Domestic IT market in an outsourcing overdrive

It’s an era of IT outsourcing in the domestic market. Vinutha V says that 2006 onwards the managed services space will move beyond BFSI and telecom to untapped sectors such as manufacturing, government and retail

Some of the recent deals by IBM (Bharti), HP (Bank of India), Wipro (Sanmar group) and TCS (Department of Company Affairs) explain the growing importance of IT outsourcing to Indian companies. The domestic IT services market in India has finally emerged from the shadow of the IT services exports sector. The domestic IT services market in India has witnessed good growth in 2005. Though the final numbers for 2005 are yet to be compiled, according to IDC, the domestic IT services market was worth $2.3 billion in 2004 and has been growing at a CAGR of 19 percent.

Over the years, exports have accounted for the largest chunk of the Indian software sector pie, and the domestic market was never given its due importance. In the last few years though, a host of factors such as the global slowdown in IT spending, the strengthening of the rupee, and the growing IT maturity in India have resulted in the domestic IT outsourcing services market gaining importance.

IDC believes that the Indian market is moving towards an era of outsourcing services in the domestic space. So far, the domestic market has been dominated by plain-vanilla support services such as software and hardware deployment, and includes revenue streams like AMC (Annual Maintenance Service Contracts).

With the emergence of end-to-end operators in the services space and confidence in outsourcing to service providers, end-users are awarding more contracts with long-term commitments. It is a definite change in the mindset of even the PSUs (Public Sector Units) or government verticals in going for similar deals where the specialist provider can take up the complete headache of managing their IT infrastructure.

Economic stability and growth (specifically in the use of IT) has given greater levels of confidence to both IT service vendors and end-users. As the Indian economy continues its robust growth, outsourcing is gaining acceptance and governments are getting involved in rolling out initiatives in this segment.

Businesses want to focus on core business, not IT

"Companies have realised that outsourcing enables them to focus on core activity, and ensures that managed services providers have skilled professionals" -Nipun Mehrotra Director Services Sales IBM India

The corporate sector is embracing a trend from the West. IT outsourcing is no longer an a fterthought for companies that want to cut costs and avoid the overhead of managing technology. It is no longer going to be driven by guessing. It’s going to be changing market trends, client requirements and ensuring rapid growth and transformation.

Business models today are no longer immortal and merely use technology to differentiate businesses. Differentiation today is going to come from the integration of technology into the core elements of the business.

Says Nipun Mehrotra, Director, Services Sales, IBM India, “The intersection of business process and technology will provide the competitive edge. It will ensure innovation and also drive the agenda in this on-demand era. The need to innovate for the client has led organisations to move up the value chain. Companies have realised that outsourcing of their IT applications enables them to not only focus on their core business activity but also ensures that managed services providers have skilled and qualified professionals to manage their infrastructure.”

"Outsourcing has been helping CIOs to be free from operational hassles, focus on strategy, and understand business needs" -Heera John Country Manager, Services & Solutions Marketing, Technology Solutions Group, HPIndia

Economic stability and growth (specifically in the use of IT) has given greater levels of confidence to both IT service vendors and end-users alike. Remarks Heera John, Country Manager, Services & Solutions Marketing, Technology Solutions Group, Hewlett Packard India Sales, “Businesses are realising that it makes sense for organisations to outsource IT to managed service vendors who can bring in technology, expertise, systems and processes to improve overall SLA to the business. Outsourcing has been helping the CIOs to be free from operational hassles and focus on strategy and understanding business needs. It has improved employee productivity and of course has brought cost advantages.”

Businesses had good growth in the last year. In verticals like banking, IT has helped organisations to expand and offer new service offerings around Internet banking, phone banking, ATM and value-added services. However, this brought its own challenges in attracting and retaining skills, the availability of knowledge and resources in the in-house IT team, and the ability to manage IT and meet business needs. Vendors echo the fact that managing IT manpower with relevant skill sets is becoming difficult. As the pressure within the IT industry is growing, it may be a nightmare for non-IT companies (where IT is a non-core activity) to hold back IT manpower.

Nevertheless, IT outsourcing successfully addressed these challenges. Issues in managing IT manpower compelled large and small enterprises to focus on their core competencies and look for external help in managing their growing IT operations. Outsourcing of their IT applications enabled companies to focus on their main business activity.

"Equipment and software are only a part of IT outsourcing. End-users do not have the time to solve problems. They want a proactive management" -Deepak Jain General Manager & Business Head Managed IT Services Wipro Infotech

Earlier, it was said that total outsourcing of IT activities would become popular when users learned to focus completely on their core competencies and gain clarity on what IT activities to be outsourced, which has happened over the last 12-18 months. “Obtaining equipment and software are only a part of IT outsourcing. End-users do not have the luxury of time to solve problems. They are adopting a proactive management approach rather than reactive management. This is allowing our customers to outsource for the entire IT lifecycle solutions including design, deployment, complete support and management,” says Deepak Jain, General Manager & Business Head, Managed IT Services, Wipro Infotech.

Mid-sized firms follow enterprise footsteps

Large enterprises are leaning on IT service vendors for all non-core IT activities, while small-sized companies are still managing with piecemeal or without IT outsourcing. The need for IT outsourcing thus exists with mid-sized companies.

Comments Rajeev Asja, Executive Vice-president, HCL Infosystems, “Typically these organisations are growing at a faster rate, expanding the network infrastructure from LAN to WAN and wanting some specialised services to manage their network IT set-ups. Therefore in 2005 we saw a tremendous opportunity coming from the mid-sized segment.”

With the expertise on servicing global customers, Indian IT service providers have the apt knowledge and experience. Says Virender Aggarwal, Senior Vice-president and Director, Satyam, “On the other hand, IT outsourcing vendors can offer multiple options. An explosive growth in business is allowing companies to look at the advantage of IT outsourcing. With their expertise in serving global customers, the vendors are mature enough to serve the domestic market.”

Retail, a new entrant

BFSI was a high growth segment with large strategic outsourcing deals taking place in 2005. Within BFSI, the core banking application was the key driver with customers looking at leveraging IT to bring transformation in building and managing their IT infrastructure and applications. HP recently completed a core banking solution implementation at Bank of India’s 500 branches across the country.

India is witnessing a dynamic banking environment and becoming customer-focussed. Additionally, banks are branching out into various divisions such as tele-banking, Internet banking and ATM services. The BPO industry saw a major chunk of IT outsourcing followed by BFSI and telecom in 2005. Besides contracting heavy projects, the time line to finish the work is getting shorter. Another new entrant in complete IT outsourcing is the retail sector. “We are witnessing an increased traction in this vertical. To be competent in the market, large FMCGs in India are looking at automating their operations. Without on-line information, it’s challenging for FMCGs to meet the growing consumer demands,” adds Jain of Wipro.

From piecemeal to total outsourcing

The saga of IT outsourcing in the domestic market started three years ago with the basic service of maintenance. Gradually, certain value-added services such as facilities management, Web services, network management and few discrete services have evolved. Outsourcing certain high-end activities began when 24/7 operations started taking place.

Emphasis on customer servicing is laid mainly in two sectors—banking and telecom—leading to a trend of setting up of BPOs and call centres. “Such trends in 2005 drove Indian companies to move from traditional software projects outsourcing to application development, application maintenance and data centre management. Infrastructure management, application outsourcing through the ASP model and customer-based application outsourcing are also increasing,” adds Aggarwal of Satyam.

Multimillion long-term contracts

2005 became a feel-good factor for IT service vendors. As per IDC, IBM Global Services (IBS) was the clear market winner in 2005 in the Indian domestic IT market, much ahead of its nearest rivals Wipro and TCS. In 2005, IBM launched a Global Services Delivery Centre in Bangalore after investing $10 million in the earlier year to meet the growing market demand for strategic outsourcing and improved technology management services. It also set up a Services Innovation Research Centre in Bangalore and a High-Performance On-Demand Solutions Centre at its software lab in Bangalore to help clients in India and the region address high-performance and scalability issues.

States John, “We grew over 40 percent in 2005 in terms of order booking. These deals are long-term and the outsourcing revenue will start flowing after the infrastructure is built. We have won some projects in outsourcing deals such as Ashok Leyland, Hindustan Lever, Reuters and Tata Steel.”

2005 was a landmark year for Wipro as they saw a considerable customer win on the FMCG, banking and telecom fronts. It identified desktop management services as a major area within IT outsourcing. It even set up a Desktop Operations Centre where a large number of desktop management services can be executed remotely. Wipro wanted to address the logistics challenge and remote support simultaneously as their customers cannot afford any downtime.

Satyam, which started serving Indian customers two years back, is growing at 50 percent year-on-year. In the last year, HCL Infosystems has acquired a substantial number of customers such as BSNL, Bank of Rajasthan and some pharmaceutical companies.

Trend in outsourcing projects

Besides expanding beyond traditional discrete, tactical ‘out-tasking’ projects or facilities management into strategic outsourcing projects, another trend is catching on with regard to the timeframe of the outsourcing projects. From a 2-3 year term contract, the relationship is extending to over 10 years. ‘Flexible contracts’ is what end-customers seem to be preferring and vendors offering.

Comments Jain of Wipro, “Long-term relationships are happening, but customers are expecting flexibility as far as the contract model is concerned. The flexible contract model is based on the business needs or satisfaction levels with an IT service vendor. The customer can scale up further or exit from the project contract without being penalised. At present, every project comes with an exit penalty.”

2006 will see more of strategic outsourcing

So far, traction in the managed services space has been mainly from the BFSI and telecom sectors, but in 2006 IDC expects more traction from untapped sectors like manufacturing, government and niche verticals such as retail and utilities. IDC estimates that managed services (outsourcing services) would be 24 percent of the total domestic IT services market vis-à-vis 22 percent for Technology Product Services (TPS) in 2006.

Governments and PSUs are stretching their IT budget allocation focussing on maintaining and maximising returns on IT investments. Also, organisations will focus on security infrastructure, and emergence of new services like business continuity services. ASP models will continue to drive the growth in the IT outsourcing market in 2006.

The key driver however will be the client’s need to innovate and stay ahead in a surging economy, notes Mehrotra. Vendors are seeing a favourable period. To be competent at the global level, productivity of more for less will drive companies going in for IT outsourcing. Not just the technology, business automation of the processes and better usage of the IT infrastructure will pave the way for IT outsourcing.

Several attributes can fuel the growth of domestic IT outsourcing. So far, the boom in the telecom sector has handled the hassles of connectivity. “Although the technology was available earlier, the usage was interrupted by the connectivity. Now we can afford to have 100 percent connectivity throughout and this will allow customers to invest in IT outsourcing,” says Asja of HCL Infosystems.

“We see a mix of both discrete and strategic outsourcing deals happening in India. While large enterprises are going for strategic outsourcing, smaller enterprises choose discrete outsourcing like desktop management, server and storage management, and network management. We expect the momentum for strategic outsourcing deals to continue,” says John.

Some of the key trends in 2006 include high attrition rates in IT departments, in-house availability of expertise on new technologies, and cost advantage to vendors. Networks are becoming far more integrated into the enterprise computing architecture, but most IT organisations lack the depth of knowledge to deal with this area.

Outsourcing can provide access to new and increasingly complex IT capacity and functionality without capital expenditure. Infrastructure and application outsourcing continue to be high-growth areas for outsourcing. Today, outsourcing is subtle and organic, and will continue to be so. The shift that we saw in 2005 towards full-scope or strategic outsourcing from selective out-tasking is likely to continue this year, opines Mehrotra.

Govt to peddle more IT outsourcing projects

Though the government sector has already tasted the benefits of IT outsourcing, it is expected to grow further. Be it Life Insurance Corporation or the ever-expanding BSNL, they all need IT. It is not just the need for having IT but having a single point of contact for a better manageability.

The other growth segment is the public sector, which includes state and central government departments, health care sectors and educational institutions.

India is becoming a destination for health tourism. This should boost the growth of the health care sector in a big way. Universities are going for online education where IT is the enabler. We expect more ‘build, operate and transfer’ projects happening in the public sector.

The services industry is expected to further drive the trend of IT outsourcing on the domestic front, especially in the areas of insurance, banking and telecommunications. The manufacturing sector will be the next in the line. “Since the manufacturing sector does not hire a large number of people in the IT department, and it’s core value addition is just manufacturing, outsourcing most of the IT activities is expected to take place. Large businesses will continue to outsource all IT activities and medium and small businesses will drive application IT outsourcing,” adds Aggarwal of Satyam.

Services

“In 2005 we saw a shift towards full-scope or strategic outsourcing from selective out-tasking, and the trend is likely to continue this year,” notes Mehrotra. Strategic outsourcing, as the name suggests, is a strategic decision taken by the company after considering different aspects like finance, human resources, and fixed period business strategy along with IT strategy and deliverables.

Strategic outsourcing constitutes a partnership between organisations and is significant compared to facilities management or out-tasking which tend to be basic in nature and expectations. In the future, applications management outsourcing will take centre stage as it requires specialised skills. Most of the applications are package applications, and customisation is tending to get lost. In India, constant tweaking in the packaged applications are crucial as there will be a continuous change in the tax, duty and law structure.

The global phenomenon of focus on IT security is gathering momentum in India too. IT security services such as IDS (Intrusion Detection Systems) is expected to grow as Internet banking and mobile banking will drive the trend. Having security building blocks of firewall and anti-virus are not enough for organisations to safeguard their data. There will be an increased demand for the management of security.

“Customers are demanding quicker updates of patches and remote security management to reduce the impact on day-to-day administration. Since security management is a specialised area, customers may not have the required skill sets, and hence we expect growth in it,” adds Jain of Wipro. In printing services outsourcing, IGS closed several major client contracts in production printing and enterprise printing, and will continue seeing this traction in 2006 as well.

In future

In the scenario of robust business growth, enterprises can have two options—in-sourcing or outsourcing. It makes business sense for the organisations to outsource IT to vendors who can bring in technology, knowledge, systems and processes and improve overall service levels. Outsourcing helps CIOs to be free from operational hassles and focus on strategy and understand business needs. It improves employee productivity and brings cost advantages.

By delegating the entire IT activities to an IT services vendor, end-customers not only get the cost advantage but a guarantee on the IT skill sets, uptime and better SLAs. Even vendors are bullish on the prospects for domestic growth. HCL Infosystems aims at growing ten-fold in the next three years. Some of the largest strategic outsourcing deals in Asia Pacific happened in India in specific verticals like BFSI and NSP (Network Service Providers). Similar deals are expected in other verticals.

Analysts and industry pundits suggest that companies pick one thing that they do best and keep it in-house, letting providers (managed services) take care of the rest. They point out that the trend to outsource IT infrastructure to providers will result in enterprises becoming virtual enterprises focussed on their core business activities.

vinutha@expresscomputeronline.com