Domestic IT Services: The Brakes Are Off

The laws of nature suggest that once great heights are scaled, the descent
back to ground can be sharp and sudden. That is why even in the IT industry
there is always trepidation following a year of euphoria. But often, a slower
growth rate following a highly successful year does not really mean a fall. It
could mean consolidation after a significant base has been achieved, and,
sometimes, a review and direction changes.

This was quite the scenario in the Indian IT services market during FY
2005-06. The Rs 16,069 crore (excluding training and BPO) market's 15% growth
paling against the 39% a year ago.  The
slower growth might suggest an approach toward maturity, but that wasn't quite
so either.  True, some large
enterprises rode high on the maturity curve by embracing areas like managed
services or total IT outsourcing, but they made up a minority. And more
significantly, the SMB/midsize market did not become a major or mature consumer
of IT services, nor was it expected to, last year.

However, even the adoption blitz of the handful of large enterprises ensured
that the SIs in the domestic market enjoyed strong growth. In a
services-oriented economy like India, it came as no surprise that vendors of
every hue operating in the domestic market, whether sellers of hardware or
software, offered some sort of services around their products. (While even these
product-oriented services would constitute a significant chunk of the overall
services pie, Dataquest considered only those players involved in SI, NI,
application development, facilities management, managed services or total IT
outsourcing projects for both the services and solution providers' analysis.
That means vendors who earned AMC revenues around their products have not been
considered for listing.)

In the services analysis, the top ten domestic SIs are ranked, while in the
solution providers segment, the next 20 are listed in two separate categories.
Also many of these top SIs report associated hardware in their services
billings, while some did not. Therefore, apart from the listing of pure services
revenues of the top SIs,  we have
shown a separate column showing services revenues along with associated hardware
and software sold as part of services contracts. The latter required some rough
estimations, but allows a better apple-to-apple comparison. As this was not done
last year, we have not shown FY05 revenues for both lists, nor given growth
percentages for each player.

IT Outsourcing is the Norm

The saga of IT outsourcing in the domestic market started three years ago
with the basic service of maintenance. Gradually, certain value-added services
such as facilities management, Web services, network management and few discrete
services evolved. Outsourcing high-end activities, however, became a little more
acceptable in FY 2005-06, when the preponderance of managed services, network
management, customized software development and even IT consulting took center
stage.

In FY 2005-06, IT outsourcing was no longer an afterthought for companies
that wanted to cut costs and avoid the overheads of managing technology.
Business models were no longer immortal and were merely using technology to
differentiate businesses. Most enterprises realized that differentiation would
come from the integration of technology into the core elements of the business.
This ensured innovation and also drove the agenda in this on-demand era. The
need to innovate led organizations to move up the value chain and realize that
outsourcing of their IT applications enabled them to focus on their core
business activity.

The high growth in managed services and even customized software development proved that at least the larger enterprises were reaching close to the crest of the IT maturity curve. However, the widely disparate growth across different areas showed that IT adoption is still heavily skewed towards the larger enterprises and it would still take some time for the overall domestic services market to attain uniform maturity.

Sifting Through Outsourcing Dynamics

While most Indian enterprises, at least the larger ones, realized the
advantages of outsourcing their IT functions to specialists so that they could
focus on their core business, the success of an outsourcing deal depended on
other business dynamics too. The Bharti deal with IBM proved that no two
companies could sustain an outsourcing deal unless they generated value
mutually. Apart from a fixed component, IBM's revenues from this arrangement
are linked to Bharti's performance. This ensured that the service provider had
enough incentive to provide the best services to the outsourcing organization.
Typically, companies that had large ERP installations, databases, manufacturing
systems or multiple production facilities and so on resorted to outsourcing of
information systems and networking during the year. 

Outsourcing of non-production-related IT applications enabled a company to
not only focus on its main business activity, but also achieve cost savings-on
IT initiatives of course-to the tune of up to 30%.Â
Interestingly, MNC vendors like IBM, HP, Accenture as well as Indian
vendors like Wipro Infotech and TCS all joined in to garner a share of the
business pie. In the long run too, probably the collaboration between Indian and
MNC vendors holds the key to the success of an outsourcing deal since it could
bring out the best-of-breed solutions. The best example would be Tata Steel who
outsourced their hardware maintenance to IBM, software application development
to TCS and management of distributed IT environments to HP. Or, Bank of India
where HP closely worked with Infosys to deploy Finacle across its branches.

Not only did Indian organizations prefer outsourcing contracts with multiple
vendors, selective outsourcing was still a more prevalent trend against total
outsourcing. Many organizations still believed in maintaining small in-house IT
teams and retained control, particularly over the enterprise applications as
well as purchase-related information. The movement towards consolidation of
vendors started during this year , primarily because the vendors were getting
better equipped in terms of capabilities, methodologies, tools and processes,
transition management and in implementing the SLAs catering to the requirements
of Indian corporates.

Regarding SLAs, contrary to traditional perception, even Indian organizations
were demanding stringent parameters involving both risk and reward clauses.

Facelift for Facilities Management

Though facilities management at Rs 1,205 crore constituted a big chunk of
services, the traditional model was gradually losing relevance. The transition
from the earlier model of facilities management, where vendors were taking on
the entire manpower themselves, to the current model of asset stripping, where
device-based resources were outsourced, changed life for an increasing number of
enterprises. IT was now looked on as an operational expenditure and not as
capital expenditure in the balance sheet by most corporates.

IT infrastructure outsourcing thus, helped drive growth in many ways. It
reduced operational costs by turning what was a fixed cost into variables, got
assets off the balance sheet, and freed up cash for investments. Both CIOs and
vendors agreed that the value of outsourcing was derived only in long-term
contracts, especially those beyond three years. While the dangers of base
erosion remained, providers needed at least three years to give sufficient
inputs for process re-engineering for their customers.

FY 2005-06 also saw a shift towards full-scope or strategic outsourcing from
selective out-tasking. Strategic outsourcing, as the name suggests, was a
strategic decision taken by the company after considering different aspects like
finance, HR, and fixed period business strategy along with IT strategy and
deliverables. Strategic outsourcing constituted a partnership between
organizations and was significant compared to facilities management or
out-tasking which tended to be basic in nature and expectations.

Applications management outsourcing was also becoming prominent, as it
required specialized skills. Most of the applications were package applications,
and customization was tending to get lost. In India, a constant tweaking in the
packaged applications was crucial due to a continuous change in the tax, duty
and law structure. The global focus on IT security gathered momentum here in
India too. IT security services such as IDS grew with Internet banking and
mobile banking driving the trend.

The Vendor Saga

MNCs were more successful in bagging the large services contracts in the
domestic market. Therefore, it was IBM Global Services and HP India who
dominated the show amongst domestic service providers. The Bharti deal signed
with IBM entered its third year and was being gradually regarded as the landmark
in the domestic IT infrastructure landscape. Apart from the fixed component, IBM
also got a percentage in revenue share that was linked to Bharti's
performance. Payments on this count ranged between Rs 400-500 crore, and could
increase subsequently. Tata Steel and Tata Motors were other significant IBM
customers for the year. Like TCS, IBM too beefed up its SI portfolio in the
domestic market with the acquisition of Network Solutions, though the effect
would start coming in only from next year. 

HP at #2 was another player to have redefined Indian IT services paradigm
through its contracts with Bank of India and Bank of Baroda. During the year, it
finished supervising the implementation and management of Finacle core banking
solution across BoI's 750 branches. Besides deploying core banking and
data-warehouse activities, HP assumed responsibility for project management,
configuration management, change and release management, incident and problem
management, capacity management, as well as availability management.

IT infrastructure outsourcing helped reduce operational costs by turning what was a fixed cost into variables and got assets off the balance sheet

Though the TCS/CMC combine bagged the #3 slot, it was only just; it was
heartening to note that another Indian vendor, Wipro Infotech offered TCS stiff
competition and finished a close fourth. While domestic services revenues for
TCS was already bolstered by CMC, in FY 2005-06 a further fillip was provided by
the Tata Infotech acquisition. The merger provided TCS an expanded customer base
and deeper penetration in the systems integration area, particularly in telecom
and defense. The result-TCS bagged the landmark Tata Teleservices (TTSL) deal
estimated at over Rs 1,000 crore and spread over five years. Under this
contract, TCS was given the responsibility of managing the IT infrastructure of
both TTSL and Tata Teleservices, Maharashtra. The wide area network project for
the Army inherited from Tata Infotech also proved the viability of the TCS/CMC/Tata
Infotech combo.

Wipro's rise owed much to the four total outsourcing deals it bagged during
the year. These included the ten-year Rs 360 crore contract with HDFC Bank for
IT outsourcing that involved provisioning of IT infrastructure for branches,
infrastructure management for datacenter, Networking, end user support and level
1 Application support as well as a five year contract with an oil exploration
organization for transaction processing in F&A, procurement, IT outsourcing
comprising consulting, ERP deployment and Infrastructure Management. Other major
wins included Sanmar Group of Chennai that involved the complete IT set-up
including applications, infrastructure, technology consulting, as well as a five
year contract with Optimix for building and managing end to end IT
infrastructure. On the managed IT services front, Wipro bagged StanChart, HLL,
Maruti, Arab National Bank and Worldspace India; it also executed SI projects
for BPCL and Lakshmi Vilas Bank amongst others.

Beyond the top four, barring Datacraft, it was only Indian vendors who made
up the remaining slots in the top ten and all of t. The top ten combined
contributed 25% of the overall domestic services.

HCL Comnet, pioneered remote infrastructure management including application
management-a second coming for the ASP model discarded earlier. It leveraged
network management expertise especially in the education and stock broking
segments.

Similarly, Tulip IT Services and Datacraft too banked heavily on network
integration to gain foothold in the services market. Tulip's amazing growth
reflected in its major wins for 2005-06: it provided complete wireless VPN
connectivity for all Delhi University colleges as well as all offices of Times
NOW news channel across India; apart from connecting more than 200 Samsung
dealers, it also serviced clients like HDFC Bank, Bajaj Allianz, AC Nielsen,
Luxor, Fortis and Gujarat State Chemicals & Fertilizers amongst others.
Datacraft's magnum SBI project continued as it completed connecting 10,000
branches in January and embarked on another 4,000. It also provided 100 PoPs
overseas for a CDMA service provider.

Conclusion

Overall FY 2005-06 reiterated the perception that domestic IT demand is
witnessing a visible shift towards services and management even as enterprises
stepped up investments in enhancing their IP infrastructure. With the size and
complexity of IT infrastructure increasing by the day, enterprises showed an
increasing preference for outsourcing the IT management activities to external
experts resulting in the massive growth in demand for managed IT services.

Rajneesh De


rajneeshd@cybermedia.co.in