Perspectives on global O&O+ preview on EESTCom7+ implications for Bulgaria and

its Young IT LeadersDetlev J. Hoch/ Dr. Peter Peters

Sofia, April 26, 2012

Presentation at Young IT Leaders Forum at IT Leaders Academy by Musala Soft and University of Sofia Faculty of Mathematics + Informatics preceding Global O&O Conference/EESTCom 7

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

|McKinsey & Company 1

Contents

Outsourcing & Offshoring in the world and EE – status quo

Opportunities for Bulgaria

What could this mean for you

|McKinsey & Company 2

ITO & BPO are still the largest O&O markets, while newer segments such as Knowledge Process Ousourcing and Cloud Sourcing show rapid growth

Outsourcing market size, USD Bn / Growth percentMarket size 2012, USD Bn

Growth 2011 vs 2010, %

182

3,3%

315

7,3%

11

20,0%

55

10,6%

48

37,0%

▪ Eastern European BPO market is growing double digit despite low growth for the industry globally

▪ Growth driven by bold moves, with 1000s of FTEs in shared service centers for maximal value creation

Business Process Outsourcing (BPO)

IT (and Eng.) Outsourcing(ITO)

Knowledge Process Outsourcing (KPO)

Telecom Network Outsourcing (TNO/NWO)

▪ ITO growth remaining stable, ESO somewhat slowed▪ Mega deals are replaced by multisourcing of different

IT services/stacks

▪ Need to O&O even high-end knowledge activities due to select talent shortages and productivity pressures in slow-growth mature developed markets favoring

▪ Further labor arbitrage of high-end niche activities cutting across BPO, ITO and ESO

▪ Driven by large transformational deals, where end-to-end responsibility for NW operations is outsourced

▪ Adapted globally, and emerging markets (e.g. EE) contribute to significant portion of the growth

▪ Still relatively small market, but rapidly growing▪ Private cloud solutions outgrowing public ones in

the enterprise space due to security reservations

Cloud Sourcing

SOURCE: Gartner, Evalueserve est., Factiva, IDC, Forrester, McKinsey analysis/Apr. 2012, small double-counting tbd

Total: 611 bn USD growing at 8%

|McKinsey & Company 3

2,171

India

Latin America

384

Middle East & Africa

83

10%

5%

15%

Geographically, highest O&O growth primarily in Asia and Eastern Europe

Market size 2011, FTEs, ‘000

Growth 2011 vs 2010, %

O&O market size and growth by geography Number of FTEs, ‘000 / Growth percent

Key observations

▪ O&O industry is quite a sizeable industry with 4,580,000 FTEs and varying growth by region

▪ AsiaPacific is a large market with most positive growth forecast

▪ Central and Eastern Europe growth at almost double the rate of India

Central & Eastern Europe

304

19%

SOURCE: Gartner, EESTCom, China Sourcing, NASSCOM, BPAP, BRASSCOM

NOTE: CEE: Poland, Czech Rep. Hungary, Romania, Bulgaria, Russia, Slovakia, Ukraine; AP: China, Philippines; LA: Mexico, Brazil, Argentina, Chile, Colombia, Uruguay; ME&A: Egypt, Tunisia, Morocco, South Africa,Kenya, Senegal

Asia/Pacific

1,638 25%

|McKinsey & Company 4

O&O jobs in Eastern EuropeFTEs, thousands, cumulative

YE 2010: 254,000 FTEs

2000 01 02 03 04 05 080706 09 100

100

200

300

400

500

O&O job growth in Easter Europe is back to pre-crisis levels

▪ The Eastern European O&Oindustry is recovering from the financial crisis, and is heading back to growth levels around 20%

▪ Poland and Russia are main contributors to last year’s growth,

+11%

+22%

+34%

+31%

SOURCE: McKinsey

2011

20% expectedin 2011

19%

+15%

YE 2011: 304,000 FTEs

|McKinsey & Company 5

India is still the benchmark gorilla in O&O, although EE recently grew at almost double the rate of India

SOURCE: NASSCOM; McKinsey EESTCom Research Apr. 2012

1 For India the data correspond to FY ending in March 2010 and 20112 Estimates

O&O centers, 2010 and 2011 Eastern Europe India1

∆∆∆∆ 2010/2011 (percent)

EE as %of India

BPO (F&A,HR, CC)

R&D, ESO

ITO

Total

11

15

16

13

12

16

15

14

2010 2011

+9.7

+19.0

+9.6

+10.0

+6.0

+18.0

+13.4

+25.0 ▪ Future value proposition of EE currently evolves around BPO and ITO simultaneously

▪ Can EE enhance development/ retention of high-skilled IT/R&D work?

▪ In 2005 EE O&Omarket was only 7% of Indian market vs. 14% in 2011

Great growth story2010 2011

92

855

120

835

45

290

257

1,980

115

9772

140

8762

49

3182

304

2,1712

FTEs ('000)

|McKinsey & Company 6

Poland has been the main engine for 2011 growth in EE O&O

SOURCE: McKinsey

2010

2011

Total FTEs (FTE, thousands, 2010, 2011)

Change in FTEs (percent, 2010/2011)

00 10 20 30 40 50 60 70 80 90

▪ Poland is holding the leading location position in Eastern Europe with highest absolute growth

▪ EU countries' growth is decreasing, but Russia and Ukraine regained growth

Ø 2010: +15% Ø 2011: +19%

Romania

Czech Republic

Poland

Ø 2011: 38

10

20

30

40

50

60

Ø 2010: 33Hungary

Slovakia

Romania

Czech Republic

Bulgaria

Russia Poland

70

80

90

Russia

Ukraine

Hungary

Bulgaria

Ukraine

Slovakia

|McKinsey & Company 7

Captives are the stronghold of offshoring to Eastern Europe, although outsourcing is catching up

SOURCE: McKinsey

27 27 2831 33

2011

67

1009

72 697373

2007 08

Captives

Global and localvendors

Total number of FTEsShare in percent across EE1

1 Proxy based on data for Poland

▪ Change corresponds to growth contribution of 38% from outsourcing providers (6%-points share gain in a growing market)

▪ Market is becoming more mature

▪ Local providers, especially for Poland, seem more successful

|McKinsey & Company 8

1.04532

58

767

Total 2011

20102009

59

20082007

96

2006 2011

33

Existing centers remain anchors of growth – just 5 percent of additional jobs were created in new centers

SOURCE: McKinsey

FTEs in new centers (‘000)

Share of new center FTEs (%)

Examples of new centers (2011)

Number of centers

10 7 4

25 19 20

2

5

3

8

|McKinsey & Company 99

Companies turn to Eastern Europe as a O&O hub because of talent

What is the most important reason for outsourcing and offshoring to EEMEA locations? (multiple answers possible)

1 Flexibility, higher quality2 Labor laws, focus on core competencies, reduction of complexity

SOURCE: EESTCom pre-conference survey 2010/2011/2012 as of Apr22, 2012; McKinsey

5670

4

30

53

7063

5

15

68

0

3

31

76

72

55

Other 5251

Government subsidies

Closeness to new market

Access totalent pool

Language skills &cultural proximity

Cost savings EESTCom 2011

EESTCom 2010

Percent respondents

EESTCom 2012

▪ Cost advantages are table stakes, but with decreasing relevance

▪ Language skillsand culturalproximity are a necessity

▪ Access to talent is becoming the most important reason for choice of O&O locations

|McKinsey & Company 10SOURCE: LRI Analysis; MGI; country government statistics; embassies; McKinsey

11

11

16

23

86

Hungary

Poland

Romania

Czech Republic

177

Bulgaria

Russia

Grads suitable for O&O per year '000 graduates

O&O industry needs to improve/retain the value proposition in order to attract the suitable talent

Suitable grads intake of O&O industry3

Percent

1 proxy assuming growth is fueled by graduates

5

12

4

27

20

7

▪ There is enough suitable graduates in the Eastern European market

▪ However, there is a need for the O&O increase it´́́́s value proposition to attract the available talent

▪ Two questions to be considered to asses possibility to increase value proposition

– 1. What actions shall be taken tap in to the talent pool (e.g. university partnerships, career growth opportunities)

– 2. Can the industry offer raising salary levels and still stay competitive on cost

|McKinsey & Company 11

Overall O&O has become a relevant industry across EE, where Poland has shown strong growth not only in 2011 but ever since 2007

SOURCE: McKinsey EESTCom research Apr 2012

49

1812

22

6714

34

66

31

22

41

1317

32

82

Eastern Europe

304

162

RussiaRomaniaSlovakiaCzech Rep

BulgariaUkraineHungaryPoland

20112007

24%24% 24% 19% 17% 15% 15% 8% 17%

X%Annual growth (2007-2011 (CAGR)

O&O jobs in Eastern Europe 2011 vs. 2007FTEs, thousands

▪ Since 2007, growth in Eastern European O&O is spread across multiple locations, with Poland being the key one

▪ Pool size deployed has nearly doubled

▪ Growth in all locations besides Poland and Russia is still not picking up to pre-crisis levels

▪ Bulgaria today seems a niche player (with strong focus on ITO)

1%40% 13% 11% 9% 9% 5% 15% 19%

X%Growth 2011 vs 2010

|McKinsey & Company 12

Contents

Outsourcing & Offshoring in the world and EE – status quo

Opportunities for Bulgaria

What could this mean for you

|McKinsey & Company 13SOURCE: Global Insight, LRI Analysis, Country government statistics, Embassies, McKinsey

Number of inhabitants, 2009Age group 18-30‘000 000 persons

Total number of graduates per year2, 2007/08‘000 graduates

Portion of engineering grads1

Percent

Engineering grads per year1

‘000 graduates

Suitability of engineering grads, 2009Percent

Suitable engineering grads per year‘000 graduatesCountry

Portion of grads per yearPercent

1

2

3

3

3

4

7

11

12

18

19

83

125

63

49

60

62

58

330

110

800

410

1,358

420

5,464

3,245

7

7

10

6

6

21

26

74

52

37

118

827

500

8

1

3

2

2

18

4

45

21

31

11

Bulgaria

Tunisia

Czech Republic

Hungary

Egypt

Romania

Brazil

Philippines

Russia

Poland

China 217

India 249

Morocco

1 The division into fields of education for European countries according to the International Classification of Education (ISCED 1997)2 University graduates

ITO+ESO

LOCAL STATISTICS

Difference to past material !

1

3

3

3

4

4

2

2

3

2

2

5

1

15

15

10

10

9

9

13

9

24

6

17

14

11

25

10

50

50

50

15

23

15

25

20

25

25

20

Appa-rentlydrastic shift away from Eng.studies in some EE countries

Bulgaria adds rather small quantities of suitable Eng++ talent seemingly most appropriate for high-end niches of ITO++, BPO+ and KPO

Can BG get 40%?

Can BG get 50%?

~11,000 suitable grads in BG for all of O&O, where Eng. is subsegment

BG opportunities in ITO++, BPO+ KPO niches

|McKinsey & Company 14

Where are the growth opportunites in the current Bulgarian market

Category 1

…

…

…

…

…

Opportunitiesfor start ups in the knowledgeintensive areas

2 - 20

Category 2

Keppel Fels

telerik

Ixetic

Musala Soft

Infosys Bulg.

TCS Bulg.

Scale up of localplayers as KPOincreases

20 - 200

Category 3

SAP Bulg.

Johnson Controls Bulg.

EPIQ/Melexis

Accenture/ Avanade

CSC/OBS

C3i

E.ON

Capgemini

Dell

Cisco

Oracle

EMC/VMWare

200 - 1,000

Category 4

HP/EDS

IBM

Vodafone

DT/TSI via OTE

Siemens

Fujitsu

> 1,000

SOURCE: Discussion between Colliers, Adecco and McKinsey, Varna, June 10,2009 + McK additions

… existing … new

Further growth of global brands intake and growth ofdemand forspecializedtalent

Size categories by number of employees OPPORTUNITY ROSTER

|McKinsey & Company 15

The growth of KPO is being driven by 4 key elements

Availability of genuinely high-quality talent in low cost offshore locations

▪ Number of skilled engineers, scientists, mathematicians, PhDs inlow cost locations is growing steadily

▪ The economic downturn is leading well qualified people in low-cost countries to seek local employment opportunities

Capabilities and presence often exist, upon which to build KPO capabilities

▪ Often, KPO capabilities are built on top of existing scale-based capabilities, so taking advantage of existing facilities, relationships and G&A investments

▪ Skill-based O&O often taps into existing data sources from processes already the subject of scale-based O&O

The rewards and RoIof skill-based O&O are great

▪ Typically the value created is top-line related and often many times the cost of the resources (who are often hired on top of existing resources)

▪ The labour arbitrage from skill-based offshoring is greater than for scale-based in absolute terms, and often in % terms

Increases technology and the drive for “Big Data” has provided KPO a tailwind

▪ Innovations in data management and could technologies have provided increased opportunities to deliver new innovative KPO services

▪ The market hype for “Big Data” has provided the KPO industry increased attention

|McKinsey & Company 16

46 6 7

911

1417

20

332

276

230

192

160150150

106

0

2

4

6

8

10

12

14

16

18

20

22

0

50

100

150

200

250

300

350

400

Global RevenueUSD Billion

Global No of FTE’sThousands

2014-15

398

2013-1412-1311-1210-1109-1008-0907-082006-07

$11B KPO market expected to grow at 20% annuallyGlobal No of FTE’s (Thousands)

Global Revenue (USD Billion)

SOURCE: Evalueserve estimates, Factiva

1 Low end of estimates has 2010 spend at $6B with 15% CAGG

KPO FTE ~3-4%

of global O&O

market

There are several emerging trends in the KPO industry

▪ India and Philippines are primary locations for current offshore KPO activity, reflecting that established IT-BPO players are capturing majority of early market share

▪ KPO providers’ revenues tied to general economy as services offered typically focus on revenue generating endeavors (e.g., market analysis, equity research), resulting in slow growth between 2007 and 2010

▪ Increasing alignment of KPO services with specific industries (e.g., applied sciences, legal and intellectual property) limiting the amount of consolidation in the space

|McKinsey & Company 17

The Big Data hype is creating a renewed focus on KPO

SOURCE: McKinsey Global Institute analysis

Europe public sector administration▪ €250 billion value per

year

▪ ~0.5 percent annual productivity growth

Global personal location data▪ $100 billion+ revenue

for service providers

▪ Up to $700 billion value to end users

Manufacturing▪ Up to 50 percent

decrease in product development, assembly costs

▪ Up to 7% reduction in working capital

US health care▪ $300 billion value

per year

▪ ~0.7 percent annual productivity growth

US retail▪ 60+% increase in net

margin possible

▪ 0.5–1.0 percent annual productivity growth

EXAMPLE

|McKinsey & Company 18

Profit pool increases

Profit pool decreases

Impact of Big Data adoption

Profit pool stable

Intermediate analytics programming environments

Analytical DesktopPredictive analytics

Statistical analysis

Natural language processing

Other analytics engines (e.g. rich media processing)

Data visualization / dashboards

Data visualization programming interface

Master Data Management (MDM)

Data security

Data quality tools (cleansing, normalizing)

Platform agnostic accelerators / query optimiz.

Decision Support Systems

Statistical programming interface (e.g., SPSS)

Performance management

Mobile delivery

Data access (e.g., ETL)

Enterprise data warehouse tools

Mid-range servers

Volume / commodity servers (e.g., x86)

Server Operating System

High-end servers

NoSQL (e.g., key-value, columnar, document)

Enterprise Network Attached Storage (NAS)

Hierarchical DBs (e.g., XML)

Scale-out network storage

Enterprise Direct Attached Storage (DAS)

Traditional DBs(e.g., relational, transactional)

Storage Area Network (SAN)

Application integration

Deployment

Application development

Operations services

Maintenance and support (HW and SW)

Applications management

Servers StorageDBMS / Data storage

Data management / integration

Unified development layer

Analytics processing engine

Analytics programming interface

Presentation applications

End-user devices

System integrators

Services provision

1 2 3 4 5 6 7 8 9 10 11

ServicesPresentation / accessAnalyticsData managementInfrastructure

IT/Business technology consulting

Data providers (e.g., data as a service)

File systems (HDFS, flat-file systems, object store)

Other services (e.g. analytics as a service)

Other applications

Infra. SW (e.g., hypervisor, availability, system mgmt.)

Data instrumentation / extraction

Outsourcing providers players are moving quickly to capture shifts in profit pools driven by advanced analytics

SOURCE: Industry experts, team analysis

Storage Operating System)

Multisource aggregator platform

Data platform as a service

End user productivity platform

Unified data programming abstraction

Advanced analytics will continue to grow the needs for analytical talent and services. Many of these capabilities will

be sourced

|McKinsey & Company 19

There are many active KPO players across categories (1/3)

SOURCE: Gartner, vendor websites

Research & Analytics

Location(s) ServicesVendor FTEs

1,500+ ▪ Marketing analytics▪ Risk analytics▪ Supply chain analytics

Chicago, USBangalore, India

Gurgaon, India 1,000+ ▪ Market research packs, statistical analyses

▪ Patents processing

1,300+ 1 ▪ Retail analytics▪ Corporate risk management

services▪ Financial modeling and

valuations

Mumbai, India

China, Dubai, Argentina, India

1,300+ ▪ Financial analysis ▪ Market research

Mumbai, Chennai, Nangpur in India

700+ 1 ▪ Financial analysis▪ Risk analytics

1 Number does not include BPO services

|McKinsey & Company 20

There are many active KPO players across categories (2/3)

SOURCE: Gartner, vendor websites

Clinical Trials

100+ ▪ Drug discovery services▪ Complex chemistry services▪ Genomics/proteomics based

technologies

Budapest, Hungary

100+ ▪ Clinical research▪ Data management▪ Biostatistics

Moscow, Russia

Saint-Petersburg, Russia

100+ ▪ Drug development▪ Post-marketing surveillance ▪ Pharmaco-economics

Engineer-ingServices

8,000+ ▪ Product & Software Development

▪ Product & Commodity Management

▪ Business Platforms▪ Product (Co-) Innovation

Americas, Asia Pacific, Europe, Middle East and Africa

850 ▪ New Product Development▪ Plant Solutions and Services▪ PLM Solutions▪ Geospatial Technology Solutions

Americas, Asia Pacific, Europe, Middle East and Africa

Location(s) ServicesVendor FTEs

|McKinsey & Company 21

There are many active KPO players across categories (3/3)

SOURCE: Gartner, vendor websites

Supply Chain Services

LPO

Chicago, SF, Washington , NY in US; Mumbai and Pune, India

475 ▪ Litigation support, ▪ Contracts, compliance and legal

research▪ Legal analytics and real estate

Overland Park in US; Gurgaon, India; London UK; Tel Aviv, Israel

600+ ▪ Litigation support, ▪ Contracts, Intellectual Property▪ Law Firm Solutions▪ Immigration Services

▪ Sourcing▪ Procurement▪ Logistics Support

3,000Americas, Europ, Asia, Australia & New Zealand

India, China, Mexico, Hungary

▪ Demand and Inventory Management

▪ Sourcing▪ Logistics

125

Location(s) ServicesVendor FTEs

|McKinsey & Company 22

Most regional growth success stories are basedon a clear set of strategic enablers …

BangaloreTaiwan

Malaysia

Singapore

North America

Europe

Asia

Portland

Silicon Valley

Phoenix

Boston

Virginia

Pittsburgh

Austin

St. Louis

Silicon Alley

Scotland

Ireland

Cambridge Stockholm

Kempala

Israel

SophiaAntipolis Styria

Munich(Martinsried)

Catalonia

DresdenJena

Wolfsburg

Graz

Poitiers

Oulo

Companies and

Research institutes

Human capital

Financial capital

Infra-structure

Demand

(Local+)

Busi-nessenviron-ment

Strategic masterplanPossible initiatorsof the master plan

Companies/corporate associations (Wolfsburg, Phoenix, Pittsburgh, St. Louis)

Governments/district administrations (Oulo, Graz, Dresden, Israel, Catalonia)

Universities (Austin, Boston, Cambridge)

Individuals (Poitiers, Silicon Valley)

|McKinsey & Company 23

Bulgaria’s current status against enablers is rather mixed

SOURCE: World Economic Forum Global Competitiveness Report 2010-2011; McKinsey Innovation Heatmap

Financial capital

Infra-structure

Demand (Local+)

Business environment

Human capital

Companiesand research

institutes

Top quartile

Above average

Below average

Bottom quartile

xx

xx

xx

xx

Bulgaria rank (139 countries)

Company spending on R&D

Ease of access to loans

Financing through local equity

Business impact of rules on FDI

Venture capital availability

96

62

90

126

71

Broadband Internet subscribers per capita

Quality of air transport infrastructure

Quality of electricity supply

Quality of railroad infrastructure

Quality of roads

44

90

96

54

135

Buyer sophistication

Domestic market size index (GDP + net trade)

Foreign market size index (exports)

Govt. procurement of tech. products

Control of international distribution

State of cluster development

87

100

112

84

64

65

Availability of scientist and engineers

Quality of primary education

Quality of math and science education

Quality of management institutions

Availability of research and training services

University-industry collaboration in R&D

94

80

110

77

76

69

Intellectual property protection

Hiring and Firing practices

Burden of govt. regulation

Extent and effect of taxation

Time required to start a service

Utility patents per capita

Availability of latest technologies

112

42

76

83

31

100

65

|McKinsey & Company 24

Local deep domain knowledge is crucial for success in both ideation and commercialization

SOURCE: World Economic Forum; Worldbank; McKinsey analysis

1 Global leaders: United States, Japan, Singapore, Germany, Finland

2 World Economic Forum – 2010-2011 Global Competiveness Survey (index 1-7)

3 Worldbank – World Development Indicators Database;

5,74,74,13,5

Innovation driver

Quality of scientific research institutions2

Technical journal pubs per million people3 15,5

186,8106,8

660.8

Availability of specialized training2

5,74,45,1

3,9

Quality management schools2

5,25,14,23,7

Quality of math and science education2

5,04,74,64,0

Example basic human capital drivers▪ Demographic profile▪ Quality of basic educational system▪ Quality of math/science education

Deep domain knowledge

High-tech commercialization

Number of engineering PhDs

IndiaGlobal

leaders1PolandBulgaria

Quality of the educational system2

5,04,33,83,4

Example domain knowledge drivers▪ Number engineering/science PhDs▪ Quality of research institutions▪ Number of entry-level engineers▪ Technical/scientific publications

|McKinsey & Company 25

▪ Significant talent pool trained through specialized education to suit the profiles of key focus areas

▪ Presence of select global players focused on these areas in BG

▪ Conducive business environment including incentives for setting up business focused on the areas

BG should focus on knowledge intensive areas in the nearer term, and over time build-out capability

Near-term2012-2014

* first examples: Ship/vehicle design/CAD, Sustainabiltiy monitoring tech, Embedded systems in Mechatronics, Remote I/S mgmt incl Cloud services

SOURCE: McKinsey, BG SVoBS team

Value proposition of Bulgaria

Key enablers needed

Longer-term2015-2020

▪ Leading in specialized focus areas* (defined by a functional service domain, vertical) industry segment and geographic demand structure)

▪ Not competing on scale and cost with leading locations such as India and China, but quality niche play

▪ Larger base of IT experts and engineers as well as leverage of alternative talent such as science and commerce graduates

▪ Competitive costs of operations driven by sufficiently large suitable talent pool, and cost-effective infrastructure

▪ Top IT destination competing with leading locations such as India and China, becoming a global hub for ADM and other specialized focus areas

3,000 – 5,000 newjobs in focus areas*

>15,000 new jobs in focus areas & beyond

PROPOSAL FOR DISCUSSION

|McKinsey & Company 26

Contents

Outsourcing & Offshoring in the world and EE – status quo

Opportunities for Bulgaria

What could this mean for you

|McKinsey & Company 27

Select Bulgarian regions seem to provide excellent opportunities for good work-life balance - important to global citizens of a Silicon Valley of the Black Sea (SVoBS)

Bulgaria offers the opportunity to choose among several large cities each offering different lifestyle and business opportunities

- Bulgarians are very open and receptive of different cultures, practices and innovations

- All large cities are relatively close to both the sea side and to a major mountain resort

- All large cities have universities andspecialized high schools

Distance Varna –Bourgas similar to San Francisco -San Jose ☺

SVoBS initative scope:- Varna +/- Bourgas

greenfield approach and/or

- Sofia brownfield withSofia Business Parkas pot kernel, yet, tbc:- expandability- academia linkage- cultural spirit of

business only vs.townhall + agora

- cost of office space++

SOURCE: Colliers BG + team, McKinsey

Silicon Valley of the Black Sea (SVoBS)could serve as pilot forfurther regional/ country-wide economicdevelopment initiatives

Where is BIT: Bulgaria Institute of Technology ?

|McKinsey & Company 28

KFS In SW&SERVICES vary significantly by the three major types of business and recent trends blur the boundaries - Your idea positioning to be discussed -

Source:DJH/ McKinsey

▪ Aggressive standard setting

▪ Massive partnering

▪ Superior marketing

▪ Speed management

[Licence and Maintenance Fee revenues]

▪ Excellent HRM processes (recruiting, development, retention)

▪ Top-notch project management and project controlling (scoping to claiming)

▪ High utilization of people

▪ World-class relationship management

[Times&expenses based revenues]

▪ Outstanding operations processes

▪ High utilization of assets

▪ Excellent service level management

▪ Phenomenal scale advantages and corresponding low cost position

[Recurring ops services rev/PPU]

Prof. SW Services

OperationalServices- ITO- BPO- KPO

SW products

TopPeopleMgmt.

Servicization of products

Productization of services

e.g. XaaS over the Cloud

e.g. “PMO in a box“,

Benchmarking 360

Trends

FOR DISCUSSION

Identify your next best game changing opportunity now ☺

|McKinsey & Company 29

Potential game changers for you

What are potential game changers in the SW&S space both on- and off-shore to adapt to and take advantage of?

SaaS and Cloud Computing

Crowd-Sourcing from R&D to Marketing and Open SW Development

ChindiaSourcing and/or Addressing the next 3bn consumers via Social Networks Solutions

▪ Openness and readiness of several enterprise app domains may not be there yet, however, once „death“ of traditional ERP++ is occuring, it may be too late to shape and only choice left may be to run after a trend

▪ Study eg salesforce.com and other innovative SaaS players and check partnering opportunities

▪ Fully exploit the Crowd-Sourcing potential▪ Check e.g. scientific contribution competitions like

from Netflix or screen Innocentive and see if you can join as top-notch solver

▪ Check e.g.TopCoder community▪ Test your appetite as marketing crowds member to

contribute to e.g.Doritos campaign re best video clip

▪ Consider teaming/partnering with those investing in/from China or India as largest growth markets

▪ Identify your personal app opportunity like Kevin Systrom/Mike Krieger from Instagram, just bought by Facebook for 1bn USD for 15 employees, a neat picture taking/processing+forwarding sol. + no rev!

▪ And/or collect money via Crowdfunder Kickstarter as Pebble did (3 mUSD in 3 days) for their iPhone and Android campatible watch

Source: Secrets of Software Success advanced, recent press-covered examples as of April 2012

PRELIMINARY SELECTIONFOR INITIAL DISCUSSION

|McKinsey & Company 30

Netflix sponsored a contest to improve the accuracy of its recommendation algorithm

One of many impressiveexamples for

Crowd-Sourcing as game changer

▪ Netflix offers $1M prize in 2006 to anyone that can improve their prediction algorithm accuracy by 10%, won in Sept 2009

▪ Many other contests:

SOURCE: Company web site, press clippings

Did you know:

The world's largest competitive community for software development and digital creationThe TopCoderCommunity is 402,420 strong.

|McKinsey & Company 31

▪ 250,000+ engineers, scientists, inventors…

▪ … from 200+ countries

▪ … ~ 40% in China

▪ … ~ 2/3 have PHDs

Facts and StatsCurrent as of March, 2012

InnoCentive is an open platform to bring together "seekers" and "solvers" of R&D-related Challenges & beyond

* from ALS biomarker via oil spillage resolution to toothpaste contraction

SOURCE: www.innocentive.com, expert interviews; Open Business Models by Henry Chesborough; MGI/MTI on Multi-sided platforms / Open business models leveraging Crowd-Sourcing

▪ Intermediary, matching seekers with solvers, charging 40% fee on top of solver compensation (avg. ~ USD 32k; range .5k - 1m +, total 35m+)

▪ 30,000+ solutions* submitted, 1,100 awards

▪ Often buys several solutions for one "seek"

▪ Handles IP rights

P&G expanded its creativepotential through its„connect+develop“ online platform and drasticallyimproved R&D productivity

Legal performance, e.g. speed, isviewed as competitive advantage

▪ 12million+ solvers reach

Do you want to become a solver?

|McKinsey & Company 32

What could all this mean for you

O&O continues to grow and provides fantastic job opportunities inside and outside of Bulgaria – interested?

Bulgaria, traditionally has great talent for ITO++ and KPO – are you part of those talent pools?

Global providers as well as local niche playerswill be the growth drivers for Bulgaria O&O– where do you want to play?

Entrepeneurial mindset and global actionare crucial for success – any appetite?

The train is leaving the station – are you ready to jump on?

|McKinsey & Company 33

BACKUP

|McKinsey & Company 34

ESO/R&DO

BPO

ITO

SOURCE: Global Insight; Gartner 2009, McKinsey assessment 2011/2012

O&O encompasses USD 1.6 trillion addressable market by 2020 New untapped segments will drive 75% of future incremental growth

Total addressable market for global sourcing and domestic outsourcing, 2020, USD billions

130

Growth in core markets

200-250

1,500-1,640

895

405-440

Total ad-dressablemarket in 2020

Core markets 2008

500

220

200-220

Domestic outsourcing mkt. in new geographies

380-420

190-220

New customer segments

230-250

New verti-cals in developed countries

150

▪ BFSI, telecom, retail, pharma, manufacturing, travel

▪ NA, WE, Japan▪ Large enterprises

SMBs

▪ Public sector

▪ Health▪ Media▪ Utilities

▪ Brazil▪ EE▪ India▪ China

“Everythingthat can beO&Oed will be O&Oed“

CapturingOffshoringbenefits via the O&Opartner onemain driverforOutsourcing in developed markets!

|McKinsey & Company 35

A dozen trends shape the future BPO/ITO services landscape

Supply Market/Competition Demand

Some consolidation, yet, still fragmentation, but tierization of providers

S1

Global sourcing:Labor arbitrage and risk diversification���� Multi-Shoring!(Offshore, Nearshore, Closeshore, Onshore)

S2

Scarcity of talent: 1st

or 2nd argument for global sourcing

S3

Industrialization/ Commoditization of IT services and resulting margin pressures

M1

Unbundling/rebundlingof value chain and proliferation of new services ���� Multi-Servicing! (BPO/ BPaaS, SmartS, …)

M2

Globalization of enterprises and tierization of demand

D1

Growth saturationoutside select emerging countries

D2

Buyer sophistication���� Multi-Sourcing! (inclselect Re-Insourcing)

D3

Needs differentiationby topic � Intimacy along global slivers

D4

Enabler

E1 ICT Innovation, e.g., BigData, Web 2.0/E 2.0, Cloud… ���� Cloud-Sourcing!

Technological progress in general, esp. price performance improvements of converging ICT; global transportation ease

E2

Trade barrier removal/ some reregulation, yet free smart capital flow for reassembly of services domain modules

E3 ���� Crisis impact on Outsourcing?

���� Crowd-Sourcing!

SOURCE: McKinsey SW&S and O&O Practices ; Update spring 2012

|McKinsey & Company 36

Specific elements make KPO distinct from other services

“KPO” is the outsourcing of highly skilled services that require decisions or problems to be solved by the provider to enable the output of the outsourced service

4 characteristics differentiate KPO from traditional outsourcing

▪ Source of value: Very highly skilled labor (e.g., PHDs, advanced mathematics degrees), often creating top line value as opposed to pure cost savings

▪ Operation model:

– Some scale can be created already in small pools (e.g., at the industry or function specific level)

– High flexibility, less standardized repeatable processes

– Dedicated pricing model, e.g. based on deliverables

▪ Solution type: Typically high value and more bespoke solutions targeted on a specific deliverable vs an ongoing leverage process; can be more “performing a function” related vs “performing a process”

▪ Solution longevity: Faster innovation cycles with KPO solutions changing frequently (e.g., customer segmentation modeling, equity research)

SOURCE: Team analysis, expert interviews

|McKinsey & Company 37

KPO services used to be part of the traditional ITO/BPO/ESO segments and are now considered as a dedicated segment

Typical services for …

Generic O&O service stack

Judg-ment and

knowl-edge

services

Transactional services

KPO services on the one hand included in traditional ITO/BPO/ESO offerings, on the other hand dedicated novel KPO services are emerging

BPO

▪ Accounts payable

▪ Payroll

▪ Claims processing

ITO

▪ Call center

▪ IT helpdesk

R&D/ESO

▪ R&D data processing

▪ …

KPO services usage is expected to grow heavily in specific industries

▪ Banking, finance, securities, and insurance (BFSI)

▪ Research and analytic services

▪ Legal, paralegal, and intellectual property (LPO)

▪ Publishing

KPO providers fall into 4 categories

▪ Specialist KPO providers– Emerged in past 10 years

offering focused or broad KPO services (e.g., Evalueserve)

▪ BPO providers– Moving up the stack by

rebranding existing services or providing basic analytics services

▪ Existing industry specialists– Specialists in a specific vertical

or function offering knowledge services (e.g., marketing specialists, supply chain management experts, legal process outsourcers)

▪ Management consultants– Creating products out of long-

standing decision support services

… “KPO share”of service

SOURCE: Gartner, Evalueserve, Factiva, Company filings; Expert estimates; McKinsey analysis

▪ Budgeting

▪ Annual reports

▪ Claims adjudication

▪ IT incident manage-ment and solution

▪ …

▪ Product design support

▪ Modeling support

15-20%10-15% 30-40%

|McKinsey & Company 38

Since several years Doritos is engaging customers to create a commercial for the SUPERBOWL

▪ Provided an on-line platform for fans to post videos…

▪ … it received more than 1,000 videos

▪ … the top-5 videos received a price of USD 10,000

▪ … the top video was selected by fans, and was aired at the 2007 Super Bowl

2007 2008

▪ It will provide an online platform for bands to post songs…

▪ … the band will be selected to play live at the 2008 Super Bowl

Select open issues- Long-term implications to advertising

agency business prospects?- Re-insourcing potential opportunity vs.- Outsourcing to „nextgen“ intemediaries

2008 , …

Another of many impressive examples for

Crowd-sourcing as game changer

SOURCE: Company web site, press clippings, McK E 2.0 team