Is infrastructure management the next big opportunity for India?

Recent trends in the BPO space have given India the epithet of ‘back-office of the world’. Now a new thrust by Indian software service players in the IT infrastructure management space could see India becoming the nerve centre of the world’s networks, at least on the maintenance side. Srikanth R P has the details

Even as Indian software services players fight hard to stay in the game and win, there’s an opportunity almost equal in size to the entire global software services industry that’s hardly been discussed yet. The opportunity is ‘infrastructure management outsourcing’ and represents a massive $126 billion market—virtually untapped by Indian players. While this market is still a tough one to crack and remains dominated by global giants—the likes of IBM, EDS and CSC—pure-play Indian software services firms like Wipro, TCS and Infosys are trying to get a foot into the door by leveraging their offshore expertise.

Almost the entire Indian IT services industry depends on three categories of services. The first segment is system integrations, which includes packaged application implementation, custom application development and integration. The market size for this is approximately $98 billion. The second segment is application outsourcing, which includes support and maintenance services. This market is estimated to be close to $15 billion. The third segment is IT consulting, which includes strategic consulting, business process consulting and change management. This space is estimated to be worth close to $25 billion. But as traditional markets have started entering the commodity phase, Indian players have no other choice but to expand the scope of the markets they are addressing.

The potential in the infrastructure management outsourcing space is best outlined by Sudin Apte, country manager, India, Forrester Research when he says, “The total IT services space that Indian players have addressed is said to be close to $138 billion. But Indian companies do not get much business from IT consulting, as even large companies don’t do more than 10 percent of their business via this route. So in reality, Indian IT services providers have flourished inside a market size of approximately $120 billion. Now take a look at IT infrastructure outsourcing. Mainframe-related outsourcing is a $29 billion market. Network-related outsourcing is a $7 billion market, while the desktop outsourcing market is a $18 billion market. Add to this the distributed environment related outsourcing market, estimated to be close to $57 billion. If you sum up the numbers, you would see that it comes to $111 billion, close to the same market size Indian players have been addressing over the years with falling margins.”

While very few Indian companies are playing in the infrastructure management outsourcing space, Apte says that the trend is a positive one as some North American and European firms have started looking at Indian offshore vendors to help them cut costs and improve productivity on the infrastructure side.

How Indian players can win

Over the long term, current Tier-1 infrastructure outsourcers will be forced to address skill and service rate disparities as compared to offshore alternatives, says Sudin Apte

While infrastructure outsourcing has typically been a game for large vendors, recent trends have shown that demand is also coming from small and medium-sized firms. Additionally, one more important trend that could be key for Indian firms is the price advantage. Unlike the past, price is amongst the most important criteria today and clients are even overlooking past relationships.

While Indian vendors have always aimed at moving up the value chain to command higher margins, the reality is that few Indian vendors have made even a dent in the IT consulting space. This is where the move into infrastructure management outsourcing can be beneficial to Indian players as this is not only a huge untapped market, but more importantly, a market which is a bigger spend area for customers than application development is.

Strategies of Indian players

Unlike the strategies of global players like IBM, CSC and EDS who have been using the take-over route, taking over assets of their clients and moving infrastructure on to their balance books, Indian players clearly do not have the advantage of size. This has meant that Indian players have been happy to stick to infrastructure management services, unlike the infrastructure-outsourcing route that global players have taken.

Says G K Prasanna, VP, technology infrastructure services, Wipro, “Our approach has been based on trust rather than the take-over approach. From the client’s perspective, we feel that our approach has been more realistic and controllable as the client can see and monitor exactly what he is getting.” Wipro’s approach has paid off and today the company has established a leadership position in the infrastructure management space with close to 180 clients in India and over 95 clients abroad.

Like onsite and offshore services in the software services space, there are three approaches in the infrastructure management space—onsite facilities management, offshore management and a hybrid approach consisting of 20 percent onsite and 80 percent offshore. Indian players have started approaching the infrastructure management space in the same way as they had approached the software services market—pounce on the market with onsite support and gradually move work offshore once you have proved your capabilities.

Transformational outsourcing

Wipro initially started with domestic clients and then moved on to tap global markets. The focus has paid off as the business has grown almost 10 times in the last three years and accounted for 8 percent of the company’s revenues. More importantly, almost 55 percent of the infrastructure management services at Wipro are done offshore, resulting in enhanced margins for Wipro. Gradually, as Wipro starts establishing more reference customers, the growth could be even faster, not only in winning new clients but also enhanced margins when the client realises the benefit of moving the work offshore.

Another major active in the infrastructure management space is Asia’s biggest software services exporter, TCS. Says Atul Takle, TCS’ vice president for corporate communications, “Infrastructure management is a key strategic fit to our overall software services portfolio and enhances our capability to provide end-to-end solutions to our domestic and international clients.” TCS is leveraging its dominant position in the software services space and has won several deals in this space from clients looking at a single point of contact for addressing all their IT needs.

TCS has also been helped by its acquisition of CMC as it helps in utilising CMC’s strong system integration skills and domain expertise in networking and facilities management. Currently, TCS has around five domestic clients and two international clients in the infrastructure management space.

Taking advantage of proven strengths

Indian players have also realised that unlike the software services space, the IT infrastructure management space is tough to crack as most clients are reluctant to hand over control of their networks to outsiders. Also, unlike application development, infrastructure management is a critical issue where even minutes of downtime can cripple a client’s business. While Indian vendors would clearly prefer a 100 percent offshore model as margins are better, the road ahead is tough as this is a space that has been dominated by global giants and Indian players do not have enough reference customers currently to make a larger impact. The ideal route would be to start with an onsite model and then move the services offshore, as is done in the software services industry.

Says Dr Bhaskar Ghosh, vice president, head, Infrastructure Management Service, Infosys Technologies, “IT infrastructure management services demand the right mix of onsite and offsite models. The nature of the services involved decides this. For instance, helpdesk management and network management works well with remote management mainly because of the customer’s confidence in the same. However, most large companies may not be comfortable outsourcing their network security management needs. There is a mindset change needed here.”

To get around this concern, vendors like Wipro have established Network Operating Centres (NOCs) in countries like the US, UK and Japan. This gives the client confidence in outsourcing their infrastructure management requirements. Once the confidence is established, Wipro can move the work offshore. Currently, Wipro delivers its infrastructure management services through a Global Command Centre (GCC) present in India with Point of Presence (PoP) locations in the US, UK and Japan. PoP locations are equipped with software to handle and monitor networks and perform basic event correlation and event suppression functions. This ensures localisation of management traffic of customers to the respective POP servers, resulting in valuable savings on bandwidth. POP servers are in turn integrated with servers in the GCC in India and engineers at GCC get notifications whenever there is any problem in the network.

This approach has boosted client confidence because it ensures that the core management set-up in the form of NOCs remains close to customers, in addition to ensuring disaster recovery capabilities. The NOC set-up has also helped in faster root cause analysis and in prioritising problems based on business impact. This is an innovative approach and may well set the trend for other players to follow.

Indian vendors are also bullish on the offshore delivery model, which has been a proven and accepted business model for application development and maintenance. And as Indian players have perfected this model, most players believe that the chances of success in this space are bright as IT infrastructure management is a logical extension of India’s offshore delivery capability.

Says Dr Ghosh of Infosys, “Growth of call centres and the BPO industry has already proved the telecommunication infrastructure capability of India. This coupled with our skilled manpower gives Indian players significant opportunities in the remote infrastructure management space.”

Price not the only factor

While most projects would still come to Indian vendors on the basis of price, vendors like Wipro have also been trying to create other differentiators by showcasing hidden costs in managing a network. For example, most CIOs do not account for losses in productivity and revenues due to downtime. Says Prasanna of Wipro, “Cost savings are not even half the story. With our expertise in this industry, we have enhanced service levels and improved productivity in most client organisations.” For example, for one client Wipro integrated the helpdesk with a monitoring system. The result is that today every single incident is recorded and problems are solved in a proactive manner than a reactive one.

Like the software services space where Indian vendors went on a quality certification spree, in the infrastructure management space too vendors are keen on following quality practices, which act as differentiators in the global space. Wipro follows the ITIL (IT Infrastructure Library) framework to develop its process framework. This is significant as ITIL has become the de facto standard in IT services management.

Challenges

Most Indian vendors have built considerable experience only in the application outsourcing space. While Indian players have one of the best processes in application support—on the infrastructure side Indian vendors do not yet have that level of experience.

Says Sudin Apte of Forrester Research, “Unlike global system integrators, Indian vendors have not spent years in perfecting their infrastructure outsourcing models and methodologies in order to streamline their infrastructure and support. As a result, while companies may realise cost savings they may suffer on service levels until Indian vendors perfect this model.” On the infrastructure side too, Indian players may be find the going tough when it comes to scaling up of operations. This may inhibit the vendor’s capability to move work offshore.

Explains Apte, “In terms of mainframe data centre outsourcing, Indian vendors have limited exposure to mainframe operations. The largest of the Indian IT services providers, TCS, has just 1100 MIPS of mainframe capacity. In the few instances, where the vendor manages a bulk of the client’s infrastructure, the work is done wholly onsite. While this reduces the client’s risk, it also reduces savings since Indian vendors are supposed to pay staff prevailing charges onsite.”

But while MNC companies may hold the advantage now, Indian companies like Wipro and Infosys are bullish on their prospects in the infrastructure management space. Says Dr Ghosh of Infosys, “MNC companies have several challenges, which in most cases have been perfected by the top IT companies in India. Indian companies have held lower sales, general and administrative expenses compared to MNC companies in the offshore business. Also, Indian companies have the advantage of speed in building critical mass for offshore delivery centres.”

Conclusion

While Indian offshore service providers do not currently have the expertise to assume a prime contractor role for large organisations, they still have considerable opportunities as offshore service providers start hitting giants in the space with their low-cost quality solutions. As Apte says, “Over the long term, current Tier-1 infrastructure outsourcers will be forced to address skill and service rate disparities compared to offshore alternatives. If they fail to do so, fledgling offshore providers will rapidly capture enough talent and experience to join the ranks of Tier-1 providers.” Knowing Indian software service players, who have almost never lost an opportunity to gain revenues, the infrastructure management space could be one area where Indian players repeat their software magic again.