The laws of nature suggest that once great heights are scaled, the descent back to ground can be sharp and sudden. That is why even in the IT industry there is always trepidation following a year of euphoria. But often, a slower growth rate following a highly successful year does not really mean a fall. It could mean consolidation after a significant base has been achieved, and, sometimes, a review and direction changes.

This was quite the scenario in the Indian IT services market during FY 2005-06. The Rs 16,069 crore (excluding training and BPO) market's 15% growth paling against the 39% a year ago.  The slower growth might suggest an approach toward maturity, but that wasn't quite so either.  True, some large enterprises rode high on the maturity curve by embracing areas like managed services or total IT outsourcing, but they made up a minority. And more significantly, the SMB/midsize market did not become a major or mature consumer of IT services, nor was it expected to, last year.

However, even the adoption blitz of the handful of large enterprises ensured that the SIs in the domestic market enjoyed strong growth. In a services-oriented economy like India, it came as no surprise that vendors of every hue operating in the domestic market, whether sellers of hardware or software, offered some sort of services around their products. (While even these product-oriented services would constitute a significant chunk of the overall services pie, Dataquest considered only those players involved in SI, NI, application development, facilities management, managed services or total IT outsourcing projects for both the services and solution providers' analysis. That means vendors who earned AMC revenues around their products have not been considered for listing.)

In the services analysis, the top ten domestic SIs are ranked, while in the solution providers segment, the next 20 are listed in two separate categories. Also many of these top SIs report associated hardware in their services billings, while some did not. Therefore, apart from the listing of pure services revenues of the top SIs,  we have shown a separate column showing services revenues along with associated hardware and software sold as part of services contracts. The latter required some rough estimations, but allows a better apple-to-apple comparison. As this was not done last year, we have not shown FY05 revenues for both lists, nor given growth percentages for each player.

IT Outsourcing is the Norm
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 evolved. Outsourcing high-end activities, however, became a little more acceptable in FY 2005-06, when the preponderance of managed services, network management, customized software development and even IT consulting took center stage.

In FY 2005-06, IT outsourcing was no longer an afterthought for companies that wanted to cut costs and avoid the overheads of managing technology. Business models were no longer immortal and were merely using technology to differentiate businesses. Most enterprises realized that differentiation would come from the integration of technology into the core elements of the business. This ensured innovation and also drove the agenda in this on-demand era. The need to innovate led organizations to move up the value chain and realize that outsourcing of their IT applications enabled them to focus on their core business activity.

The high growth in managed services and even customized software development proved that at least the larger enterprises were reaching close to the crest of the IT maturity curve. However, the widely disparate growth across different areas showed that IT adoption is still heavily skewed towards the larger enterprises and it would still take some time for the overall domestic services market to attain uniform maturity.

Sifting Through Outsourcing Dynamics
While most Indian enterprises, at least the larger ones, realized the advantages of outsourcing their IT functions to specialists so that they could focus on their core business, the success of an outsourcing deal depended on other business dynamics too. The Bharti deal with IBM proved that no two companies could sustain an outsourcing deal unless they generated value mutually. Apart from a fixed component, IBM's revenues from this arrangement are linked to Bharti's performance. This ensured that the service provider had enough incentive to provide the best services to the outsourcing organization. Typically, companies that had large ERP installations, databases, manufacturing systems or multiple production facilities and so on resorted to outsourcing of information systems and networking during the year. 

Outsourcing of non-production-related IT applications enabled a company to not only focus on its main business activity, but also achieve cost savings-on IT initiatives of course-to the tune of up to 30%.  Interestingly, MNC vendors like IBM, HP, Accenture as well as Indian vendors like Wipro Infotech and TCS all joined in to garner a share of the business pie. In the long run too, probably the collaboration between Indian and MNC vendors holds the key to the success of an outsourcing deal since it could bring out the best-of-breed solutions. The best example would be Tata Steel who outsourced their hardware maintenance to IBM, software application development to TCS and management of distributed IT environments to HP. Or, Bank of India where HP closely worked with Infosys to deploy Finacle across its branches.

Not only did Indian organizations prefer outsourcing contracts with multiple vendors, selective outsourcing was still a more prevalent trend against total outsourcing. Many organizations still believed in maintaining small in-house IT teams and retained control, particularly over the enterprise applications as well as purchase-related information. The movement towards consolidation of vendors started during this year , primarily because the vendors were getting better equipped in terms of capabilities, methodologies, tools and processes, transition management and in implementing the SLAs catering to the requirements of Indian corporates.

Regarding SLAs, contrary to traditional perception, even Indian organizations were demanding stringent parameters involving both risk and reward clauses.

Facelift for Facilities Management
Though facilities management at Rs 1,205 crore constituted a big chunk of services, the traditional model was gradually losing relevance. The transition from the earlier model of facilities management, where vendors were taking on the entire manpower themselves, to the current model of asset stripping, where device-based resources were outsourced, changed life for an increasing number of enterprises. IT was now looked on as an operational expenditure and not as capital expenditure in the balance sheet by most corporates.

IT infrastructure outsourcing thus, helped drive growth in many ways. It reduced operational costs by turning what was a fixed cost into variables, got assets off the balance sheet, and freed up cash for investments. Both CIOs and vendors agreed that the value of outsourcing was derived only in long-term contracts, especially those beyond three years. While the dangers of base erosion remained, providers needed at least three years to give sufficient inputs for process re-engineering for their customers.

FY 2005-06 also saw a shift towards full-scope or strategic outsourcing from selective out-tasking. Strategic outsourcing, as the name suggests, was a strategic decision taken by the company after considering different aspects like finance, HR, and fixed period business strategy along with IT strategy and deliverables. Strategic outsourcing constituted a partnership between organizations and was significant compared to facilities management or out-tasking which tended to be basic in nature and expectations.

Applications management outsourcing was also becoming prominent, as it required specialized skills. Most of the applications were package applications, and customization was tending to get lost. In India, a constant tweaking in the packaged applications was crucial due to a continuous change in the tax, duty and law structure. The global focus on IT security gathered momentum here in India too. IT security services such as IDS grew with Internet banking and mobile banking driving the trend.

The Vendor Saga
MNCs were more successful in bagging the large services contracts in the domestic market. Therefore, it was IBM Global Services and HP India who dominated the show amongst domestic service providers. The Bharti deal signed with IBM entered its third year and was being gradually regarded as the landmark in the domestic IT infrastructure landscape. Apart from the fixed component, IBM also got a percentage in revenue share that was linked to Bharti's performance. Payments on this count ranged between Rs 400-500 crore, and could increase subsequently. Tata Steel and Tata Motors were other significant IBM customers for the year. Like TCS, IBM too beefed up its SI portfolio in the domestic market with the acquisition of Network Solutions, though the effect would start coming in only from next year. 

HP at #2 was another player to have redefined Indian IT services paradigm through its contracts with Bank of India and Bank of Baroda. During the year, it finished supervising the implementation and management of Finacle core banking solution across BoI's 750 branches. Besides deploying core banking and data-warehouse activities, HP assumed responsibility for project management, configuration management, change and release management, incident and problem management, capacity management, as well as availability management.

IT infrastructure outsourcing helped reduce operational costs by turning what was a fixed cost into variables and got assets off the balance sheet

Though the TCS/CMC combine bagged the #3 slot, it was only just; it was heartening to note that another Indian vendor, Wipro Infotech offered TCS stiff competition and finished a close fourth. While domestic services revenues for TCS was already bolstered by CMC, in FY 2005-06 a further fillip was provided by the Tata Infotech acquisition. The merger provided TCS an expanded customer base and deeper penetration in the systems integration area, particularly in telecom and defense. The result-TCS bagged the landmark Tata Teleservices (TTSL) deal estimated at over Rs 1,000 crore and spread over five years. Under this contract, TCS was given the responsibility of managing the IT infrastructure of both TTSL and Tata Teleservices, Maharashtra. The wide area network project for the Army inherited from Tata Infotech also proved the viability of the TCS/CMC/Tata Infotech combo.

Wipro's rise owed much to the four total outsourcing deals it bagged during the year. These included the ten-year Rs 360 crore contract with HDFC Bank for IT outsourcing that involved provisioning of IT infrastructure for branches, infrastructure management for datacenter, Networking, end user support and level 1 Application support as well as a five year contract with an oil exploration organization for transaction processing in F&A, procurement, IT outsourcing comprising consulting, ERP deployment and Infrastructure Management. Other major wins included Sanmar Group of Chennai that involved the complete IT set-up including applications, infrastructure, technology consulting, as well as a five year contract with Optimix for building and managing end to end IT infrastructure. On the managed IT services front, Wipro bagged StanChart, HLL, Maruti, Arab National Bank and Worldspace India; it also executed SI projects for BPCL and Lakshmi Vilas Bank amongst others.

Beyond the top four, barring Datacraft, it was only Indian vendors who made up the remaining slots in the top ten and all of t. The top ten combined contributed 25% of the overall domestic services.

HCL Comnet, pioneered remote infrastructure management including application management-a second coming for the ASP model discarded earlier. It leveraged network management expertise especially in the education and stock broking segments.

Similarly, Tulip IT Services and Datacraft too banked heavily on network integration to gain foothold in the services market. Tulip's amazing growth reflected in its major wins for 2005-06: it provided complete wireless VPN connectivity for all Delhi University colleges as well as all offices of Times NOW news channel across India; apart from connecting more than 200 Samsung dealers, it also serviced clients like HDFC Bank, Bajaj Allianz, AC Nielsen, Luxor, Fortis and Gujarat State Chemicals & Fertilizers amongst others. Datacraft's magnum SBI project continued as it completed connecting 10,000 branches in January and embarked on another 4,000. It also provided 100 PoPs overseas for a CDMA service provider.

Conclusion
Overall FY 2005-06 reiterated the perception that domestic IT demand is witnessing a visible shift towards services and management even as enterprises stepped up investments in enhancing their IP infrastructure. With the size and complexity of IT infrastructure increasing by the day, enterprises showed an increasing preference for outsourcing the IT management activities to external experts resulting in the massive growth in demand for managed IT services.

Rajneesh De
rajneeshd@cybermedia.co.in

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