Lessons from the downturn, and the road ahead. NASSCOM 2002

1. 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

2. 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

3. 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

4. Metcalfe’s Law: The network effect • The usefulness, or utility of a network equals the square of the number of users • 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 Utility Users

5. Radio= 38 TV= 13 Cable= 10 120 Internet = 5 Users (Millions) 90 60 Cable Radio Internet 30 TV 0 ‘22 ‘30 ‘38 ‘46 ‘54 ‘62 ‘70 ‘78 ‘86 ‘02 ‘94 Law of disruption: The network effect Years to reach 50M users: • Law of disruption • Until a critical mass of users is reached, a change in technology only affects the technology. • Once critical mass is attained, social, political, and economic systems change Source: Morgan Stanley.

6. …Led to more information at a lower cost Source: UNDP 2001

7. The dot-com boom and bust

8. 50% 45% Commercial Internet 40% 35% 30% PC Introduction 25% 20% 15% 10% 5% 0% 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 Internet revolution fuelled corporate tech spending… US-based IT spending as a share of business capital equipment spending 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.

9. …And increased funding for startups Source: Morgan Stanley

10. The highpoint in funding Source: Morgan Stanley

11. ...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

12. …And also opportunities for new categories of companies

13. 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)

14. Effects of the Telecommunications Act Increasing share of CLECs Decreasing prices Source: FCC reports and Bear, Stearns & Co

15. Accelerated Innovation and Infrastructure Expansion Increased Investments And New Entrants Improved Utility, Price Performance and Profits Telecom Boom Increased Bandwidth Demand The telecom sector witnessed strong growth...

16. 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

17. Combined with other drivers of growth in bandwidth supply • 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

18. 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

19. 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 Source: Morgan Stanley

20. The impact of the downturn

21. Global Economy “Old “Economy “New” Economy Short term impact of the shifting paradigms • 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 Traditional IT Markets in Recession The Old and New Economy Converge

22. Global Economy “Old “Economy “New” Economy Long term impact of the shifting paradigms • 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 Traditional IT Markets in Recession The Old and New Economy Converge

23. Technology will continue to be a key driver of businesses worldwide

24. 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

25. eBay Yahoo Amazon eBay – the future of online business models? Trends in market capitalization • Growing at twice the rate of overall e-commerce sales • 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 Source: Goldman Sachs, Yahoo Finance

26. 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

27. Traditional companies will continue to use technology in numerous ways Corporations will use technology to improve internal processes Corporations will use technology to closely integrate with vendors and suppliers Corporations will use technology to be more customer-friendly • 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 • CRM • Extranet • Electronic Delivery Channels • Global call center • Electronic markets • Intranet • Computer Integrated Manufacturing • Office productivity tools • Teleworking • Video conferencing • SCM / ERP • EDI / Intranet • Electronic markets Source: BusinessWeek September 18, 2000

28. Technology in banking • Net transactions cost far less than transactions through traditional channels • Investment for a commercial bank to reach 10M potential customers • Bricks & Mortar: $900M • Internet: $1M Cost / Transaction ATM Branch Internet Telephone PC Banking Source: Booz Allen Hamilton.

29. Forces defining level of integration of the firm Lowering in-house costs Lowering transaction costs fueled by outsourcing companies Cost 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 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

30. Building durable organizations in these challenging times

31. 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

32. 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

33. 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

34. 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

35. 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

36. The road ahead: Build new drivers of growth • Create new services and strengthening existing services • Systems integration • Business process outsourcing • Consulting / package implementation business

37. 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

38. 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

39. Thank you