SERVICES: Indian IT’s Hot Dish Goes Cold

DQI Bureau
New Update

English mythology has it that when those in nobility wanted to get rid of a

guest who had overstayed his welcome, this guest

would be served a cold piece of lamb shoulder for dinner–a subtle suggestion
that it was time for him to head homeward.


Thus was born the maxim, "Giving the Cold Shoulder". A contrarian

affliction seems to have enveloped the Indian IT services space. Much as

everyone wanted this segment to build on its strong showing of 2000-01 (total

revenues had jumped by 39% that year), the segment has refused to hang around

and perform, registering a measly 9.3% growth in 2001-02.

The less-than-expected revenue is being seen as a direct consequence of

crashing systems sales and a tightening of corporate technology budgets. The

reaction of the industry to the southward trend has been singular and unanimous–vendors

across the board had a tough time landing orders for services, an area

traditionally considered to be the IT industry’s profit pill. After all,

services had saved the IBM ship from sinking in the nineties.

IT services ended the year at Rs 6,073 crore, a growth of 9.3% against the previous year’s 39%
Growth in systems/network integration was flat,but still made up 28.5% of the total services pie
Growth in customized software development—4%
Biggest growth area—facilities management, at 80%

The domestic services segment stood at Rs 6,073 crore in fiscal 2001-02, with

the largest chunk coming in from turnkey projects from systems integration and

network integration. The turnkey projects market stood at Rs 1,729 crore, 28.5%

of the total services market. Most vendors described the SI and NI markets as

nearly flat. So what was the reason for the greatly lower 4.8% growth in this

segment this year, compared to a healthy 31% last year? The industry placed its

bets on public sector companies, large telecom infrastructure projects,

state-wide networking projects and some large corporate network expansion and

consolidation deals. While the first half of the year looked promising, most

organizations ran shy when it came doling out projects–they cited global

economic uncertainty, fall in national economic indices, curtailment of expenses

due to bottomline pressures and other debilitating factors. Order cycles got

lengthened–the Punjab sales tax order, for instance, got re-tendered twice

over and many telecom orders went into a tailspin.


the Services Pie


2001-02 (Rs crore)

2001-01 (Rs crore)


Domestic Exports Total Domestic Exports Total Domestic Exports Total


160 10 170 110 15 125 45 -33 36

of own brand (systems)
750 0 750 613 - 613 22 - 22

920 30 950 855 58 913 8 -48 4
Total 1,830 40 1,870 1,578 73 1,651 16 -45 13


Network integrators have reported that terrestrial networks found favor with

most takers, as against the previously hot VSAT networks. VoIP and virtual

private networks led the growth chart in this area. Service providers like

Bharti, BSNL, Tata Internet, Tata Teleservices and VSNL are now expected to

enter the fray and deliver managed VPN services. Some of the notable networking

and SI projects for the year were executed by Life Insurance Corporation, New

India Assurance, United Bank of India, Syndicate Bank, National Insurance,

Ericcson, Gujarat WAN, West Bengal WAN, Iffco and State Bank of India–most of

these hailing from the financial sector. Leading vendors included Datacraft

India, GTL, HCL Comnet, IBM, TIL, Compaq and Wipro.


A similar fate awaited the customized software development segment, the

second-largest component of the services story.

The customized software development market grossed Rs 1,667.5 crore, growing

only at 4%, with the reasons for this dismal performance mirroring those in the

turnkey projects space. While companies continued to tweak their software,

however, they deployed their in-house resources in the good old-fashioned way,

instead of engaging software and service companies to do the job. Call it the

‘captive’ software development market. While it is difficult to measure this

activity, Nasscom has estimated the market size for captive software development

in a bid to show the greens at home to export-obsessed software companies–the

number bandied about here is Rs 2,784 crore.

The Driving Trends
India Inc gets ready for wide-scale outsourcing
Consolidation of IT infrastructure and applications will drive growth in the IT services space
Security, storage and business continuity solutions get to the center-stage of large corporate IT spending
The huge potential in the e-governance space is yet to be tapped

One trend driving spending in IT services is that of consolidation within

large organizations. In the banking area, this manifests as a move from a

decentralized structure to a centralized one–in effect moving from a focus on

branch computerization to having a core banking system deployed at the center,

with branches connecting to it. Notable examples are SBI, UBI, and the Reserve

Bank. In the manufacturing context, the trend is seen in the form of large

companies consolidating their ERP systems and adding refinements like supply

chain integration and partner integration. Firms with legacy applications are

engaging in enterprise application projects.

Services in the form of ASP, e-procurement, payment gateways and the like–all

of which hinge on electronic network-based delivery models–are yet to take

off. They are currently more of an exception than a rule, though there were a

couple of such projects signed during the year.

Security as an area witnessed a lot of traction during the year. Due to

well-publicized incidents of hacking and security breaches, organizations are

acquiring a heightened sense of the importance of security. Coupled with this is

the fact that companies are now integrating external constituencies–like

partners and suppliers–to their computing backbone through the Web. Banks and

financial institutions are using the Web for service delivery as well as

information delivery. The net result is that organizations are increasing

investments in security, according it a top priority. For services vendors, this

presents an opportunity in the form of end-to-end security solutions involving

security audit, designing security architecture, evolving policies, and

deploying multi-level security technology. In a very similar manner, large

organizations have got sensitized about the need for business continuity

programs and are setting up disaster recovery centers. Storage and storage

networks are being set up and the area presents a very good opportunity for IT

services vendors.


Amongst vertical market segments, banking and finance took a clear lead once

again. With nationalized banks waking up to the reality of competing though

technology, most chalked out large IT projects. The manufacturing segment

chugged along at a slow pace, while the service sector was depressed and

telecoms a mixed bag. In the transportation segment, except for freight

management systems under CRIS (railway information backbone), airline spending

was low. The IT industry, which in itself was a big consumer of IT

infrastructure and services, showed a negative growth this year.

In all, the services segment growth was uninspiring. But vendors opine that

this is a passing cloud. There’s enough evidence of potential growth coming in

from telecom, banking, insurance and the government, they say. These will drive

the required growth in the IT services segment in the coming year. Amen.