The last five years of the 20th century witnessed a "perfect storm"
for IT spending, resulting in over $250 billion of above-trend IT spending. IT
spending grew at 17% CAGR between 1995 and 1999 up from 9% between 1986 and
1995. IT’s share in capital spending went up from 30% in the late 1980s to 54%
in 1999.
Three factors were responsible for a lion’s share of the overspend and
accounted for 70% of the IT capital stock increase in the US:
n Y2K, which
resulted in over $31 billion of excess spend
n Platform/IT
standards, including PC upgrades and modifications/upgrades in telecom and
network infrastructure, which resulted in nearly $104, billion of excess spend.
n The Internet
and e-commerce boom, which drove at least $100 billion of above-trend IT
spending.
The real question is whether all these IT investments had a material impact
on productivity and business performance. The answer seems to be no, for the
most part. IT in fact, had marginal impact on labor productivity in most
industries.
An analysis of the US economy conducted by the McKinsey Global Institute
reveals that in the period from 1995-2000, six sectors, viz. retail trade,
wholesale trade, securities, semi-conductors, computer manufacturing and telecom
accounted for almost all the labor productivity improvements in the US economy
even though they accounted for only 40% of the IT capital investment growth.
On the other hand, over 50 other sectors that accounted for 62% of the growth
in IT capital, brought in less than 1% of total labor productivity growth.
Retail banks and hotels, for example, have collected significant amounts of
customer data from CRM systems, that they are yet to use productively.
CIOs today are, therefore, sitting on piles of unused/partially used software
and hardware functionality that has come to be known as "shelfware".
These poor results from past IT excesses, coupled with the prolonged slowdown
currently underway, are driving cuts in IT budgets and also making RoI the
defining paradigm for evaluating new IT projects.
The current frugal IT spend environment and the absence of any major
technology waves therefore means that Indian companies will need to hone in on
key customer needs and rapidly tailor service lines and approaches that will
best address them.
In the near term, application maintenance and outsourcing will be an
important area of activity. CIOs will look for low cost, "smart" data
and application integration solutions that will help extract functionality from
"shelfware". In addition, the September 11 attacks have raised the
importance of robust security and business continuity plans. A recent survey by
Morgan Stanley covering 225 CIOs confirms these priorities. CIOs ranked
application integration and security software among their top three priorities
for the year 2002. Over time, as IT budgets return to sustainable levels, CIOs
will look to fill out gaps in their applications portfolio, thus creating more
opportunities for package implementation. Mobile enablement of enterprise
applications could also experience healthy growth provided some of the
underlying issues around ROI and technology immaturity get resolved. The first
set of customers will also start experimenting with web services and this could
provide Indian opportunities to leap frog into consulting. Clearly, in the near
term, data and application integration is going to be one of the most important
opportunities for Indian companies.
The EAI opportunity Application integration (or EAI) refers to the integration of existing
and/or new applications and database systems within and between companies to
enable effective inter-operability. It represents an important opportunity for
Indian companies for three reasons. First, it is a rapidly growing market (25%
CAGR) that is slated to exceed $25 billion by 2005. Second, significant parts of
the work can be off-shored. Finally, individual engagements often run into
several millions of US dollars.
The growth in the integration market in the near term is being driven
primarily by the need to extract value from past investments. This is, in turn,
expected to improve internal efficiencies by reduced duplication of data entry,
faster transaction provisioning and increase production throughput. This growth
is also enabled on the supply side by the rapid evolution of the EAI technology
landscape with multiple strong players in the fray. Contenders in the
integration arena include pure play integration vendors such as WebMethods and
TIBCO, transaction server vendors such as Vitria and See Beyond, and, players
from an application server heritage such as BEA and IBM. Of the total market for
EAI, Development and Integration will account for 64% or nearly $18 billion by
2005.
Layers in the integration market There are four levels at which EAI operates in increasing degree of
complexity.
Data integration is the lowest level of integration where information
exchanged is usually at the data level. Some of the key tools involved in this
stage include ETML (extract transfer migrate load) tools and database gateways.
Data integration helps address data inconsistencies in different systems. It
consequently improves internal efficiencies by reducing duplication of data
entry and by accelerating transaction provisioning.
At the next level of abstraction is application integration, which typically
involves exchange of messages. In the absence of technologies to enable these
exchanges, IT architectures today are a criss-cross mess of point-to-point
connections between applications often resulting in increased IT maintenance
costs, and slow implementation of IT changes. Application integration helps
reduce these challenges significantly. (Here, the technology components include
Message-oriented middleware (MOM), Message brokers, Transaction servers and
application servers).
Further up the chain is B2B integration, which involves integration of
different entities in a supply chain and handling of inter-company workflows.
The highest level of complexity and integration is business process integration,
which involves creating an integrated workflow for core processes that cuts
across various "stove pipe" functional applications.
In today’s environment, a majority of growth is being driven by the first
two stages of integration as companies look to digest the enormity of past
investments. Most CIOs reveal that the biggest drivers of integration spend
today are indeed, integration of packaged applications and webfronts with legacy
mainframes, and development of standard interfaces for enterprise applications.
Lifecycle: Some portions are offshore-able A significant portion of the integration lifecycle is offshoreable. In an
integration engagement, later stage activities such as integration and
deployment can be carried out offshore, many of the upstream portions need
intensive onsite presence. The real challenge for Indian companies is to build
the skills to be able to compete in upstream activities.
In the first stage, the key issue is understanding the business context for
integration. Integration is usually never a stand-alone exercise but part of a
larger business context. Hence, to be able to map out key business processes and
decide on the levels of integration required, companies will need solid domain
expertise and business process modeling skills. The next stage involves
analyzing the application landscape to determine the data representation format
and the database architecture. This stage calls for people conversant with
multiple database schemas and data formats. Also required are domain familiar
project managers who can efficiently outline key data flows.
At the IT architecture stage, high-level IT architecture skills are extremely
critical. Also, companies will be expected to counsel customer on
technology/vendor choices. This will call for deep knowledge of different
technologies—MQ Series, Web Methods, TIBCO, JMS, CORBA, legacy/mainframe
systems such as DB2 and CICS and finally leading enterprise applications such as
SAP, Oracle and Peoplesoft.
Competition is seething, and increasing Another challenge for Indian companies is that the market for integration
services is becoming mainstream. So far, the market for EAI has been a
relatively niche market as all emerging technology markets are in their early
stages. Specialized niche players such as Gebit, SPM and Valtech have had a
strong presence in the high end of the market and have had the privilege of
direct customer access. Prices have also held firm thus far. However this is
rapidly changing as many large professional services players are training their
guns on this space. This could lead to "basic" integration skills
rapidly commoditised. BEA has been aggressively working with leading
professional services players globally to make integration skills mainstream.
They expect that in less than six months there will be multiple global players
with experience and knowledge on their platform. Accenture has an alliance with
BEA. CSC has been named BEA’s First System Integrator for B2B collaboration.
KPMG has announced a strategic alliance with BEA to enable dramatically reduced
implementation times and lower costs for the customer.
Focus of Indian companies There are few important elements that Indian companies should focus on to
build a strong presence in the integration services space:
First, companies should integrate their EAI pursuits with their vertical
focus. This is because domain familiarity and understanding of the business
context are critical elements for EAI. For companies that have a strong presence
in verticals such as banking/financial services, insurance, and telecom,
building EAI skills is a critical imperative. A pure "technology" play
devoid of vertical specific input is likely to be unsustainable and could end up
as nothing more than a staff augmentation play.
Second, companies should invest in understanding the specific vertical market
context for EAI. This is important both from a business development perspective
and also to ensure high-quality client service in the delivery stage. Building
differentiators into the value proposition is important. Alliances with key
technology vendors are important. Infosys, for example, has a relationship with
TIBCO.
Finally, given the increasing competitive intensity in this space, alliances
like the Hexaware-Valtech deal are going to be important to ensure customer
access.
Special Issues 
