During last years Top 20, Dataquest called the rapid strides made by domestic IT services as signs of the industrys ultimate democratization. In FY 08, the Indian democracy itself might have been in doldrums, but the democratization principles set in motion in IT services continued rolling smoothly. True there were bumps on the road (fluctuating dollar rupee relation, the whiff of a US slowdown, oil prices and the alarming rate of rising inflation); the IT services juggernaut had to apply a temporary third gear, but there was no question of pulling the brakes or going on a complete reverse.

What this translates into in rupee terms was that the domestic services market grew by 28% to reach Rs 26,756 crore, up from Rs 20,948 crore a year earlier. Though there was a two point drop in growth (it was 30% the year before), probably most industries would have been thrilled to record anywhere close to 28% growth in a challenging fiscal like 2007-08. The domestic services market that like a coy bride used to shy away from suitors a few years back, seemed to have finally lost all its inhibitions and courted all and sundry irrespective of time and place.

The burgeoning domestic services market made good sense for its constituents too. The principles of democratization seem to have seeped in deep here, with the 80-20 rule not applicable in a straightforward way. Unlike most sectors where the top 10-15 players often contribute the maximum, the top 15 services players here only contributed 29% of the market (at Rs 7,834 crore), though it must be admitted that they bagged most of the lucrative contracts.

However, one significant event of FY 08 was the coming of age of a set of tier-2 system integrators and solution providers. These were primarily the erstwhile distributors and box-pushers who transformed themselves into their new avatars. The top 15 tier-2 players together contributed Rs 2,711 crore, constituting more than 10% of the total market. Two main reasons could be attributed to the rise of this category: the burgeoning population of SMBs meant that market forces demanded the emergence of smaller service providers to address their needs. Secondly, in many cases, the tier-1 players partnered these smaller players to help in some aspects of delivery. As more and more organizations looked at outsourcing to multiple vendors, this trend is likely to rise further.

IBM bagged the Vodafone, Idea Cellular and Indira Gandhi International Airport, Delhi (IGI) accounts in FY 08. HP bagged United Bank and Britannia. TCS got the Department of Company Affairs and the passport processing deal from the Ministry of External affairs. All these deals spelled the growing importance of domestic IT outsourcing for Indian companies. The domestic IT services market in India finally seemed to have emerged from the shadow of the IT services exports sector.

For the second year running, the IT services market clocked a healthy growth rate, making it one of the principal catalysts for Indian ITs domestic success story. Interestingly, it now constitutes close to 1% of Indias GDP. Truly, its one rocking story of the year

While the total domestic IT services market was pegged at nearly $6.5bn, the IT outsourcing (primarily, business transformation) market itself grew between 22-24% to $3.3 bn in FY 08. IBM again cornered a lions share of this market in the face of strong competition from other players. Since March 2007, IBM announced several such services dealsboth large and smallincluding one with Idea Cellular valued at $600-800 mn, a $45 mn deal with the Central Board of Direct Taxes, a project with the Delhi International Airport and many more.

Analyzing the Transformation
The IT services market responded positively for most vendors during FY 08 and was largely responsible for making the domestic share of the Indian IT pie bigger than exports in more than a decade. Initially, it was large enterprises in BFSI and telecom that went in for long-term outsourcing projects. That has changed over time (not that it meant these verticals stopped outsourcing in 2007-08) and the market has expanded to other verticals in India like government, manufacturing, retail, and FMCG.

While most of the spending on IT was initially restricted to large corporations (and the local arms of global MNCs), the last couple of years have seen strong investment from the SME market. There were many big-ticket deals that were announced in 2007-08 and industry watchers and analysts believe that this is just the beginning. There will be heavy investment in the government sector, since the defense sector alone is expected to spend around $500 mn on communication and technology needs, including the national e-governance project (NeGP).

The emergence of end-to-end operators in the IT services space and the growing confidence in outsourcing to service providers, led to businesses awarding more contracts with long-term commitments to specialist firms. There was a definite change in the mindset of even the 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.

The Indian market is moving toward 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. Though this is expected to continue, but it has started happening with a differenceservice providers and customers are working together as partners. Result: there is an increasing proportion of outcome-based deals.

Another important trend noticed in FY 08 that could be a harbinger of the changing market was that mega deals gave way to mega-relationships. Large billion-dollar, multi-year transactions were being divided up among many vendors and also those customers that preferred to sign up service providers in limited two-three year relationships. The market started moving from Total Contract Value (TCV) to annualized billing.

Instead of some six to eight large service providers who have dominated the IT outsourcing market in the past, the number of vendors went up in 2008 as many smaller tier-2 players entered this specialized service space. Players like Accel Frontline tied up with the likes of IBM to be part of some large deals. This change was due to the fact that some pure-play outfits coming out of India are becoming hybrid players, complementing and competing with traditional players.

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 overheads of managing technology. It is no longer going to be driven by guesstimates. Business models today are no longer in a 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 enterprises computing architecture, but most IT organizations 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.

The process of business transfor-mationoutsourcing process and technologyprovide a competitive edge for business at large. It also ensures innovation and drives the agenda in this on-demand era. Domestic players have realized 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.

Although long-term relationships were forming too, customers expected flexibility more as far as the contract model was concerned. 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 organizations 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.

Page(s)   1  2