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.