SERVICES: Into Its Own

The domestic IT services market grew at a robust 39% to touch

Rs 16,072 crore, growing faster compared to the previous year's growth rate of

nearly 31%. Leading the growth clearly were three categories of services-facilities

management, managed services, and total outsourcing, each getting to be sizeable

market segments. Packaged software implementation, domestic BPO, and turnkey

projects are the other significant growth drivers.

Facilities management became commoditized and margins were,

therefore, extremely squeezed. A more comprehensive model emerged, with

consolidation of different activities like datacenter management, access control

management, and database management, besides the traditional personnel

acquisitions for managed services.

The last few years have witnessed a certain shift in the

mindset of Indian enterprises with networking and security aspects being

increasingly outsourced to third-party experts. It has in fact helped a large

number of system integrators in India like Datacraft, GTL, Sify, Microland and

Network Solutions, besides Wipro Infotech and HCL Comnet, to establish Network

Managed Services (NMS) and security services as viable revenue streams. However,

in the last 12 months Indian enterprises have undergone a change in focus

whereby they are looking at different models of outsourcing different levels of

IT-related activities.

Changing from the earlier model of facilities management,

where vendors were taking manpower on their own, to the current model of asset

stripping, whereby device-based resources are outsourced, have changed life for

most enterprises. IT is now looked in the balance sheet by most corporates as

operational expenditure instead of capital expenditure. The shift has been good

for the vendors too. According to services vendors, facilities management had

become commoditized and margins were therefore getting extremely squeezed.

Another new trend that has emerged out of this new model of

outsourcing is the shift towards comprehensive outsourcing wherein there is a

consolidation of different activities like datacenter management, access control

management, database management, besides plain vanilla people acquisition. While

earlier outsourcing involved discrete processes, there is now an amalgamation of

these processes and in future a more seamless consolidation would lead to

concepts like on-demand computing (propagated by IBM) and adaptive enterprise

(evangelized by HP).

The industry moved from pure uptime SLAs to SLAs that managed

professional and training services from the service provider. A lot of this

shift was attributed in part to the emerging competitive necessities. In the

case of large networking orders, clients demanded a partner who could offer

end-to-end services (from consulting to project management, and integration to

network management).

As the market began to mature, service providers added

services like disaster management and bandwidth management to their portfolio.

The overall NMS market registered a 33% growth to reach Rs 311 crore in FY 2004—05.

New services like bandwidth management, application response time management,

network management services with guaranteed bandwidth savings were the flavor

last year and still continue to be. PSUs, private sector banks, and retail had

significant traction.

The network and systems integration market maintained its

steady growth in FY 2004—05. The market jumped 40% to Rs 4,640 crore as

against Rs 3,300 crore in FY 2003—04. Last year saw a major shift towards

services and many integrators added or expanded their services portfolio. This

year also saw many small players making it big in the integration market. The

larger integrators differentiated themselves with end-to-end offerings with more

managed service kind of solutions. Notably, there is the rise of a healthy

mid-market segment in the services business.

The market also shed its burden of low margins and freebies,

as the companies realized that free offerings would not bring them business in

the long run. Consequently, the equipment margins have stabilized and the

ever-expanding networks are making the deal sizes larger. Last year also saw

emphasis on applications- and solutions-based integration. This increased the

solution vs hardware ratio. While larger integrators, with revenues of over Rs

200 crore, reinvented themselves with managed services, the equipment vendors

were seen promoting smaller players because of their cash-and-carry business.

The network integration market is expected to gather steam in the current

financial year with more organizations going in for networking their businesses.

All verticals are expected to maintain their contribution to the integration

business.

Telecom service providers would continue to give MPLS and

other data network implementation to the integrators. They would be

incorporating IP on their networks in a big way and the ISPs would be

implementing IP-VPN for their clients. On the other hand, service provider-network

integrator partnerships would also flourish and they would bid for larger

projects together.

On the technology side, IP networks are already being rolled

out and after years of hype we might finally see convergence of voice, data, and

video happening on a single network. Bandwidth prices have crashed and they are

expected to go down further. So, bandwidth intensive applications would be

implemented and for this, networks would have to be made more resilient and

secure. VoIP is also expected to make inroads and conferencing equipments would

be included in the networking deals. High-speed networks, with multimedia

applications running over them, would be deployed.

On the last-mile side, wireless networks and access points

have proved their usefulness. Deployment and implementation of Wi-Fi on the last

mile and WiMax as the backhaul is expected to take place. However, Wi-Fi

deployment on the existing networks would have an incremental effect on the

revenue side. With the government taking up rural connectivity in a big way and

wireless networks having proved their efficiency in places like Mallapuram, more

such networks are expected to come up. Educational institutions with large

campuses are also opportunity areas.

With most of the networks migrating to IP, technologies like

VoIP are making inroads. There was also an increased awareness about security

services, and security policies and solutions were being implemented during the

network rollout itself.

The complexity of technologies has increased enterprises

dependency on integrators. Enterprises require more hand-holding now than ever

before and all this has moved the market more towards managed services. Managed

services are a huge opportunity because the network integrator assumes full

responsibility for operating the network of the customer on an on-going basis.

Last year, remote monitoring of networks was accepted by the

customers and comfort level on offsite management was seen to be rising. For the

integrators also, the remote management deals proved beneficial as they could

manage more than one customer from the same premises. It led to overall lowering

of costs for the customers and the operating costs for the integrators also came

down.

The banking, financial services and the insurance (BFSI)

sector were the drivers for growth in FY 2004—05 for network integrators. BFSI

companies did good business and did not shy away from diverting investments into

the expansion and upgradation of their network. From core banking applications,

these institutions adopted other applications to streamline services like the

real-time gross settlements. Almost every integrator had majority of their

revenues flowing from the BFSI sector. Some like HCL Comnet had almost 17

banking clients with deal sizes which ranged from Rs 15 crore (Indian Bank) to

smaller ones in the Rs 7-8 crore range. Datacraft closed a $1 mn 50-office deal

with SBI for its international operations.

Similarly, Wipro Infotech had Indian Overseas Bank and Union

Bank of India as its clients. The Rs 35 crore PNB deal concluded by Tulip was

among the largest contracts in the banking sector.

Pure customized software development continued to decrease

with a 29% dip. At Rs 1,210 crore, bespoke software development activity has

reduced considerably due to extensive use of packaged application software in

various areas like core-banking applications, insurance solutions, retail

back-ends, ERP, SCM, CRM, and business intelligence. Organizations have cut down

the IT department staffing levels and are outsourcing more. The first casualty

in this move was the customized software activity that used to get done

in-house.

And that's the reason for the phenomenal rise in

implementation revenues. Packaged software implementation led to an overall rise

in service revenues in three areas: pre-sales consulting, implementation

services and software/application maintenance. Of these, the market size for

implementation of packaged software is estimated to be Rs 1,530 crore, excluding

the license fees. Revenues from software/application maintenance have not been

estimated. Consulting revenues made up by large IT consulting organizations and

numerous smaller consulting outfits are pegged at Rs 1,675 crore, up by 24%.

These include pre-sales application software consulting; technology-specific

consulting in areas like storage, security, data management, supply chain and

others; vendor appraisals; regulatory compliance and standards like BS 7799;

business continuity; and disaster recovery.

Traditional hardware maintenance comprising maintenance of

own systems and third party maintenance regained their pace of growth at nearly

30% to reach Rs 2,966 crore. Most often these services were not sold on a

standalone basis, but as a part of overall IT management deal. Deployment of

equipments beyond servers, desktops, and network elements in the form of

storage, ATMs, kiosks, and others is providing growth to this area.

Finally, the domestic ITeS segment-driven by outsourcing of

business processes, primarily customer service, document processing, and

outbound marketing-saw more people getting added. On a small base, the

domestic BPO market grew nearly 70% to touch Rs 2,428 crore.

Easwaradas S Nair