Trend

Domestic IT transformation: a multi-million market

IT outsourcing was the over-arching trend in the domestic market last year. IT outsourcing (re-engineering) has moved beyond BFSI and telecom to untapped sectors such as manufacturing, government, auto, pharma and retail and is expected to grow further says Mohd Shariff PA.

A flurry of events have transformed the IT outsourcing market in the recent past. The market has seen multi-million deals bagged by IT services companies for periods ranging from 5 to 10 years. The Vodafone, Idea Cellular and IGI accounts were bagged by IBM Global Services. HP bagged Bank of India and Britannia. TCS got the Department of Company Affairs deal. All these deals spelled the growing importance of IT outsourcing for Indian companies. The domestic IT services market in India has emerged from the shadow of the IT services exports sector. Although the final numbers for 2007 are yet to be compiled, according to a leading analyst firm, the IT outsourcing (business transformation) market is estimated to have grown between 20 to 24% from $3.3 billion in 2006.

Over the years, IT exports have accounted for the biggest chunk of the Indian software sector’s revenues, 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 (business transformation) services market gaining importance.

Marshal Correia, Director, Outsourcing Services, HP India said, “The Indian market is moving towards an era of outsourcing services in the domestic space at a faster rate. So far, the domestic market has been dominated by plain-vanilla support services such as software and hardware deployment, and includes revenue streams such as AMC (Annual Maintenance Contract) and it is expected to move beyond that in the near future.” According to sources at iGate, with the emergence of end-to-end operators in the IT services space and the growing confidence in outsourcing to service providers, businesses are awarding more contracts with long-term commitments to specialist firms. It is a definite change in the mindset of even the Public Sector Units (PSUs) or government verticals in going for similar business transformation deals where the specialist provider can take up the complete headache of managing their IT infrastructure end-to-end.

Marshal notes, “The three-year contract of HP and Britannia makes Britannia the first FMCG firm in the subcontinent to outsource its IT operations for business transformation and accelerated growth in a competitive environment.”

Long-term multi million dollar deals

Interestingly each of the IBM deals with Idea Cellular and Vodafone is in the $600 to 800 million range and these are contracts for 10 years. So why are large businesses are going in for long term contracts with specialized services companies?

The domestic market is embracing a western trend in a big way. IT outsourcing is no longer a postscript for companies that want to cut costs and avoid the overhead of managing technology. It is no longer going to be driven by guestimates. Business models today are no longer in flux. Differentiation comes from the integration of technology into the core elements of a business.

Some of the key drivers for IT outsourcing included high attrition rates in IT departments, lack of in-house availability of expertise on new technologies, and cost advantage to vendors. Networks are becoming far more integrated into an enterprise’s computing architecture, but most IT organisations lack the depth of knowledge to deal with this area. This has led many CIOs to look at stronger alternatives to leverage their IT decision making.

Marshal said, “The process of business transformation—outsourcing process and technology—will provide a competitive edge for business at large. It will ensure innovation and also drive the agenda in this on-demand era.” Domestic players have realised that outsourcing 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 IT infrastructure at all levels.

A flexible business model

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.

Like the Bharati deal, IBM’s recent deal with Idea Cellular Ltd. (Idea) deal is a 10 year business transformation pact to integrate, innovate and transform Idea’s business processes and IT infrastructure. The pact is designed on an innovative risk-reward revenue sharing model. It will help Idea accelerate time-to-market of new services to delight customers and enhance loyalty, leverage opportunities from the convergence of voice, data, video and wireless technologies, and add new revenue streams to provide a competitive edge and provide advanced revenue assurance capabilities for top and bottom line growth.

IBM’s other two deals have a wider scope. For example IBM Global Business Services will implement an enterprise resource planning (ERP) system at Indira Gandhi International Airport (IGIA) integrating and modernizing the airport’s business processes. The ERP system will integrate all data and processes of the organization into a unified system that can handle almost 37 million passengers per year. IBM will manage all Vodafone Essar’s IT [information technology] operations with the exception of network service platforms. The agreement will include maintaining billing, data centers and financial systems.

Although long-term relationships are forming, customers expect flexibility as far as the contract model is concerned. Marshall said, “The flexible contract model is based on business needs or satisfaction levels with an IT service vendor. The customer can scale up further or exit from the project contract without being penalized. At present, every project comes with an exit penalty.”

Businesses are realizing 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 service levels being delivered to the business. Outsourcing has been helping CIOs to be free from operational hassles allowing them to focus on strategy and understanding business needs. It has improved employee productivity and, of course, has brought cost advantages too for many domestic players.

If we look at the deals in recent years, IBM Global Services seems to maintain its lead in the Indian domestic IT market, ahead of its nearest rivals HP, TCS and Wipro. IBM launched a Global Services Delivery Centre in Bangalore after investing $10 million in the previous year to meet the growing 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.

As we said in the beginning, the IT industry believes that traction in the IT transformation space has been primarily from the BFSI and telecom sectors, but in 2007 the market has moved down to the traditional spenders such as BFSI and telecom to verticals such as manufacturing, government retail and utilities. We have seen that governments and PSUs are stretching their IT budget allocation focusing on maintaining and maximizing returns on IT investments. Moreover, organisations will focus on security infrastructure, and emergence of new services such as business continuity services. ASP models will continue to drive growth in the IT outsourcing market in 2008.

The key driver however will be technological innovations and the need to stay ahead in a surging economy, notes Marshall. Vendors are seeing a favourable period now. 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 in a big way in the future.

K.R Jyothilal IAS, Secretary-IT, Govt of Kerala said, “The Kerala government is trying to peddle IT business transformation outsourcing projects. Though this sector has already tasted the benefits of IT outsourcing in many areas it now wants to move ahead in doing total business transformation.”

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 line. Since the manufacturing sector does not hire a large number of people in the IT department, and its core value addition is manufacturing, most of the IT activities in this vertical are expected to be outsourced. Large businesses will continue to outsource all IT activities and SMBs will also start to do so.

In line with the steady growth of the domestic market, the objective is to build an agile and adaptive IT infrastructure that will enable business verticals to stay ahead of the competition and increase profitability, and that’s where the entire business of outsourcing is focused.

mohammed.shariff@expressindia.com