GLOBAL IT SERVICES MARKET: India’s Rising Share

What do we mean by the e-volution? “The e-volution is
premised on leveraging Internet technologies to enter a new paradigm of
increasing cross-enterprise interaction and efficiency.” The Internet and
the applications that power it are permitting enterprises to achieve
productivity gains across multiple facets of their businesses by enabling
entirely new communications and distribution channels. As a result, procurement
cycle times are being shortened, acquisition costs are coming down, and
inventory exposure is being reduced. In essence, the e-volution is ushering in
an era that promotes end-to-end interaction across enterprise boundaries via the
seamless flow of knowledge capital–thus challenging the limits of productivity
and boosting economic output. It is an era of opportunity in which old and new
economies can converge. Technology will drive the e-volution and Internet
infrastructure applications, such as those provided by Indian IT services
companies, will fuel its growth.

E-frastructure opportuniy

A recent survey of 375 businesses and IT managers conducted
in the US by Information Week found that the share of companies that have
deployed e-business initiatives in a majority of their business units surged to
more than 61% in June from 46% at the end of 1999. At the same time, there has
been a remarkable drop-off of companies that used to treat e-business as a
separate non-mission-critical project. Today e-strategy is a increasingly core
necessity 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 consulting
firms are their preferred technology partners.

Traditional broadline IT services companies such as IBM
Global Services, EDS, and the ‘Big Five’ consulting firms are relying on
established 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 doing
business, traditional IT services vendors with longstanding client relationships
and a developed understanding of a client’s legacy systems have the most to
gain. For example, TCS has some of the longest client relationships in the
industry–some of which span over ten years.

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

E-frastructure opportuniy

A recent survey of 375 businesses and IT managers conducted
in the US by Information Week found that the share of companies that have
deployed e-business initiatives in a majority of their business units surged to
more than 61% in June from 46% at the end of 1999. At the same time, there has
been a remarkable drop-off of companies that used to treat e-business as a
separate non-mission-critical project. Today e-strategy is a increasingly core
necessity 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 consulting
firms are their preferred technology partners.

Traditional broadline IT services companies such as IBM
Global Services, EDS, and the ‘Big Five’ consulting firms are relying on
established 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 doing
business, traditional IT services vendors with longstanding client relationships
and a developed understanding of a client’s legacy systems have the most to
gain. For example, TCS has some of the longest client relationships in the
industry–some of which span over ten years.

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

The ASP opportunity

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

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

There will be emerging opportunities for offsourcing
companies, such as India’s IT services providers, to maintain the growing menu
of ASP offerings.

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

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

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

Lastly, an ASP-enabling organization often requires
interfacing with legacy systems. Corio, for example, has developed Orion, an
integration framework to simplify integration between various applications and
external systems. India’s experience with legacy systems could rapidly be
harnessed to provide upfront customer system integration.

Implications for enterprise resource planning

Over much of the last decade a prominent source of revenues
for Indian IT services providers has been from implementing and customizing ERP
solutions.

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

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

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 one
source of information (i.e., a ledger) and implementation was not cheap
especially when complete data synchronization was required across multiple
locations. However, the end solution was very useful and appreciated as it
allowed data consolidation from anywhere around the world.

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

The vertical domain opportunity

Indian IT companies claim a wide degree of industry expertise
ranging from financial services to communications and government according to a
study released by Nasscom (in association with McKinsey & Company). In
reality, the bulk of the revenues generated by exports by the sector concentrate
on three major verticals:

Financials/banking, manufacturing, and insurance. Infosys
Technologies, for example, is well regarded for its expertise in the financial
and insurance industry, which represented about 30% of its revenues based on
June 2000 numbers.

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

We see upside potential in building up expertise in other key
vertical domains.

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

  • Professional services–where GroupWare technologies
    can be explored

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

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

  • Utilities–datawarehousing opportunities

Courtesy: Goldman Sachs

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