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As we approach the end of 2006, we should look back and evaluate
the changing market dynamics throughout the year. We can then determine what's
in store for the IT services industry in the coming year, and beyond.
According to IDC India's Half-Yearly IT Services Tracker, 1H
2006, the domestic IT services market in India is estimated at around $3.5 bn
and is expected to grow at a double digit CAGR of 17.2% between 2005 and 2010.
Outsourcing is the fastest growing engagement type across the complete IT
Services market with an overall CAGR of 25.4% for the period 2005-2010.
Overall, outsourcing engagement consists of IS outsourcing,
network and desktop outsourcing, application management, hosted application
management and hosted infrastructure services. However, network and desktop
outsourcing can be clubbed with hosted infrastructure services and is referred
to as 'discrete outsourcing services'.
A Business View
India has generated for itself an incredible amount of publicity over the
years for outsourcing. A growing optimism is seen in the market, with the IT
investment agenda changing from a focus on pure cost savings to one on improving
business through improved efficiency of processes. The growth in the economy and
business optimism is the key to this transformation.
Most companies in the large and medium segment have yet to
accept IS outsourcing, but they are opening up to the concept. As such, those
companies still present a significant opportunity. Consequently, today's focus
within large enterprises is on how IT can be used effectively to improve
efficiency in the different business lines of a company-an approach that takes
a business view on IT investments and deployments. Business cases and metrics
for evaluation of IT projects are the order of the day. Vendors are trying to
articulate and incorporate business value of outsourcing into the selling
process and execution. Also, consumers are primarily focused on business issues,
expecting service providers to address them with solutions using IT.
Trends in IS Outsourcing
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IDC forecasts that the overall growth in IS outsourcing is
expected to experience a high CAGR of 25.4% from 2005-2010. It will mainly
be driven by deals in the large enterprise segments.
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Within the Indian market vertical space, the majority of
large organizations, especially in the BFSI and telecommunications segments,
are actively considering using the IS outsourcing services model.
Outsourcing continues to shape the growth of the services markets. It has
allowed organizations to drive down costs, access specialist expertise and
technologies, and refocus management skills away from non-core IT functions
towards those challenges driving competitive differentiation.
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Organizations are working with service providers for
defining process and governance frameworks under the various standard
services delivery frameworks to ensure better alignment with the
organization's processes
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The vendors are communicating the benefits of their
outsourcing services better than ever before, and those offerings are
becoming more sophisticated with each passing year. Some of the fundamental
messages that are resonating with an increasing number of enterprise
customers are not new and are shared with a wide variety of IT outsourcing
services.
The key drivers for the growth of outsourcing stem very much
from the exposure that Indian companies get from the IS outsourcing that occurs
around them. Indian enterprises have exhibited a willingness to engage with
foreign or multinational vendors for their outsourcing needs. That said,
companies like Wipro and TCS have ramped up efforts in the domestic market for
the provisioning of IS outsourcing and have been successful in verticals like
BFSI, manufacturing and telecom.
Despite strong growth in India, there remain some corporate and
cultural concerns that serve as inhibitors to IS outsourcing. Strong concerns
about corporate politics, downsizing, and layoffs prevent some companies and
government agencies from outsourcing. This is especially prevalent in some parts
of India where companies and government agencies have a strong union presence.
In some cultures, companies are hesitant to hand over important business
operations to third parties. Adding to this hesitance is a fear of failure or an
inadequate service performance and management.
Discrete Outsourcing
Discrete outsourcing plays a major part in India's outsourcing ecosystem.
Unlike IS outsourcing, discrete outsourcing requires organizations to coordinate
several different contracts for the most part with several different vendors-to
achieve the same results like IS outsourcing but not with a single point of
contact. Whilst, theoretically, this approach provides greater flexibility
within organizations, the difference between success and failure rests on the
ability of the users to manage and coordinate the many and disparate engagements
in their ecosystems. For many organizations, this proves a daunting task, which
requires managing not only user-vendor interaction but also vendor-vendor
interaction. To provide seamless environments, vendors need to work together on
interdependent processes and within certain elements of the ecosystems. The
management of these types of engagements is something that very few
organizations have experienced.
The desktop management and network management markets will
continue to be a big part of this and will be driven by leading vendors with
large installed bases. This activity is difficult to manage by many players.
However, major innovations are expected to come from smaller, niche players.
There are number of reasons for this particular market's acceleration in a
country like India. As firms face a need for network expansion and higher levels
of security over WANs, specialization requirements may drive them to outsource
network management functions to vendors. In the search for higher RoIs, firms
are turning toward the integration and subsequent management of systems,
storage, and applications. These would require increased activities in network
management and desktop management.
| The lines
between software company and service provider are continuing to blur.
While the notion of software as a service (SaaS) is well known and is
proving to be quite a disruption to the software industry |
IDC expects that the broadband policy and falling bandwidth
prices will act as an enabler for businesses to make increased use of hosting
services, which include both hosted AM and hosted infrastructure services.
Whilst AM will achieve growth of some degree as a result of this move, the
majority of growth sustained will be seen under hosted services within the
hosted AM market. A growth surge is also anticipated within the hosted
infrastructure space.
Discrete outsourcing services providers are paying more
attention to the SMB customers. There has been quite a bit of noise in the IT
services market about creating service offerings for the SMB, but there have
been relatively few success stories so far. This is not surprising given the
depth in terms of highly customized nature of traditional IS outsourcing
engagements, which makes working with smaller customers an unappealing
proposition.
Three to Tango
HAM, SaaS and the Enterprise
The acceptance of Software as a Service (SaaS) delivery models, which
includes software on demand and hosted application management (hosted AM), has
continued to gather momentum and customer mindshare in 2005-2006 and is expected
to further increase in 2007.
Hosted application management services (formerly called
application service provisioning) has evolved far beyond the ASP offerings of
the dot-com era and offers both customers and vendors enough benefits above and
beyond traditional AM delivery models to justify continued investment and
development.
The lines between software company and service provider are
continuing to blur. On one side of that equation, the notion of software as a
service (SaaS) is well known and is proving to be quite a disruption to the
software industry. IDC believes that SaaS providers will pay particular
attention to developing and increasing partnerships in order to expand revenue
streams and customer adoption in the upcoming year.
All in all, we will witness an exciting next few years with
services vendors catering to the large enterprises and opening up to
opportunities and prospects in the "long tail" (SMB) that could
generate significant business for them in the future. Newer and more innovative
business models will be witnessed along with the shaping and alignment of the
Indian IT services market with the overall global trends.
Mrydul Vats
maildqindia@cybermedia.co.in
The author is Senior Analyst, Software and Services Research, IDC India Page(s) 1
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