IT&BPO companies interviewed employ mainly Georgians No specific sectorial focus although largest IT&BPO companies seem to be providing call center, HR outsourcing and IT services No specific regional focus, IT&BPO companies service both domestic, as well as English and Russian speaking countries The general trend on the market is the growth in the number of small IT outsourcing companies No specific expansion plans were identified at the IT&BPO companies interviewed Potential for call centers Presence of inhouse call centers In-house call centers extensively used in banking, insurance and telecom industries Language skills available Communication skills available According to call centers, banks and insurance companies interviewed currently non of the large Georgian banks, telecoms or insurance companies considers outsourcing their call center Source: KPMG Research and Analysis 31

32 Current state Service industry Overview of service industry in Georgia Georgia has established service culture evidenced by high contribution to GDP Average CAGR of the key services industries 18% GEL 4,229 GEL 4,712 GEL 5,551 GEL 5,994 GEL 6,512 Retail trade Tourism Overall key services industry s contribution to GDP in 2014: 69.1% Turnover by industry mln GEL GEL 2,623 GEL 2,318 GEL 2,215 GEL 2,349 GEL 1,920 GEL 1,759 GEL 1,293 GEL 2,047 GEL 2,358 GEL 1,223 GEL 1,698 GEL 1,887 GEL 1,217 GEL 1,491 GEL 1,104 GEL 1,023 GEL 1,144 GEL 1,196 GEL 1,219 GEL 384 GEL 574 GEL 730 GEL 787 GEL 730 GEL E Post&communicat ions Hotels and restaurants Banking Contribution of the key service industries highlighted to GDP in 2014: 42% Note: (1) 2015 turnover was estimated by annualizing 2015 H1 data on a straight line basis (2) Turnover for the Banking industry comprises interest and commission income Employment by industry Key service industry in Georgia saw an overall rise during the past 5 years This resulted in a significant number of employees with service orientation that can be leveraged for the IT&BPO industry The total number of employees in Retail trade, Hotels and restaurants, Tourism, Post and communication and Banking services as at the end of 2014 was 136,143 The average salary across these industries was GEL 1,033 (USD 585) whereas average salary in Retail trade and Hotels and restaurants only was GEL 556 (USD 315) 60,000 50,000 40,000 30,000 20,000 10,000-1,600 1,400 1,200 1, Source: KPMG Research and Analysis, Geostat, National Bank of Georgia Number of employees 2014 Average monthly salary in GEL 2014 Note: Number of employees for the Banking sector is available for the Q2 2015, however no significant difference expected 32

33 Current state Service industry Overview of top industries in Georgia Wholesale and retail trade dominates the Georgian market by annual turnover 2, ,114 3,356 Turnover by industry, 2014 in mn GEL 6,899 19,237 Wholesale and retail trade Industry Transport and communication Construction Real estate, renting and business activities Hotels and restaurants Banking Sectors with higher potential in Georgia Energy Hospitality and Real estate Manufacturing Agriculture and Food processing Regional logistics corridor Regional services hub 5,167 8,637 Note: Banking turnover was calculated from National Bank of Georgia report Others Georgian National Investment Agency has identified Hospitality and Real estate and Regional services hub as sectors with higher potential in Georgia. Consequently, various initiatives and improvements shall be expected by investors in these areas. Top industries in Georgia during the last three years are: Wholesale and retail trade, Industry, and Transport and communication. 33

34 Section 4 Overview of Cost Base and Human Resources in Georgia Cost base Approach for talent assessment Probable and readily employable talent pool Supporting assessment of talent

35 Estimation of the cost base - Cost per FTE We have estimated the maximum total monthly gross cost per FTE at GEL 1,396 (USD 790) excl. management overheads. No other infrastructure set up costs are identified Description People Costs Real Estate Costs Components Frequency of expenditure Cost in USD per month per FTE Net Cost in USD per month per FTE Gross Cost in GEL per month per FTE Net Salaries Monthly Cost in GEL per month per FTE Gross Bonus Annual Annual L&D Annual New Hire - Recruitment & Relocation One-time New Hire - Training Annual Employee insurance costs (not mandatory) Annual Total People Costs Rental Costs (Net USD 15 for 10 sq.m.) Monthly Rationale Closer to the lower end of the average salaries was used for IT&BPO average monthly salary. However, increased based on the population survey. Refer to slide 15 A- class offices rent prices used for calculation. Please refer to slide 17 Utilities (Net USD 2.5 for 10 sq.m.) Monthly Amortized during 3 years Repairs & Maintenance (Net 5.35 for 10 sq.m) Annual Asset Rental Charges (for conference rooms etc.)quarterly Cost base Other Admin & Infra (Net USD 0.03 for 10 sq.m) Annual Total RE Costs Laptop/Desktop Lease Costs One-time Amortized during 3 years Bandwidth Charges MPLS & Internet Monthly End User Software Licenses One-time Amortized during 3 years Telecom costs Monthly IT Costs Print Managed Services - printer One-time Amortized during 3 years Print Managed Services - consumable Monthly IT Admin costs Monthly Repairs & Maintenance Annual Total IT Costs Travel & Travel Monthly Transport Transport Monthly Costs Total T&T Costs Other Costs Marketing & Sales Annual Total Other Costs Total monthly cost , ,395.6 Note: (1) Average of 8 to 12 sq.m was used for area per FTE calculation in accordance with employment density guide. Refer to slide 17 Costs in USD was translated into GEL using average 2014 rate of 1.77 Analysis of talent Source: KPMG Research and Analysis 35

36 Estimation of the cost base - Cost per FTE We have estimated the minimum total monthly gross cost per FTE at GEL 1,128 (USD 639) excl. management overheads. No other infrastructure set up costs are identified Description People Costs Real Estate Costs IT Costs Other Costs Components Frequency of expenditure Cost in USD per month per FTE Net Cost in USD per month per FTE Gross Cost in GEL per month per FTE Net Salaries Monthly Cost in GEL per month per FTE Gross Bonus Annual Annual L&D Annual New Hire - Recruitment & Relocation One-time New Hire - Training Annual Total People Costs Rental Costs (Net USD 13.2 for 10 sq.m.) Monthly Rationale Closer to the lower end of the average salaries was used for IT&BPO average monthly salary. However, increased based on the population survey. Refer to slide 15 B- class offices rent prices used for calculation. Please refer to slide 17. Utilities (Net USD 2.5 for 10 sq.m.) Monthly Amortized during 3 years Repairs & Maintenance (Net 5.35 for 10 sq.m) Annual Total RE Costs Laptop/Desktop Lease Costs One-time Amortized during 3 years Bandwidth Charges MPLS & Internet Monthly End User Software Licenses One-time Amortized during 3 years Telecom costs Monthly Print Managed Services - printer One-time Amortized during 3 years Print Managed Services - consumable Monthly IT Admin costs Monthly Repairs & Maintenance Annual Total IT Costs Marketing & Sales Annual Total Other Costs Total monthly cost ,128.3 Cost base Analysis of talent Note: (1) Average of 8 to 12 sq.m was used for area per FTE calculation in accordance with employment density guide. Refer to slide 17 Costs in USD was translated into GEL using average 2014 rate of 1.77 Source: KPMG Research and Analysis 36

37 Labour cost Highest salaries are earned in the financial intermediation sector Cost base Analysis of talent Generally largest average monthly gross salaries are in the Financial intermediation sector and the lowest are in Education, Hotels and restaurants and Agriculture. Overall average monthly salary for 2014 was GEL 865 (USD 490 at average 2014 exchange rate). GEL 1, , , ,156.1 Average monthly gross salary, , , Average GEL 865 Median GEL Financial intermediation Public administration Transport and communication Construction Production and distribution of electricity, gas and water Mining and quarrying Real estate, renting and business activities Health and social work Fishing Other community, social and personal service activities Manufacturing Wholesale and retail trade; repair of motor vehicles and personal and household goods Agriculture, hunting and forestry Hotels and restaurants Education Average Median Average salary for IT&BPO sector is estimated to be closer to the lower end of the average salaries at USD 250 Source: GEOSTATE. National Bank of Georgia, KPMG Analysis Note: Information from GEOSTATE was obtained in Georgian Lari and average salaries in USD were calculated using National Bank of Georgia s information of FX rates during first quarter of Source: Caucasus Barometer 37

38 Office stock in Georgia (1/2) Around 460,000 sq.m leasable offices are available in Tbilisi Cost base Analysis of talent Total office stock supply in Georgia In Tbilisi office stock supply grew significantly in 2014 In 2015 and 2016 Tbilisi office stock supply is predicted to increase slightly, compared to 2014, while no changes are expected in the stock of the regional business centers Around 52% of the office stock in Tbilisi is leasable, the rest is owner-occupied The biggest share in leasable office space is C and D class offices, under which old Soviet Union buildings and offices in apartments are considered Vacancy rates in business centers in Tbilisi From 2010 to 2014 there was significant decrease of vacancy rate for A class offices. Vacancy rate for B+ class offices also decreased and is currently below 5% Vacancy rate of A- class offices increased from 5% in 2010 to 16% in 2014 Average modern business centre vacancy rate in Tbilisi stands at around 7% in Thousands sq.m % leasable F 2016 F Tbilisi Regional business centers Leasable office space in Tbilisi by class, 2014 D 42% A 7% A- 7% B+ 23% 45% 40% 39% 35% 30% 30% 25% 25% 24% 23% 20% 19% 17% 15% 16% 16% 14% 12% 10% 8% 5% 5% 4% 4% 0% A A- B+ Source: Colliers 2014 report C 20% B 1% 38

39 Office stock in Georgia (2/2) Cost base Analysis of talent Average rent prices range from USD 13 (GEL 23) to USD 22 (GEL 39) per sq.m for B+ to A class offices Weighted average rent prices in Tbilisi for leasable office stock (USD per sq.m per month excl. VAT and service charges) After 2008 average rent prices in Tbilisi for leasable office stock (excl. VAT and service changes ) were decreasing for all categories of offices Since 2012 weighted average rents in business centres have been constant to date. The prime office rent in Tbilisi is around USD 21 (GEL 37) per sq.m. The figure is the same as CEE average. Rent price in the regions (USD per sq.m per month excl. VAT and service charges) Rent prices in Batumi and Kutaisi are almost the same USD 14.3 (GEL 25.3) and USD 14.5 (GEL 25.6) respectively. For Poti and Rustavi prices per sq,m are USD 8 (GEL 14.1) and USD 6 (GEL 10.6) respectively. USD USD Source: Colliers 2014 report A A- B Batumi Kutaisi Poti Rustavi Average space per FTE is estimated at 8-12 sq.m in accordance with employment density guides IT&BPO industry is expected to use B+ (lower vacancy) and A- (higher vacancy) class of leasable spaces Utilities are generally paid by the landlord and a fixed surcharge of around USD 2.5 (GEL 4.4) added to the rent price Source: KPMG Research and Analysis, OffPAT

40 Telecom, internet and energy distribution Internet and energy distribution Cost base Analysis of talent Internet There are four main Internet providers in Georgia - Caucasus Online, Silknet, Magticom and Geocell they cover almost whole territory of Georgia. Price and speed are nearly similar for the companies but generally it depends on the packages that companies offer and can range from GEL 60 (around USD 27) to GEL 200 (around USD 90) depending on the speed. In our experience, the average internet cost is GEL 20 (around USD 9) per FTE. Telasi Energy distribution companies Coverage Other terms Energo-Pro Georgia Source: KPMG Research and Analysis, telecom websites, Energy distributor websites Covers the whole territory of Tbilisi Covers the rest territory of Georgia Energy Distributors The prices per kw/h vary from Gel (0.032 USD) to Gel (0.061 USD) excluding VAT. On Consumption stage there are also three types of network: 101kw/h, from 101kwh to 301 kw/h and 301 kw/h and more. Prices per kw/h are: 0.08 Gel ( USD), Gel (0.047 USD) and 0.15 Gel (0.067 USD) accordingly, excluding VAT. For voltage stage network prices per kw/h vary from Gel ( USD) to Gel (0.075 USD), excluding VAT. For Consumer stage network prices per kw/h vary from Gel ( USD) to Gel ( USD), excluding VAT. 40

41 Legal environment Beneficial legal environment for IT&BPO Cost base Analysis of talent Labor Code of Georgia Legal age 16 years old Holidays 24 working days paid and 15 working days unpaid annually Minimum salary no minimum wage requirements Standard working hours 40 hours per week (48 hours for specified sectors) Overtime and shifts to be agreed between employer and employee. Rest time of minimum 12 hours between working days Payment for overtime more than for standard working hours but the exact rate to be agreed between employer and employee Termination by employer 1 month prior written notice and 1 months salary or 3-day prior written notice and at least two months salary/compensation within 30 calendar days of the contract termination Law on Entrepreneurs A business entity shall be registered by the National Agency of Public Registry, a legal entity under public law within the Ministry of Justice of Georgia The registration of a foreign enterprise may be re-domiciled in Georgia without interrupting the continuity of the business of the enterprise Unless otherwise provided for by the Charter, annual profits and loss shall be fixed and each partner's share shall be calculated at the end of each fiscal year on the basis of the annual balance sheet No exception is for services provided within Georgia or abroad. Law on personal data protection Georgia has adopted a law on personal data protection which regulates the requirements for processing personal data and data security, as well as the rights of the personal data subject in relation to processing the data The law also regulates the transfer of data to other countries and international organisations Tax Code of Georgia The tax legislation of Georgia comprises the Constitution of Georgia, international treaties and agreements, this Code and subordinate normative acts adopted in compliance with them Tax Rate Personal income tax 20% Profit tax 15% VAT 18% Georgia does not have social security tax Company set-up costs The state registration in Georgia is performed by National Agency of Public Registry (NAPR) The registration should be carried out within one working day after submitting all required documentation to the NAPR and paying a state due in the amount of GEL 100 (approximately USD 50) A representative office/llc can be registered on the same day of submission of documentation and the state due payable is GEL 200 (approximately USD 100) All copies of documentation provided from the country of incorporation of the Company are to be notarized and apostilled/legalized in that country (where possible), if any. Afterwards the documents are to be translated into Georgian and notarized in Georgia Normally the translation costs amount of GEL (approximately USD 7-10) per each translated standard page Source:: KPMG Research and Analysis 41