Trends: When Will We Have a Revival?

n This is another cycle. There have been

47 downturns and 47 recoveries in global economic history

n The market outlook is cautious optimism

n Channels are beginning to look up this

quarter (JAS). Sales are still muted, credit lines are squeezed at 7-10 days,

but better financial and credit controls have led to greater efficiency.

Cautious credit lines and conservative growth plans ahead will mark the year,

with the focus being on the bottomline, and not on chasing revenues

n Software exports will increase to 30% in

the ongoing year–the reliable backbone of the Indian IT industry

n The domestic IT market will bounce back

from -2% growth in 2001-02 to 15%-plus growth this year

n ITeS will be hot–it will grow at over

60%, helping achieve an overall industry growth rate of 20%-plus

In the past 40 years, the global IT industry has seen many downturns and

subsequent sharp recoveries–the current slowdown is part of the same economic

cycle. IDC India data shows that past crashes occurred in 1967-71, 1982-86 and

the current slowdown, which began in 1998. But check this: IT had its best years

immediately after these slowdowns–history should repeat itself this time too.

And just when we thought the storm clouds would blow away, the economy has

been bludgeoned again–this time by drought. The first two quarters of the

ongoing year have seen strong sales, but it will be Q3 that reveals how the

drought impacted. Domestic players could see another year of severe price

undercutting. Add to this weak economic conditions and pressure from CIOs for

discounts.

Hits Where our forecasts made last year found the mark: More offshore work, as the slowdown sees companies move projects to low-cost geographies Enterprises will increase outsourcing of IT backbones and support funtions like storage and security Server growth will be spurred by growth in ATMs and front/back office networks from PSUs and private banks PC assemblers will continue to hold over half of the market The click-and-mortar model will spell survival in the online space The concept of implementing a single solution (against integrating best-of-breed products) will propel products into the e-biz space TCS, Wipro and Infosys will remain the top three companies–but revenues will come from volumes, with margins turning slim Training cos will get aggressive with services, and Aptech will separate IT training from services Intel’s Pentium 4, despite its lukewarm opening, will replace the P3 as the mainstream product Misses Where our forecasts made last year missed the target altogether: The government will drive a big upswing in industry revenues and increase in PC number, apart from servers and network equipment Intel will gain marketshare, both with its multi-way IA32 and the new line of Itanium servers  Private operators will set up international gateways and lay down fiber for broadband services Microsoft’s ‘OS for the Internet’ plan, based on the Passport identity system, will take off in a big way

The bright spot could be for services players–the trend of companies

outsourcing their IT infrastructure is catching on. DQ’s prognosis–growth

will remain in the 0-5% band, but if the drought blows away quickly and the

government displays some quick thinking, the domestic market will touch

double-digit growth rates. Software exports will continue to chug along, with

growth in the region of 30%. The star of fiscal 2002-03–IT-enabled services,

which has the potential to see 60%-plus growth rates.

Low costs and snappy transactions drive B2B



Indian end-users have successfully transitioned to the testing of B2B

solutions on a limited scale and are well positioned to increase scales of

deployment in the coming months. Solutions from global vendors Ariba and

Commerce One have not penetrated Indian enterprises, primarily due to high costs

and changing technology architectures. But solutions from SAP, Oracle, i2

Technologies and QAD have been modestly used in medium and large enterprises to

conduct limited B2B transactions with partners. However, more impressive

benefits appear to have come in the form of home-grown solutions from companies

like Aptech’s BconnectB.com, now acquired by Siemens Information Systems,

which build private portals, provide information exchanges and give high return

on investments in a short time period. Some examples of companies that have

migrated down this path include Raymond, Rane Engine Valves, Castrol, Glaxo

SmithKline Beecham, RPG Cables, Shoppers’ Stop, Samsung India and Gujarat

Heavy Chemicals. End-users who chose to build B2B portals in a limited way are

now ready to deploy them on a larger scale. Also enabling this process is the

recent availability of payment portals from HDFC Bank and ICICI Bank, which help

complete transactions. The Nasscom-BCG Report has forecast that online B2B

transactions will reach close to Rs200,000 crore by 2005.

No looking back for banks



The banking segment in the country is poised to increase manifold its IT

spend over the next five years. Looking at the success stories of HDFC Bank and

ICICI Bank, a fresh wave of public sector banks appear determined to shrug off

their legacy moulds, build strong technology platforms and match levels of

customer expectation. The banking segment is expected to invest substantially in

public area networks, high-end centralized server computing platforms, storage

area networks, replication of key platforms in off-site locations, core banking

apps and applications to support multi-channel access like ATMs, IVR and

Internet banking. In addition, banks are expected to invest in ATM sites at

growth rates between 50-100% depending on the particular stage of deployment.

With improving public networks, building a centralized computing platform is no

longer a CIO’s nightmare. Even State Bank of India, the public sector bank

with the largest distributed branch computing, is now working in a phased manner

to network all its branches over the next three years. Also enabling this

technology spend and changed business outlook are rebuilt core banking solutions

from vendors like iFlex Solutions, Infosys and CMC; the global implementation

expertise of TCS, ICICI Infotech, Polaris Software and Nucleus Software; and the

increasing acceptance of global solutions from vendors like FNS and CR2. Another

key driver is vendor migration toward availability of n-tier computing

applications, which makes the deployment of centralized computing applications

for banks more reliable and scalable.

Long haul ahead for training



There’s no quick fix-it solution available for the domestic training

industry right now, and neither round the corner, nor the next one and probably

not for some time still. Global enterprises have overspent on IT–with many

still to let their business processes come to terms with the technology deployed

internally. Others are cautiously assessing what technologies they’ll soon

need. From whirlwind assessment, purchase, rollout and return on investment,

technology is temporarily in the backseat. But the rot’s spread everywhere.

Microsoft’s dot.net continues to be lukewarm–there is no demand for

certifications here. That’s a big letdown after the frenzy for Windows NT Back

Office Server certification. Java and XML remain hot, but enormous numbers of

skilled programmers aren’t required right now. Programmers for enterprise

applications like ERP and CRM are required, but there’re still many around.

Where and when are the next inflexion points, the real big ones–that’s hard

to predict. But like all other revivals, this one is going to need a handful of

them and a stroke of luck for the bull-run to return.

Heterogeneity and EAI on the rise



With Indian enterprises increasing their portfolio of heterogeneous

enterprise applications, the need to have a common integration platform is also

increasing. Therefore, the adoption of EAI solutions is expected to increase

over the next two years. In the past, medium and large end-users have

implemented ERP, datawarehousing and business intelligence applications from

multiple vendors. With CRM and SCM solutions, not all users opted for common

vendor approaches. While SAP and Oracle, for instance, offer a full portfolio of

solutions covering ERP, supply chain management, customer relationship

management and business intelligence, few end-users have opted or chosen to

become completely dependent on a single-vendor solution. As long as the need to

integrate databases is absent, the end-user can continue to use these

applications disparately. But once business requirements dictate real-time cross

exchange of data, end-users have no choice but to implement an EAI solution to

make this happen.

Security: Armed and ready for combat



Even post 9.11 and all the security concerns, last year’s funds crunch

ensured that business continuity remained at the "backup every week"

level for a bulk of Indian enterprises. There are even stock exchanges running

off a single server room, without remote-site backup. This will change toward

end-2002 as enterprises ease off from the funds crunch, and get increasingly

dependent on ERP, CRM and SCM. A likely trigger (and one of those out-on-a-limb

predictions we hope will not happen)–one high-profile IS disaster at a large

enterprise this year in India, which wakes everyone up.

Aspiring to be the back-office of the world



IT-enabled services–the low-value and low margin, but high-volume and

high-growth sector–will dominate the ongoing year. By the end of fiscal

2001-02, most major IT services companies had entered the segment–Mphasis’

ITeS subsidiary MsourcE is projected to grow 200% during the year and already

employs 750 people. Wipro has recently acquired Spectramind. Infosys–the

company that had declared it would never enter this segment–set up Progeon in

March with 100 people, and plans for a quick ramp-up. Equally important, many

MNCs have decided to move their back-office operations to India. HP’s Global

eServices does part of the organization’s financial back-office work from

Bangalore. Dell’s international call center operates out of India. And Oracle

recently announced that it would be moving some of its international back-office

ops to its new facility in Bangalore. Expect the BPO-ITeS segment to grow

rapidly this year. And its new slogan–"Indians are the master paper

pushers of the world." Locally too, the call center and tech support

business will continue to thrive. Pure-play ITeS organizations that work the

domestic market, like Customer Asset, have been expanding capacity continually,

with banks being the major customers. Others like Digital and Dell are exploring

the local tech support market.

MNC development centers to propel offshoring



If outsourcing was the big word a couple of years ago, offshoring is the

trend now. There are two facets of this, both expected to show different trends.

The first is growing offshore components of projects done by Indian IT services

providers. This didn’t grow quite as much as expected last fiscal, thanks to

9.11 and Indo-Pak tensions. Expect this to increase this fiscal, but not

drastically so, primarily due to the preponderance of maintenance and support

work done by Indian companies, which is heavily onsite-driven. Thanks to this

and other coexisting factors like the downturn and increased focus on RoI, we

can expect margin pressure to continue till the end of the fiscal. The second

facet of offshoring is the growing number of MNC development centers in India.

These have mushroomed and grown quietly but steeply in the last couple of years.

IBM Global Services India, for instance, has 3,000 people in India (post-PwC

acqusition 4,200), Oracle has 2000 while HP ISO has 1,500–the list goes on.

All told, over a third of the top global ISVs and services companies already

have a presence in India and almost all have announced growth plans. For MNCs,

this strategy makes sense–savings on an Indian development center, when

compared to one in the US or Europe, can be very high, as much as over 50%.

Software and services companies apart, many global enterprises have been setting

up their IT development and research centers here.

Stack up those terabytes



Though 90% of large Indian enterprises still use direct-attached storage, the

sheer volume of data stored digitally across enterprise, government departments

and other institutions will ramp up exponentially. Another 10% of large

enterprises could buy some form of network-attached storage device. And ‘data

sharing’ will be the other big driver for applications: knowledge management

systems, partner integration, and more. The third related driver would be

disaster recovery and business continuity. On the technology front, the drop in

marketshare for DAS (direct attached storage) will continue, as SAN (storage

area networks) and NAS (network attached storage) continue to make further

inroads in the enterprise space. SAN will gain greater acceptance, as vendors

introduce products that make deployment easier and more affordable. The need for

consolidation, enhanced interest in disaster management and business continuity

solutions, coupled with the fall in prices of hardware components, will spur the

storage market in volume terms.

Hardware



No marks for guessing that the new HP will rule the Indian hardware segment–be

it servers, desktops or printers. In other peripherals, ‘PC Essentials Company’

Samsung will continue to hold its top slot thanks to highly-efficient channel

management. In systems, all vendors will focus on the BFSI (banking, financial

services and insurance) and telecom segments–with players in these segments

set to continue investments in technology. Another hot focus area will be the

government as a host of e-governance projects take off. Hardware players will

focus on extending their reach and making their presence felt in ‘B’, ‘C’

and ‘D’ class cities. In the desktops space, while the new HP will emerge as

the number one player, it will be the assemblers who will continue to nibble

away at the marketshare of branded players. Given their reach and strong channel

support from the likes of Intel and Samsung, assemblers will continue to hold

over 60% of the Indian desktop marketshare.

IT training: Limping to normalcy



While the previous year was a nightmare for the training industry, the year

ahead is likely to be a challenge for most players. The year ahead could see

further consolidation in the industry–as more small and mid-sized players,

unable to withstand the sustained slowdown, bow out. Software training companies

will be focusing on low-value, high-volume ‘sachet’ courses. Companies will

also try to expand customer portfolio by tapping newer segments and positioning

new courses accordingly. A thrust on institutional and corporate training fronts

is expected. Following Aptech’s lead, other training majors could possibly

hive off their development divisions from the parent business. Hardware training

companies can expect healthy growth, given the steady increase in demand for

networking professionals.

Data centers in vogue



Demand for 24x7 managed services from enterprise data centers is expected to

increase in the ongoing year. A transformation of Internet data centers–relics

of the dot-com era–the current breed of data centers have made a small but

definite entry into the market for managed support services. The services

include collocation of high-end servers, security and network management and

disaster recovery support. While these centers continue to host websites, the

primary revenue segments have moved elsewhere. The adopters of the new range of

services include medium and large businesses, spread across the manufacturing,

BFSI and logistics segments. Since data centers have a controlled environment as

well as reliable network connectivity, CIOs have realized the advantage of

housing their mission-critical servers at these locations. With incidents of

network security break-ins on the rise, availability of 24x7 monitoring services

from data centers are gaining a following.

Making a move toward China



The Middle Kingdom’s growing software aspirations are not a short-term

threat but a medium-term challenge–so Indian IT services providers better

watch out. The industry has, of course, reacted to this in the last year, trying

to turn that threat into an opportunity. Satyam has a China office and some

development work happening there. Infosys has a China initiative that has been

currently stalled due to legal hurdles. Tata Consultancy Services recently

bagged a big order from GE–part of which will be implemented from China. It

has a marketing office in Beijing and its development center will have about 150

people within the year. Mascot Systems is seriously considering moving part of

its development there. The China story plays out on many fronts–first, as a

pre-emptive step by Indian companies, second as a way of de-risking delivery,

and third as the near-source offshore center for Indian companies looking to

enhance their presence in Japan. The island nation is the second-largest IT

services market in the world and some Indian companies have made inroads there

in the last few years, with Mascot Sytems and Wipro Technologies being two good

examples. So expect to hear a fair amount of noise about China. It is not likely

that many Indian development centers will actually come up there during the

year, but the process will definitely begin.

VoIP: Wait-and-watch policy



The government’s decision to accept the Telecom Regulatory Authority’s

recommendations on voice over IP (VoIP) created a flutter among the ISP and

telecom segment in April. Although the lowering of entry barriers made it easier

to deploy services, service providers were left evaluating options before taking

the plunge. Their verdict was unanimous–there are a number of issues that need

to be resolved before VoIP can take off. A year ago, voice communications seemed

like just another application on the enterprise network. Today, VoIP is far more

aluring, with a recession looming and budgets tighter. The government’s

decision to limit the availability of VoIP within the country to PC-to-PC

communication only and to PC-to-phone for international communication is also

likely to hinder growth. Then there’s the tussle among ISPs on the issue of

revenue sharing, plus a huge grey market that poses another threat. Corporate

houses are adopting a wait-and-watch policy to understand the quality of service

before they jump in–they can’t do away with their existing networks for an

IP-based one, as the costs involved may not justify the benefits anytime soon.

Thus, the adoption of Net telephony will be seen only among the newer companies

that are in the process of setting up networks, or call centers, which stand to

benefit tremendously from such applications. Experts warn that the market was

initially hyped a bit too much–the technology is still nascent and it will be

a while before it sees large-scale adoption.

ERP rolls on



Globally, the demand for ERP solutions looks pretty flat, but within the

country, implementation is expected to continue at a moderate clip. Recession

and reduced consumer spending have forced domestic businesses to manage costs

across their full range of operations–and businesses that started ERP

implementation a few years ago are now achieving maximum return on investments

from those initiatives, and word is a-spreading. These moderate and, in some

cases, superlative successes are setting role models for other end users to

follow. Current implementation projects are building upon previous learning

experiences of change management and have a more predictable outcome in terms of

time-frames and migration to new process systems. Therefore, decision making on

new ERP projects as well as expansion of existing ones in terms of additional

locations and licenses will continue through the year.

Look who’s hiring?



If Year 2000 crowned the IT professional as the undisputed ‘King of the

Market’ and Year 2001 rudely stripped him of his laurels, Year 2002 is likely

to see a quiet but steady improvement. The layoff bleed has ceased and job

openings have started trickling in. The past year has been good for mainframes

pros and this is likely to continue in the year to come. The demand for Java

professionals is also likely to pick up, as will that for those familiar with

Web-based technologies. Given that BFSI (banking, finance, services and

insurance) and healthcare are emerging as the verticals of the future, the

demand for techno-functional professionals will be high in these areas. In the

current scenario, there’s a demand for bioinformatics professionals too, which

is difficult to meet as training courses in this area are relatively new and the

awareness about the skills required is low. Proficiency in implementing business

applications encompassing the entire CRM, ERP and SCM range will be of great

value too. The demand for hardware maintenance and network engineers will remain

steady, but is not likely to see exponential growth.

Email: Tremendous room for growth



Unlike the world, there’s tremendous room for growth here, because Indian

companies do not all use email for their internal work. Exponential growth will

continue in e-mail usage and adoption, both corporate and personal. Sadly, this

will be led by and driven by an explosion of ‘spam’, killing productivity

and bandwidth. Indian Internet service provideds led by Videsh Sanchar Nigam

(under its new management, the Tatas) will finally be driven to taking their

first steps to block inward spam. And this will be trailed by more and more

email viruses, which will wreak havoc on business systems.

Bandwidth and the Indian host



The big bandwidth boom will be led by the long-distance and basic/cellular

operators lighting up some of the miles of fiber they laid in the past year, and

driven by end-user demand–and by corporate India gradually beginning to look

an India-based hosting options for their Websites. As global data centers from

Exodus to Intel Online shut down, and India rates drop, it may make increasing

sense to host in India. Especially with an intercity backbone building up, and

inter-operator connectivity gradually happening.

RoI: The real fact of life



Vendor reactions to the dreaded phrase range from weariness to fear, but RoI

will remain a fact of life. Despite "creative accounting", but savvier

CIOs, CFOs and CEOs will demand more quantifiable returns, sometimes

unreasonably. The good thing: this will continue to build up a force toward

measures where there were none, and deadlines and penalty clauses. The bad thing

where it’s forcing decisions against apps that are a good thing for the long

term, but don’t have quick RoI, including knowledge management.

Communications: The key is savings



The key isn’t technology, but money. Savings. Technologies that directly

save money are the strongest candidates for apps implementation in enterprises,

and hence potential revenue sources for aspiring services companies. Instant

messaging is a low-cost sure-fire thing, VoIP is the next wave, and Internet

telephony is hot.

E-billing and transactions



With the strong move to demat (electronic) stocks and shares, backed by

electronic billing options by ICICI, HDFC, Citi and other banks, e-billing and

e-transactions will grow rapidly in 2002-03. ATM usage continues on its rapid

upward growth. And while mobile commerce itself is far off, the increasing use

of SMS will see at least several tens of thousands of users checking their bank

balances by SMS, as more banks introduce such services.

Services: The clear profitability mantra



It’s the clear profitability mantra for the systems vendors. There will be

determined thrusts by all major hardware vendors. That’s not all: the software

vendors will notice the Indian market, too. Led by TCS’ now famed Rs 200 crore

SBI project, other software exporters will get interested in the domestic

mega-projects, too. And there are the regional players. But in 2002, this will

remain a difficult area to tap, with customers needing to be reminded of the

value of services, so as to get reasonable billings. In a tough period, paid-for

services will continue to have an uphill task.

Mobile world: Hot, hotter, hottest



With 7 million subscribers, growing at 80%, cellular is easily the hottest

product and technology segment. With the third and fourth operators pushing the

limits of single-band handsets, BPL, Airtel and others testing GPRS services,

and a flood of SMS-based content and applications making up for the failure of

WAP, we’ll continue to see explosive growth at similar rates. The growth will

be maintained by the ‘circles’ and smaller towns–cellular networks now

reach 1,400 cties, towns, and villages. All this is good for cellular operators,

but all the competition, price drops (incoming calls will be free even without

calling-party-pays sharing), etc will force the average revenues per user down

from the current Rs 800 estimated by Voice&Data.

Linux will continue to be a nearly-happening phenomenon



Another nearly-happening-phenomenon for several years, this operating system

has been torn between active support by Intel, IBM and other systems vendors and

active resistance and counter-moves by Microsoft. This leaves Linux largely an

OS to be found in education and research institutions in India, a few pioneering

Web and development companies, and in invisible proxy servers in mid-size

companies. But the consolidation of several of the many Linux strains out there,

on the cards soon, will help reinforce Linux’s position, while its platform

support from Simputer to Superdome will help sharply increase confidence and

deployment in 2002-03. Not as an apps server, but still largely for

communications, Net/Web-based services, and email. So: yet another "year of

Linux"!

Boom-time for in-house call centers



With so much attention to ITeS exports, what many miss out on is the

tremendous potential and growth in in-house call centers within businesses based

in India. From pizza delivery to phone companies, railways to appliances

vendors, they all have call centers of varying sizes. And that makes for a

booming market for SME call center solutions, fat chunks of phone lines for the

private basic services players, 1-600 toll-free numbers, and a recruitment boom,

including for large-call-center-trained employees who are likely to head toward

these in-house call centers as managers…

The digital camera



So far an elite, super-niche computer-peripheral product above the Rs 20,000

level, the camera will get an impetus from an unlikely source: the photo shops,

who actually make all their money today processing good old film. An increasing

number of photo shops are replacing Polaroid with digital systems (digital

camera, PC, printer) for instant photography, giving customers a taste of the

convenience of digital. Added flavoring will come from the movies, TV, and

cellphone companies pushing handsets like the Sony-Ericsson T68i and Nokia 7650,

with cameras bundled or built in. And also from cheap CMOS-based cameras in the

Rs 2,000-5,000 range. India sales in the tens of thousands of units will be

tiny, against North America’s 8 million expected for the year, but it’s a

start, for Kodak, Sony, Canon and others.

Microsoft .Net



The world will finally understand what the heck it is…no, we’re kidding;

.Net will remain an impenetrable secret in 2002. But it will likely gain

acceptance as products and services roll out, including acceptance from

developers with tools like Visual Studio .Net and the .Net Framework out there..

and user acceptance of other services that demonstrate Passport and other

features, such as MSN Messenger and Hotmail have done. This year will see it

emerge as an early foundation for a de facto standard for Web products and

services…even if most of the world still doesn’t know what it really is.

There’s loads of time for it to catch on.

The CD-RW



The CD-R really took off last year, unit prices crashing from three figures a

few years ago to sub-Rs-10 levels. It aided backups, large file transfers (where

the Zip drive genre didn’t really shine)–and widespread copying of music,

games and software. The CD-RW (rewritable CD) is the current must-have for the

enthusiastic home-user segment, with drive prices dropping through the floor.

The enterprise remains a backward user of desktop technology, with most personal

computers going sans multimedia or compact disk–but even at the workplace, PCs

that do ship with CD drives will see a migration to CDRW. With HP and Iomega

dropping out of internal CDRW drives, Samsung, TDK, Sony, Philips et al should

have a good time, while 32X rewrite drives appear by year-end, and CDRW disks

dead down from Rs 90 toward the Rs 50 level. Plus: By 2003, DVD will replace VHS

in the shops.

Broadband: Killed by the last mile



Where did it go? It was killed by the last mile. The chaos of cable TV in

India will continue, as cable operators too busy squabbling with TV networks

will ensure that broadband over cable does not take off in India, except in a

few posh colonies and apartment complexes. And, of course, offices, which will

be the major focus of companies like Spectranet and Data Access, who give up on

the home as a hot market market.

The Simputer, the Indian-designed linux-based handheld, struggling to get

over its birth pangs, may actually start selling. But forget about a consumer

device competing with Palms and iPaqs (which make up a near-zero market in

India). Its holy grail will likely be enterprise client apps for on-the-field

data capture, such as channel management or delivery records. For that, MP3 and

other features will be overkill, so pricing is the second barrier to get past.

WiFi cards



Cheap 802.11b cards for laptops, and WiFi access hubs, by end-2002 will see

some wireless LAN deployment in enterprises, driven by travelers who experience

the goodies abroad. And helped by the "de-licensing" for the 2.4 GHz

spectrum for indoor use, okayed in principle after a direct appeal from Nicholas

Negroponte and others to Pramod Mahajan, but still awaiting the formal

notification.

The Rs 15,000 PC proposed by chipmaker Via. While a market spoilt by high-end

specs, multimedia, freebies and bundles will actually force prices up to over Rs

20,000, this is likely to trigger off another price war, led by AMD and then

Intel dropping prices sharply on their entry-level chips. But even a barebones

15,000 PC with some room for growth would change the PC market in schools and in

homes where people want only e-mail to start with.