Software & Services: Branching Out

As we approach the end of 2006, we should look back and evaluate

the changing market dynamics throughout the year. We can then determine what's

in store for the IT services industry in the coming year, and beyond.

According to IDC India's Half-Yearly IT Services Tracker, 1H

2006, the domestic IT services market in India is estimated at around $3.5 bn

and is expected to grow at a double digit CAGR of 17.2% between 2005 and 2010.

Outsourcing is the fastest growing engagement type across the complete IT

Services market with an overall CAGR of 25.4% for the period 2005-2010.

Overall, outsourcing engagement consists of IS outsourcing,

network and desktop outsourcing, application management, hosted application

management and hosted infrastructure services. However, network and desktop

outsourcing can be clubbed with hosted infrastructure services and is referred

to as 'discrete outsourcing services'.

A Business View



India has generated for itself an incredible amount of publicity over the
years for outsourcing. A growing optimism is seen in the market, with the IT

investment agenda changing from a focus on pure cost savings to one on improving

business through improved efficiency of processes. The growth in the economy and

business optimism is the key to this transformation.

Most companies in the large and medium segment have yet to

accept IS outsourcing, but they are opening up to the concept. As such, those

companies still present a significant opportunity. Consequently, today's focus

within large enterprises is on how IT can be used effectively to improve

efficiency in the different business lines of a company-an approach that takes

a business view on IT investments and deployments. Business cases and metrics

for evaluation of IT projects are the order of the day. Vendors are trying to

articulate and incorporate business value of outsourcing into the selling

process and execution. Also, consumers are primarily focused on business issues,

expecting service providers to address them with solutions using IT.

Trends in IS Outsourcing

• IDC forecasts that the overall growth in IS outsourcing is
  
  expected to experience a high CAGR of 25.4% from 2005-2010. It will mainly
  
  be driven by deals in the large enterprise segments.

• Within the Indian market vertical space, the majority of
  
  large organizations, especially in the BFSI and telecommunications segments,
  
  are actively considering using the IS outsourcing services model.
  
  Outsourcing continues to shape the growth of the services markets. It has
  
  allowed organizations to drive down costs, access specialist expertise and
  
  technologies, and refocus management skills away from non-core IT functions
  
  towards those challenges driving competitive differentiation.

• Organizations are working with service providers for
  
  defining process and governance frameworks under the various standard
  
  services delivery frameworks to ensure better alignment with the
  
  organization's processes

• The vendors are communicating the benefits of their
  
  outsourcing services better than ever before, and those offerings are
  
  becoming more sophisticated with each passing year. Some of the fundamental
  
  messages that are resonating with an increasing number of enterprise
  
  customers are not new and are shared with a wide variety of IT outsourcing
  
  services.

The key drivers for the growth of outsourcing stem very much

from the exposure that Indian companies get from the IS outsourcing that occurs

around them. Indian enterprises have exhibited a willingness to engage with

foreign or multinational vendors for their outsourcing needs. That said,

companies like Wipro and TCS have ramped up efforts in the domestic market for

the provisioning of IS outsourcing and have been successful in verticals like

BFSI, manufacturing and telecom.

Despite strong growth in India, there remain some corporate and

cultural concerns that serve as inhibitors to IS outsourcing. Strong concerns

about corporate politics, downsizing, and layoffs prevent some companies and

government agencies from outsourcing. This is especially prevalent in some parts

of India where companies and government agencies have a strong union presence.

In some cultures, companies are hesitant to hand over important business

operations to third parties. Adding to this hesitance is a fear of failure or an

inadequate service performance and management.

Discrete Outsourcing



Discrete outsourcing plays a major part in India's outsourcing ecosystem.
Unlike IS outsourcing, discrete outsourcing requires organizations to coordinate

several different contracts for the most part with several different vendors-to

achieve the same results like IS outsourcing but not with a single point of

contact. Whilst, theoretically, this approach provides greater flexibility

within organizations, the difference between success and failure rests on the

ability of the users to manage and coordinate the many and disparate engagements

in their ecosystems. For many organizations, this proves a daunting task, which

requires managing not only user-vendor interaction but also vendor-vendor

interaction. To provide seamless environments, vendors need to work together on

interdependent processes and within certain elements of the ecosystems. The

management of these types of engagements is something that very few

organizations have experienced.

The desktop management and network management markets will

continue to be a big part of this and will be driven by leading vendors with

large installed bases. This activity is difficult to manage by many players.

However, major innovations are expected to come from smaller, niche players.

There are number of reasons for this particular market's acceleration in a

country like India. As firms face a need for network expansion and higher levels

of security over WANs, specialization requirements may drive them to outsource

network management functions to vendors. In the search for higher RoIs, firms

are turning toward the integration and subsequent management of systems,

storage, and applications. These would require increased activities in network

management and desktop management.

IDC expects that the broadband policy and falling bandwidth

prices will act as an enabler for businesses to make increased use of hosting

services, which include both hosted AM and hosted infrastructure services.

Whilst AM will achieve growth of some degree as a result of this move, the

majority of growth sustained will be seen under hosted services within the

hosted AM market. A growth surge is also anticipated within the hosted

infrastructure space.

Discrete outsourcing services providers are paying more

attention to the SMB customers. There has been quite a bit of noise in the IT

services market about creating service offerings for the SMB, but there have

been relatively few success stories so far. This is not surprising given the

depth in terms of highly customized nature of traditional IS outsourcing

engagements, which makes working with smaller customers an unappealing

proposition.

Three to Tango



HAM, SaaS and the Enterprise


The acceptance of Software as a Service (SaaS) delivery models, which
includes software on demand and hosted application management (hosted AM), has

continued to gather momentum and customer mindshare in 2005-2006 and is expected

to further increase in 2007.

Hosted application management services (formerly called

application service provisioning) has evolved far beyond the ASP offerings of

the dot-com era and offers both customers and vendors enough benefits above and

beyond traditional AM delivery models to justify continued investment and

development.

The lines between software company and service provider are

continuing to blur. On one side of that equation, the notion of software as a

service (SaaS) is well known and is proving to be quite a disruption to the

software industry. IDC believes that SaaS providers will pay particular

attention to developing and increasing partnerships in order to expand revenue

streams and customer adoption in the upcoming year.

All in all, we will witness an exciting next few years with

services vendors catering to the large enterprises and opening up to

opportunities and prospects in the "long tail" (SMB) that could

generate significant business for them in the future. Newer and more innovative

business models will be witnessed along with the shaping and alignment of the

Indian IT services market with the overall global trends.

Mrydul Vats



maildqindia@cybermedia.co.in



The author is Senior Analyst, Software and Services Research, IDC India