BPO Sector Research - 2016

(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 2015.

For the full report, please, contact the Georgian

National Investment Agency.

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2

© 2015 KPMG Georgia LLC, a company incorporated under the Laws of Georgia, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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 2015. For the full report, please, contact the Georgian National Investment Agency.

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3

© 2015 KPMG Georgia LLC, a company incorporated under the Laws of Georgia, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

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

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4

Section 1

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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

• 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

Rest of

EMEA

162.2

35.6

IT BPO

Note: Numbers might not add to 100% because of rounding off

306.8 182.6 IT BPO

AMERICAs

49%

157.2 90.5 IT BPO

24%

% share of the global demand

Source: KPMG Research and Analysis, HFS Global IT and BPO Services Market Report 2013

598.7 631.1 651.8 679.7

267.9 282.4

296.3 321.3

2011

2012

2013

2014

IT BPO

Geography-wise break-up of IT&BPO demand in 2014 (in bn USD)

Historical IT&BPO demand (in bn USD)

Central

Europe

20%

7%

53.4 12.7 IT BPO

APAC

489.4

247.7

66.1

197.8

Note: Central Europe includes Austria, Croatia, Czech Republic, Germany, Hungary, Liechtenstein, Poland, Romania Slovakia, Slovenia, Switzerland

(7)

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

156 164 172 179 187 196 78 82 87 92 97 103 344 363 382 392 412 432 135 140 145 150 155 160 29 32 34 36 39 42 57 61 65 68 72 76 47 50 53 57 60 64 207 220 234 245 259 275

2015E

2016E

2017E

2018E

2019E

2020E

IT Infrastructure Management ADM IT Professional Services Other IT Services

F&A BPO CRM BPO HR BPO Industry Specific

IT & B P O M ar ket 2015 -2020 F o recast (i n Bn US D)

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

IT CAGR 4.5% to 5.0% BPO CAGR 5.7% to 6.3% 1,054 1,111 1,172 1,219 1,281 1,347 IT&BPO CAGR (2011-14): 4.9%

(8)

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

20.7% 10.7% 48.7% 20.0% 306.8 IT Infrastructure Management ADM IT Professional Services Other IT services Total Demand

• 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

*Demand in 2014 (in bn USD) 8.2% 15.3% 17.3% 59.2% 182.6 F&A CRM HR Industry Specific Total Demand

IT

ser

v

ices

B

P

O

ser

v

ices

Key countries for IT&BPO demand

Demand by function*

Strong Demand Moderate Demand Low Demand Canada USA Mexico

(9)

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

IT Infrastructure Management ADM IT Professional Services Other IT services Total Demand

• EMEA constitutes over 30% of global demand

• Increased demand, driven by cost pressures emanating

from sovereign debt crisis, economic challenges and

regulatory constraints

*Demand in 2014 (in bn USD) F&A CRM HR Industry Specific Total Demand

IT

ser

v

ices

B

P

O

ser

v

ices

Key countries for IT&BPO demand

Demand by function*

Source: KPMG Research and Analysis, HFS Global IT and BPO Services Market Report 2013, news articles

UK Spain France Germany Poland Czech Republic

53.4 157.2 6.6% 12.3% 10.0% 36.3% 2.5% 10.1% 6.2% 15.9% 12.7 90.4 4.1% 55.8% 0.3% 11.1% 0.3% 10.2% 1.3% 16.9%

Note: Central Europe includes Austria, Croatia, Czech Republic, Germany, Hungary, Liechtenstein, Poland, Romania Slovakia, Slovenia, Switzerland

Central Europe Rest of EMEA

• IT&BPO market in Russia was estimated at

USD 1.9 bn in 2013, growing 15% from 2012.

Main

demand

comes

from

international

companies, governmental, trade and financial

organisations. IT infrastructure management is

the most demanded/developed.segment.

(10)

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

24.2% 9.8% 45.5% 20.5% 163.8 IT Infrastructure Management ADM IT Professional Services Other IT services Total Demand

• 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

*Demand in 2014 (in bn USD) Strong Demand Moderate Demand Low Demand 6.2% 21.7% 3.1% 69.0% 35.8 F&A CRM HR Industry Specific Total Demand

IT

ser

v

ices

B

P

O

ser

v

ices

Key countries for IT&BPO demand

Demand by function*

China

India

Japan

Australia

New Zealand

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11

Vertical trends

Financial Services, Manufacturing and Telecom continue to be largest verticals

in terms of IT&BPO spend

No. of contracts

2012 2013 2014

• 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

6.7 6.4 1.4 2.9 7.6 4.4 2.2 _0.8 _1.9 12.3 3.2 8.5 1.8 1.5 2.4 4 4.8 2.1 _1.7 _1.1 15.5 3.9 10.8 1.7 4.2 4 5.6 5.8 2.4 _0.6 _0.6 19.8 4.3 85 83 64 46 27 22 22 23 14 58 58 50 74 70 78 51 66 50 41 20 27 11 23 15 40 33 28 162 125 127 101 89 77 Financial Services Insurance Automotive and Aerospace Travel and Logistics

Manufacturing Energy and Utilities Pharma and Healthcare Publishing, Media and Entertainment

Retail Telecom Others

D e a l V a lu e ( U S D b illi o n )

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12

45% 28% 26% 24% 22% 18% 14% 11% 6% Financial Services Pharma Retail Energy Healthcare Government Manufacturing Telecom Chemicals

Demand for outsourcing by Industry

Source: KPMG Global Pulse Survey 1Q15, NASSCOM Strategic Report 2015, KPMG Research and Analysis

• 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

31%

32%

25%

12%

Financial Services Manufacturing Communication & Media Emerging**

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

*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

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13

Brief review of the key industries

Financial Services

(1/2)

Industry Overview Key Delivery locations

Key Drivers for Offshoring in Financial Services

• Impact on the overall revenues

through sophisticated financial

analyses and cash management to

offer better credit terms to

customers, thereby increasing

customer base

Transformation focused

Re-engineering full processes like:

• Cash management, resulting in

higher float

• Forecasting, resulting in better

accuracy of forecast

Optimization focused

Reduce cost per FTE by offshoring

transactional processes:

• Accounts Payable

• Accounts Receivable

Savings/ Efficiency focused

• 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)

• 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

(14)

14

Brief review of the key industries

Financial Services

(2/2)

Offshorable/ Outsourceable Retained in business unit / head office

% of

Activities

50%

Product development Marketing

25%

75%

Transaction processing

20%

80%

Treasury operations

50%

Control/ compliance

20%

80%

Merchant services

60%

40%

Institutional relationships

90%

10%

Business acquisitions

10%

90%

Channel Management

25%

75%

Account servicing

10%

90%

• 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 Services which

may be

This graph indicates the typical percentage of processes split between the offshored/ outsourced

organization and the parent organization

(15)

15

Brief review of the key industries

Manufacturing

(1/2)

Key Drivers for Offshoring in Manufacturing

• Use offshoring to lower the basic

cost of the product

• Penetrate new markets using

providers’ presence in several

countries to open up markets

Transformation focused

Create the optimal environment to

support delivery and management of

production through effective:

• Supply Chain Management

• Logistics

• Deductions management

• Warehouse management

Optimization focused

Achieve direct cost savings by

offshoring transactional pieces

• Benefit Admin

• Query resolution

• Accounts payable

Savings/ Efficiency focused

• 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

• 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)

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16

• 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

Offshorable/ Outsourceable Retained in business unit / head office

% of

Activities

90%

10%

Production operations Marketing

25%

75%

Logistics

90%

10%

Sales and after-sales operations

25%

75%

Material management

90%

10%

90%

10%

Safety management

80%

20%

Quality management

80%

20%

Compliance management Warehouse management

90%

10%

Brief review of the key industries

Manufacturing

(2/2)

may be

(17)

17

Brief review of the key industries

Telecom

(1/2)

Key Drivers for Offshoring in Telecom

Transformation focused

Optimization focused

Savings/ Efficiency focused

• 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)

• 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

Source: KPMG Research and Analysis

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

(18)

18

Offshorable/ Outsourceable Retained in business unit / head office

% of

Activities

• 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

may be

Brief review of the key industries

Telecom

(2/2)

Marketing

25%

75%

Fulfilment

20%

80%

Network Management

20%

80%

Product Development

90%

10%

Assurance

10%

90%

Billing

10%

90%

Channel Management

90%

10%

Customer Acquisition & Support

25%

75%

ILLUSTRATIVE

(19)

19

Brief review of the key industries

Healthcare

(1/2)

Key Drivers for Offshoring in Healthcare

• 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

Transformation focused

Improve process accuracy by creating

an optimal environment to support

patient-focused activities and

cross-functional care

• Medical records management

• Patient administration

• Revenue cycle management

• Claims denial management

• Medication errors

Optimization focused

Achieve direct cost savings by

offshoring transactional pieces

• Customer data acquisition and query

resolution

• Medical transcription

Savings/ Efficiency focused

• 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)

• 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

(20)

20

% of

Activities

50%

Product development and Business Acquisition New business

25%

75%

Revenue cycle _management

50%

Denial management

50%

Healthcare collections

10%

90%

Medical records management

10%

90%

Claims processing

10%

90%

Policy servicing and reporting

10%

90%

Eligibility services

90%

10%

• 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

Brief review of the key industries

Healthcare

(2/2)

may be

(21)

Section 2

(22)

22

34%

6%

2%

1%

17%

1%

35%

5% 1%

IT Infrastructure

ADM

F&A

KPO

IT Professional Services

HRO

Other IT services

CRM

Other BPO Services

Services outsourced % by functions

• IT Infrastructure and other IT services contribute to

almost 70% contract value of the functions outsourced

by the top 30 companies

ADM  Application Development

 Application Testing

IT Infrastructure

 Maintenance & Support  Data Management  Security Other IT Services  Network Support  Network Security  Multimedia Services

F&A  Finance & Accounting

 Payment Processing

HRO _{ Payroll Management}

CRM  Customer Care_{ Sales & Marketing}

KPO  R&D

 Product Engineering Services

Processes outsourced in each function

ILLUSTRATIVE

Services outsourced by companies with strong demand for IT&BPO services

IT infrastructure support drives the need for offshoring among the top 30

companies

Source: KPMG Research and Analysis, KPMG Deal Tracker 100% = Total annual

contract value by top 30 companies

Other BPO Services

 Logistics

 Facility Operations and Management Services

IT Professional Services  System Integration  Information Management  Software Implementation

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23

Typical TCO1_{savings between US and captive destinations}2

2014; percentage

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

India

Philippines

China

Mexico

Poland

Brazil

80-82% 74-76% 69-71% 65-67% 56-58% 49-51% 47-49% 41-43% 41-43% 41-43% 29-31% 28-30%

BPO Services

Source:: KPMG Research and Analysis

IT Services

How much do companies save by outsourcing/ offshoring?

Depending on the outsourcing destination, typical cost savings for companies

range from 30% to 80%

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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

What are sub-functions/areas likely to be offshored/ outsourced?

F&A services with varied complexity across the value chain are being

offshored/ outsourced

Source: KPMG Research and Analysis, NASSCOM Strategic Review 2014

• 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

Tax Management Compliance Management

_50%

Business Analytics

50%

General Accounting

90%

10%

20%

80%

20%

80%

95%

Treasury Management Fixed Asset Accounting

80%

20%

Travel expenses

93%

7%

93%

Accounts Payable/ Receivable

7%

100%

Payroll Period Close and Consolidation

% of

Activities

5%

This graph indicates the typical percentage of processes split between the offshored/ outsourced organization and the parent organization Services which

may be

ILLUSTRATIVE

60%

(25)

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

• 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

63%

37%

100%

87%

Payroll

Services _{Administration}Benefits

82%

Recruitment Administration Workforce Deployment

22%

Mobility Services

78%

18%

40%

60%

31%

69%

Compensation Services Employee Care Services

81%

19%

13%

Governance Offshorable/ Outsourceable Retained in business unit / head office

% of

Activities

Services which may be

ILLUSTRATIVE 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

(26)

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

• 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,

Lead Generation

87%

13%

Finalize solution

60%

40%

Periodic update & Knowledge session

47%

53%

62%

38%

Delivery Management

57%

Planning & Identification

43%

87%

13%

Requirements Analysis & fulfilment Offshorable/ Outsourceable Retained in business unit / head office

% of

Activities

ILLUSTRATIVE Low level of Complexity Identify revenue opportunities, Data base creation of prospective clients Lead Generation through email/ phone, Create customer awareness

RFI process, Identify right solution

Coordinate with technical team for implementation Reporting/ escalating issues, liaising between internal departments

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

(27)

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

• 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

Legal services

50%

Engineering services

25%

75%

Content development & publishing

25%

75%

Market research & data analytics

10%

90%

Financial research & analytics

10%

90%

% of

Activities

ILLUSTRATIVE

Low level of Complexity

Contract Drafting, Patent Search

Finite Analysis Writing, editing &

designing, Content planning & proofing

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

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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

• 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

Retained in business unit / head office

% of

Activities

Offshorable/ Outsourceable Services which may be

40%

60%

Data Mgmt.

15%

85%

End User Services

60%

40%

Enterprise Program Mgmt.

75%

25%

Compliance / Controls Mgmt

70%

30%

IT Governance Mgmt.

50%

Infrastruc ture

50%

65%

35%

Mgmt. Support

40%

Application Development & Maintenance

60%

45%

55%

Data Centre

40%

60%

Network ILLUSTRATIVE 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

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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% 64% 30% 21% 15% 7% 61% 65% 35% 17% 10% 6% 62% 59% 32% 20% 12% 12%

IT F&A HR Supply Chain

Management

CRM Industry specific

1Q13

1Q14

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

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

(30)

Section 3 IT&BPO Market Overview in

Georgia

Current state of Georgian

IT&BPO industry

Service industry in

Georgia

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31

Current state of the Georgian IT&BPO market

There is no established IT&BPO industry but potential for leveraging

experienced talent from other industries

Current state Service industry

• 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

750-850 FTEs

• IT&BPO companies interviewed employ mainly

Georgians

Current state of the IT&BPO industry

Existing IT&BPO

companies

Potential for 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

Presence of

in-house call

centers

Source: KPMG Research and Analysis

• 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

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32

Overview of service industry in Georgia

Georgia has established service culture evidenced by high contribution to GDP

Current state Service

industry

Source: KPMG Research and Analysis, Geostat, National Bank of Georgia

Note: Number of employees for the Banking sector is available for the Q2 2015, however no significant difference expected

• 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)

GEL 2,318 GEL 4,229 GEL 4,712 GEL 5,551 GEL 5,994 GEL 6,512 GEL 1,293 GEL 1,759 GEL 1,920 GEL 2,215 GEL 2,349 GEL 2,623

GEL 1,104 GEL 1,023 GEL 1,144 GEL 1,196 GEL 1,219

GEL 1,217 GEL 384 _{GEL 574} GEL 730 GEL 787 GEL 730 GEL 832

GEL 1,223 _{GEL 1,491} GEL 1,698 GEL 1,887 GEL 2,047 GEL 2,358

2010 2011 2012 2013 2014 2015E Retail trade Tourism Post&communicat ions Hotels and restaurants Banking

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

Average CAGR of

the key services

industries 18%

Overall key services

industry’s contribution

to GDP in 2014:

69.1%

T ur nov er by i ndus tr y m ln G E L

Contribution of the key

service industries

highlighted to GDP in

2014:

42%

200 400 600 800 1,000 1,200 1,400 1,600 10,000 20,000 30,000 40,000 50,000 60,000

Employment by industry

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33

Overview of top industries in Georgia

Wholesale and retail trade dominates the Georgian market by annual turnover

 Energy

 Hospitality and Real estate

 Manufacturing

 Agriculture and Food processing

 Regional logistics corridor

 Regional services hub

Sectors with higher potential in Georgia

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.

Note: Banking turnover was calculated from National Bank of Georgia report

Current state Service industry

Turnover by industry, 2014 in mn GEL

19,237 8,637 5,167 3,356 2,114 730 2,047 6,899

Wholesale and retail trade Industry

Transport and communication Construction

Real estate, renting and business activities

Hotels and restaurants Banking

(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

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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 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 Cost in GEL per month per FTE Gross Rationale People Costs Salaries Monthly 200.0 250.0 353.2 441.5

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

Bonus Annual 30.0 37.5 53.0 66.2

Annual L&D Annual 11.1 13.1 19.6 23.1

New Hire - Recruitment & Relocation One-time 7.0 8.3 12.4 14.6

New Hire - Training Annual 16.0 18.9 28.2 33.3

Employee insurance costs (not mandatory) Annual 11.3 14.2 20.0 25.0

Total People Costs 275.4 341.9 486.3 603.7

Real Estate Costs

Rental Costs (Net USD 15 for 10 sq.m.) Monthly 150.0 177.0 264.9 312.6 A- class offices rent prices used for calculation. Please refer to slide 17

Utilities (Net USD 2.5 for 10 sq.m.) Monthly 25.0 29.5 44.1 52.1 Amortized during 3 years Repairs & Maintenance (Net 5.35 for 10 sq.m) Annual 7.4 8.7 13.1 15.4

Asset Rental Charges (for conference rooms etc.)Quarterly 1.9 2.2 3.3 3.9 Other Admin & Infra (Net USD 0.03 for 10 sq.m) Annual 0.4 0.5 0.7 0.8

Total RE Costs 184.7 217.9 326.1 384.8

IT Costs

Laptop/Desktop Lease Costs One-time 33.3 39.3 58.9 69.5 Amortized during 3 years

Bandwidth Charges MPLS & Internet Monthly 9.0 10.6 15.9 18.8

End User Software Licenses One-time 6.3 7.5 11.2 13.2 Amortized during 3 years

Telecom costs Monthly 8.0 9.4 14.1 16.7

Print Managed Services - printer One-time 0.5 0.6 0.9 1.1 Amortized during 3 years

Print Managed Services - consumable Monthly 4.6 5.5 8.2 9.7

IT Admin costs Monthly 56.6 70.8 100.0 125.0

Repairs & Maintenance Annual 3.5 4.2 6.3 7.4

Total IT Costs 122.0 147.9 215.4 261.2 Travel & Transport Costs Travel Monthly 27.1 32.0 47.9 56.5 Transport Monthly 1.9 2.2 3.3 3.9

Total T&T Costs 29.0 34.2 51.2 60.4

Other Costs Marketing & Sales Annual 41.0 48.4 72.5 85.5

Total Other Costs 41.0 48.4 72.5 85.5 Total monthly cost 652.1 790.3 1,151.5 1,395.6

Source: KPMG Research and Analysis 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

Cost base Analysis of talent

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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 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 Cost in GEL per month per FTE Gross Rationale People Costs Salaries Monthly 200.0 250.0 353.2 441.5

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

Bonus Annual 20.0 25.0 35.3 44.1

Annual L&D Annual 5.5 6.5 9.8 11.5

New Hire - Recruitment & Relocation One-time 7.0 8.3 12.4 14.6

New Hire - Training Annual 8.0 9.4 14.1 16.7

Total People Costs 240.5 299.2 424.8 528.4

Real Estate Costs

Rental Costs (Net USD 13.2 for 10 sq.m.) Monthly 132.0 155.8 233.1 275.0 B- class offices rent prices used for calculation. Please refer to slide 17.

Utilities (Net USD 2.5 for 10 sq.m.) Monthly 25.0 29.5 44.1 52.1 Amortized during 3 years Repairs & Maintenance (Net 5.35 for 10

sq.m) Annual 3.7 4.4 6.5 7.7

Total RE Costs 160.7 189.6 283.8 334.8

IT Costs

Laptop/Desktop Lease Costs One-time 16.7 19.7 29.4 34.7 Amortized during 3 years

Bandwidth Charges MPLS & Internet Monthly 9.0 10.6 15.9 18.8

End User Software Licenses One-time 6.3 7.5 11.2 13.2 Amortized during 3 years

Telecom costs Monthly 8.0 9.4 14.1 16.7

Print Managed Services - printer One-time 0.5 0.6 0.9 1.1 Amortized during 3 years

Print Managed Services - consumable Monthly 2.3 2.7 4.1 4.8

IT Admin costs Monthly 45.3 41.0 80.0 100.0

Repairs & Maintenance Annual 3.5 4.2 6.3 7.4

Total IT Costs 91.7 111.4 161.9 196.6

Other Costs Marketing & Sales Annual 32.8 38.7 58.0 68.4

Total Other Costs 32.8 38.7 58.0 68.4 Total monthly cost 525.7 639.0 928.4 1,128.3

Source: KPMG Research and Analysis 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

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37

1,594.9 1,233.1 1,160.7 1,156.1 1,048.7 1,090.7 _970.4 727.4 504.6 719.4 772.0 786.0 538.4 534.2 _457.0 865.2 _786.0 Financial

intermediation administrationPublic communicationTransport and Construction Production anddistribution of electricity, gas and water

Mining and

quarrying Real estate,renting and business activities

Health and

social work Fishing community,Other 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

GE

L

Labour cost

Highest salaries are earned in the financial intermediation sector

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 2015.

Average salary for IT&BPO sector is

estimated to be closer to the lower end of

the average salaries at USD 250

Source: Caucasus Barometer

Average – GEL 865

Median – GEL 786

Average monthly gross salary, 2014

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).

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38

A 7% A-7% B+ 23% B 1% C 20% D 42%

Leasable office space

in Tbilisi by class, 2014

467 890 902 927 160 160 160 160 0 200 400 600 800 1000 1200 2013 2014 2015 F 2016 F T hous ands s q. m

Tbilisi Regional business centers

Office stock in Georgia (1/2)

Around 460,000 sq.m leasable offices are available in Tbilisi

39% 30% 25% 23% 8% 5% _4% 12% 14% 16% 19% 17% 24% 16% 4% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 2010 2011 2012 2013 2014 A A- B+

BPO Sector Research - 2016

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 2015.

For the full report, please, contact the Georgian

National Investment Agency.

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 2015. For the full report, please, contact the Georgian National Investment Agency.

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

Table of Contents

Section 1

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

•

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

Rest of

EMEA

AMERICAs

49%

24%

2011

2012

2013

2014

Geography-wise break-up of IT&BPO demand in 2014 (in bn USD)

Historical IT&BPO demand (in bn USD)

Central

Europe

20%