GLOBAL IT SERVICES MARKET India’s Rising Share

What do we mean by the e-volution? "The e-volution ispremised on leveraging Internet technologies to enter a new paradigm ofincreasing cross-enterprise interaction and efficiency." The Internet andthe applications that power it are permitting enterprises to achieveproductivity gains across multiple facets of their businesses by enablingentirely new communications and distribution channels. As a result, procurementcycle times are being shortened, acquisition costs are coming down, andinventory exposure is being reduced. In essence, the e-volution is ushering inan era that promotes end-to-end interaction across enterprise boundaries via theseamless flow of knowledge capital–thus challenging the limits of productivityand boosting economic output. It is an era of opportunity in which old and neweconomies can converge. Technology will drive the e-volution and Internetinfrastructure applications, such as those provided by Indian IT servicescompanies, will fuel its growth.

E-frastructure opportuniy

A recent survey of 375 businesses and IT managers conductedin the US by Information Week found that the share of companies that havedeployed e-business initiatives in a majority of their business units surged tomore than 61% in June from 46% at the end of 1999. At the same time, there hasbeen a remarkable drop-off of companies that used to treat e-business as aseparate non-mission-critical project. Today e-strategy is a increasingly corenecessity whereby companies are turning to traditional IT services providers,integrators, and consultants to help reengineer business plans. Almost half(49%) of the companies surveyed said that traditional outsourcers and consultingfirms are their preferred technology partners.

Traditional broadline IT services companies such as IBMGlobal Services, EDS, and the ‘Big Five’ consulting firms are relying onestablished relationships and brand names to win major e-business engagements.

India’s IT services providers, with their on-client-site(onsite) and offshore delivery model (which we refer to as ‘offsourcing’),are well positioned to deliver these solutions at Internet speed.

As e-business becomes more of an integral part of doingbusiness, traditional IT services vendors with longstanding client relationshipsand a developed understanding of a client’s legacy systems have the most togain. For example, TCS has some of the longest client relationships in theindustry–some of which span over ten years.

Traditional Fortune 1,000 type of companies embarking one-business initiatives not only provide the highest quality source of revenues,but for Indian IT services companies that have already developed relationshipsbased on legacy system projects involving application development and/ormaintenance, they also offer a very lucrative source of new revenues. These ITservices providers are arguably better positioned than their third-party peers,especially if the relationship and the understanding of a specific customer’sbusiness has been long.

The ASP opportunity

As enterprises migrate away from client-server architectureto Internet architecture, there will be an increasing demand for e-businessapplications.

We believe we are at the beginning of a longer-term trendtoward outsourcing of corporate IT functions as the virtual corporation emerges.We believe this will drive revenues and longer-term value for Indian IT servicescompanies.

There will be emerging opportunities for offsourcingcompanies, such as India’s IT services providers, to maintain the growing menuof ASP offerings.

ASPs will need to embrace continual innovation/upgrades ofsoftware packages, as product cycles shorten, while mitigating pressures tocontrol operating costs.

Growth in companies that use ASPs will also demand seamlessservices in scaling up–as in the case of Excite’s rapid acquisition basedgrowth, which involves a constant augmentation of new users to its user base.Excite uses Corio to provide error-free scalability. India could potentiallyprovide offshore application maintenance to address scalability demands.

Implementation speed is a key selling point for ASPs. Forinstance, ConvergeNet offers implementation of an Oracle ASP solution within 12weeks, instead of six to nine months traditionally. Again, the need for rapidresource deployment, a large pool of talent, and cost-effective delivery mayattract these vendors to India.

Lastly, an ASP-enabling organization often requiresinterfacing with legacy systems. Corio, for example, has developed Orion, anintegration framework to simplify integration between various applications andexternal systems. India’s experience with legacy systems could rapidly beharnessed to provide upfront customer system integration.

Implications for enterprise resource planning

Over much of the last decade a prominent source of revenuesfor Indian IT services providers has been from implementing and customizing ERPsolutions.

ERP is an integrated information system that serves alldepartments within an enterprise. An ERP system can include software formanufacturing, order entry, accounts receivable and payable, general ledger,purchasing, warehousing, transportation, and human resources.

ERP software went through its most popular period in theearly to mid-1990s. Because the software was able to bring most of theorganizational processes together at the enterprise (as opposed to thedepartment) level, it gained popularity fairly rapidly. Also, it incorporated agraphical user interface (GUI) and was easily dispersed (installed) across aLAN.

The ERP era was one of frustration and massive investment,but it was also rewarding.

ERP was a difficult system to run if there was more than onesource of information (i.e., a ledger) and implementation was not cheapespecially when complete data synchronization was required across multiplelocations. However, the end solution was very useful and appreciated as itallowed data consolidation from anywhere around the world.

The reality is that ERP will not and should not be replacedbecause the data stored in the databases is critical to any organization.Instead, what will happen is that e-business applications will interface withERP solutions so as to be able to extract data out of the systems. Many of theERP vendors (SAP, BAAN, and Oracle) are focused on e-business applicationintegration.

The vertical domain opportunity

Indian IT companies claim a wide degree of industry expertiseranging from financial services to communications and government according to astudy released by Nasscom (in association with McKinsey & Company). Inreality, the bulk of the revenues generated by exports by the sector concentrateon three major verticals:

Financials/banking, manufacturing, and insurance. InfosysTechnologies, for example, is well regarded for its expertise in the financialand insurance industry, which represented about 30% of its revenues based onJune 2000 numbers.

Using the US as the key source of export revenues for thesector, the above three verticals represented only 37% of total verticalindustry IT services spending in 1999. IDC forecasts these verticals willlargely remain constant at about 37% of the vertical spending pie in the countryas we move into 2004.

We see upside potential in building up expertise in other keyvertical domains.

• Retail and distribution systems–Indian IT servicescompanies can develop extranets and datawarehousing applications

• Professional services–where GroupWare technologiescan be explored

• Healthcare–a key opportunity for systems integrationand multi-platform information e-volution

• Communications–a high-growth opportunity forintelligent networks, data warehousing, and mobile commerce

• Utilities–datawarehousing opportunities

Courtesy: Goldman Sachs