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
$150,000 in 1970 to 12
cents in 2000
Sources: UNDP, World Bank and The Economist
Metcalfe’s Law: The network effect
 The usefulness, or utility of
a network equals the square
of the number of users
Utility
 The more people use a
particular software, a
network or a book the more
valuable it becomes ,and
the more new users it
attracts , increasing both its
utility and the speed of
adaptation by still more
users.
Utility=Users2
Users
Law of disruption: The network effect
Years to reach 50M users:
 Law of disruption
Radio= 38
Users (Millions)
TV= 13
– Until a critical mass of
Cable= 10
users is reached, a
120
Internet = 5
change in technology
90
only affects the
technology.
60
– Once critical mass is
Cable Internet
attained, social,
30 Radio
TV
political, and economic
0
systems change
‘22‘30‘38‘46‘54‘62‘70‘78‘86‘94‘02
Source: Morgan Stanley.
…Led to more information at a lower
cost
Source: UNDP 2001
The dot-com boom and bust
Internet revolution fuelled corporate
tech spending…
US-based IT spending as a share of business capital equipment spending
50%
45%
Commercial Internet
40%
35%
30%
PC Introduction
25%
20%
15%
10%
5%
1960
1961
1963
1964
1966
1967
1969
1970
1972
1973
1975
1976
1978
1979
1981
1982
1984
1985
1987
1988
1990
1991
1993
1994
1996
1997
0%
Note: Information technology spending includes purchases of information processing and related equipment
(including office, computing, and accounting machinery), computers and peripheral equipment, communication
equipment, instruments, and photocopy and related equipment.
Source: U.S. Department of Commerce.
…And increased funding for startups
US technology funding (US$ billion)
$140
$120
$100
IPO proceeds of tech
companies
$80
$60
VC funding to tech
companies
$40
$20
Source: Morgan Stanley
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
$0
The highpoint in funding
Technology statistics for 1999 and 2000 as a percentage of total
for last 21 years
70%
Venture capital
financing
Source: Morgan Stanley
62%
56%
54%
IPO financing
Follow-on financing
M&A (dollar
volume)
...Leading to the boom in the year 2000
 US IT Spending Hit a
Record $532 Billion
 Since 1960, There Have
Been Only Three Years
When Annual IT Spending
Growth Exceeded or
Equaled 23%
– All Previous Instances
Occurring Prior to 1980 on
a Much Smaller Base
3.8
US$ trillion
– Growth of 23% Over 1999
– 51% of Its Capital
Equipment Spending
Technology wealth creation (US) as on Jan 31, 2000
Market value creation
Technology wealth
creation
0.792
0.4
0.147
Technology companies that
IPO'd between 1980 and 1999
The Internet sector
…And also opportunities for new
categories of companies
B2B providers
Ariba and
Freemarkets
Business
reengineering
verticals
eBay
Online
commerce
companies
Amazon.com
Content and
aggregation
providers
America
Online and
Yahoo!
Internet
software
providers
Internet
Infrastructure
Netscape
Cisco and
UUNet
1994
1995
1996
1997
1998
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...
Accelerated
Innovation and
Infrastructure
Expansion
Increased
Investments
And
New Entrants
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 pretax 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
320
300
250
200
160
150
100
50
0
32
8
Past
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
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 $300 billion through
new IPOs in 2000
US$ trillion
Technology w ealth creation (US)
Market value creation
3.8
0.4
Technology
companies that IPO'd
betw een 1980 and
1999 as on Jan 31,
2000
Source: Morgan Stanley
Invested amounts
2.5
0.7
0.79
0.15
Technology
companies that IPO'd
betw een 1980 and
2000 as on Dec 31,
2000
The Internet sector
as on Jan 31, 2000
0.22
0.24
As 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 econsultants
 Survivors looking to newer, more cost-effective
business models
Long term impact of the shifting
paradigms
 Increased customer interest in IT and business
Global Economy
Traditional IT Markets in
Recession
“Old “Economy
The Old and New
Economy
Converge
“New” Economy
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 ecommerce
sales
eBay
Yahoo
Amazon
 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
Source: Goldman
Sachs, Yahoo Finance
– 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
Computer Integrated
Corporations will
use technology to
closely integrate
with vendors and
suppliers
Manufacturing
SCM / ERP
Office productivity tools
EDI / Intranet
Teleworking
Electronic
markets
Corporations will use
technology to be
more customerfriendly
CRM
Extranet
Electronic Delivery Channels
Global call center
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,
Technology in banking
Net transactions cost
Transaction Costs (Banking)
$1.20
far less than transactions
through traditional
channels
Cost / Transaction
$1.00
$0.80
$0.60
$0.40
$0.20
$0.00
Source: Booz Allen Hamilton.
Investment for a
commercial bank to
reach 10M potential
customers
– Bricks & Mortar:
$900M
– Internet: $1M
Moreover, technology enables
outsourcing in both old economy and
new economy firms
Forces defining level of integration of
the firm
 A firm expands until
the cost of performing
a transaction inside the
– Search costs
– Contracting costs
– Coordinating costs
Lowering transaction
costs fueled by
outsourcing
companies
Cost
firm exceeds the cost of
performing the
transaction outside the
firm
Lowering in-house
costs
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’ business and domain
critical
 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