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What do Bharti Tele-Ventures, Bank of India, Dabur and Indo Rama Synthetics have in common this year?

Well, all these Indian enterprises have outsourced most of their IT-related functions and infrastructure to third-party vendors during the first six months of 2004. While IT infrastructure outsourcing is not a completely new phenomenon for India Inc, the difference is that these corporates have delegated most of their end-to-end computing activities and are also receiving strategic consulting advice on aligning IT with their core businesses.

And, 2004 could be the year of more big-ticket deals. Let's consider another interesting tidbit. While India boasts of a three billion-dollar IT services market and a host of other competent names that play a significant role in the global outsourcing arena, this year's contracts have all been bagged by MNC vendors.

IBM has won a $750 mn outsourcing contract from Bharti Tele-Ventures for 10 years; Bank of India has awarded a 10-year outsourcing contract valued at $150 mn to HP Services; Accenture has bagged a 10-year agreement from Dabur, and recently another multi-year contract from Indo Rama.

Domestic Outsourcing
IT infrastructure outsourcing has evolved considerably over the last few years to reach its current level of maturity, though Sanjay Jain, country manager, Accenture India, says "there's a long way to go before we reach global levels".

"The whole idea was to let the third-party vendors manage repetitive non-core activities," says Arup Chakravarty, GM, infrastructure services, HCL Comnet.

Subsequently, the last few years have witnessed a certain shift in the mindset of Indian enterprises with networking and security aspects being increasingly outsourced to third-party experts.

In fact, it has helped a large number of system integrators like Datacraft, GTL, Sify, Microland and Network Solutions, besides Wipro Infotech and HCL Comnet, to establish Network Managed Services (NMS) and security services as viable revenue streams.

However, in the last 12 months Indian enterprises have undergone a change in focus, wherein they are looking at different models of outsourcing different levels of IT-related activities.

Most of the domestic contracts currently in place cater to the second and third levels, while a very few are actually moving to the next two levels. For most Indian enterprises graduating to the BPO level is just a matter of time now.

Jain believes it will not take more than two months for finance, accounting and HR as well to becoming the foremost non-IT processes that's likely to be outsourced.

However, Business Transformation Outsourcing (BTO) is still a little far off. There are mainly two reasons for this. While most Indian enterprises still feel that they have enough in-house expertise which can align the IT processes to enhance their core businesses, there is a belief that only vendors like Accenture or IBM (following the PwC acquisition) are ready to act as business advisories.

Paradigm Shift
The transition from the earlier model of facilities management, where vendors were taking manpower themselves, to the current model of asset stripping, where device-based resources are outsourced. has changed life for most enterprises. IT is now looked at as an operational expenditure and not as capital expenditure in the balance sheet by most corporates. The shift has been good news for the vendors too.

According to N M Sundaram, country manager, marketing and services, HP Services India, facilities management had become commoditized and margins were, therefore, getting extremely squeezed.

Says Chakravarty, "We're now seeing a more comprehensive outsourcing model emerge, with a consolidation of different activities like data center management, access control management, database management, besides traditional people acquisitions." While earlier outsourcing involved discrete processes, there is now an amalgamation of these processes and in future a more seamless consolidation would lead to concepts like on-demand computing (propagated by IBM) and adaptive enterprise (evangelized by HP).

This paradigm shift, in the nature of outsourcing contracts, has also led to a change in the nature of SLAs. These have not only become more stringent, but now there is a new level of awareness about them from both the client and the vendor. The agreements are now not only fully documented, but both parties ensure that they understand clearly every nuance of these SLAs.

Enterprises are also devising monitoring mechanisms for these SLAs and they are also setting baselines in place. Jain emphasizes the need for trust between the two parties, as there is a large element of consulting now coming into the picture.

Leave IT to the Experts
Typically, outsourcing of information systems and networking is resorted to by companies that have large ERP installations, databases, manufacturing systems, multiple production facilities, and so on. Outsourcing of non-production-related IT applications enables 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%. Most vendors point out that this will translate into a market size of around Rs 1,000 crore in the present domestic environment.

Vendors like IBM, HP, and NCR, who manage the ATM networks for HDFC Bank and PNB among others, besides Accenture, Wipro Infotech, Infosys, HCLT and HCL Comnet, are all joining the race to garner a share of the business pie. From providing desktop and network support to hosting the physical infrastructure in their own premises and providing online connectivity to their clients and specializing in niche services such as SAP and server monitoring, you name it and they will offer it. The outsourced activity also includes disaster management and diagnostic systems, which focus on predicting failures based on which corrective action can be taken.

Large companies such as ITC and Tata Steel have already outsourced most of their non-critical, non-operational information systems and network management needs. While ITC has centralized its information systems and network management needs-entrusting the job to ITC Infotech-Tata Steel has had a "good experience" outsourcing its ERP, desktop, network server and other non-operational IT activities to IBM and HP.

L&T has outsourced their entire IT requirements and management to its group company L&T Infotech. Says Anantha Sayana, GM, L&T, "We have multiple companies in our group, and if there are only one or two IT functionaries in each, they get easily demotivated. Instead, if they are part of a large group like the IT team for the entire group, the motivation level is higher."

Information systems and network management are gradually catching on in India. According to Chakravarty, the developments in this regard have been primarily driven by three factors. First, a continuous change in hardware systems has forced services vendors to keep abreast of such changes. Second, it is not very easy for companies to keep up with rapid changes in software. And finally, it is easier for vendors to train manpower in tandem with changes in hardware or software technologies without wastage of time.

Perceived Benefits
IT infrastructure outsourcing can help drive growth in many ways. It can reduce operating costs by turning what is a fixed cost into a variable, get assets off the balance sheet, and free up cash for investments. Both CIOs and vendors agree that the value of outsourcing IT infrastructure to providers is derived only in long-term contracts, typically those with a minimum period of three years. The early part of a relationship is where providers invest and it is difficult to gauge the full benefits in a year. Providers need at least three years so that they can give sufficient inputs for process re-engineering to customers. The way forward for Indian enterprises is to look for long-term provider engagement, but with periodic revisions every two to three years.

KG Mohan, head of IT at Hindustan Lever (HLL), points out that there are three clear benefits of outsourcing. "For one, as an organization, we need not invest in building assets and developing skills internally. That leaves us a huge leverage to concentrate on the core business."

No wonder HLL has entered into a five-year, $10 million worth contract with HP for IT infrastructure outsourcing. The second advantage is that when an enterprise outsources to a proven player, there are economies of scale and the organization can derive cost advantages for use of optimum technology. The third advantage is that the service provider partner undeniably brings in better processes and deliver value by improving the sharpness of your information system.

Vikas Gadre, CIO, Rallis India, also endorses the view and says that the "technology partner provides you better results on a risk versus return policy than keeping IT functions in-house".

"Our business is selling pesticides, and we should concentrate on that rather than meddling with attempts to improve our IT systems," says Mani Mulki, GM-IT Systems, Godrej. Customers no longer want just a box. They want assured service levels.

The MNC Advantage
The shoe is clearly on the other foot for the Indian software and IT services industry that has earned its place under the sun primarily on the strength of its exports. Smitten by the recent large wins by global giants like IBM, Accenture and HP, top Indian IT vendors are increasingly turning their attention to their own backyard. While several of them have had significant presence in the domestic market, most top-notch Indian firms are now working overtime to get the India story right by apportioning more resources and time to domestic pitches and marketing.

Some of the recent deals indicate that the Indian domestic market have the potential to get individual deals in the range of $100-$500 mn. Sectors like manufacturing, BFSI and telecom are in the forefront with the potential to spend anything between Rs 4,000 crore to Rs 5,000 crore over the next 4-5 years. However, the Indian players are in the danger of ceding local turf to the global MNCs.

There are historical reasons behind this. Exporting in a booming market was the easy way out for Indian companies, which did not want to work on the barriers in the domestic market while the government sector was perhaps the only or largest customer fraught with its own peculiarities. But now the picture is different. While there is a definite spurt in domestic orders, we are also seeing increased competition and it is the IBMs and the Accentures who are bringing it. There have also been rumors about MNCs quoting much below Indian companies for most deals. MNCs started operations in India not to set up offshore centers but to win a share of the local business. MNC vendors such as Syntel, EDS, IBM Global and HP, among others, have all been doing domestic work here as they are used to low profitability. Another reason why Indian vendors are losing out to MNCs is because they traditionally come from the application development side and not from the strategic consulting side.

Be that as it may, Indian vendors such as TCS, Wipro Infotech and HCL Comnet, that have some presence in the domestic market, see a major opportunity unfolding over the next few years.

Besides some e-governance projects, TCS manages the IT infrastructure for Tata Honeywell. Similarly, Wipro Infotech has been working with VST Industries, Colgate Palmolive, HDFC Bank and more recently, the Indian School of Business, Hyderabad, in the area of complete IT outsourcing.

So are Indian companies prepared to take on the MNC giants? While all the top-tier companies are adding to their marketing manpower, some like Wipro are also working on getting their strategy right by strengthening their practices and concentrating on domain knowledge and right tech mix. And then others like TCS emphasize on good partnerships to provide the full array of services. A case in point is the TCS-PeopleSoft alliance for PNB.

MNCs like HP see competition from Indian vendors becoming fierce for the domestic deals.

Indian corporates are signing deals with multinationals mainly because they want to source all their requirements from a one-stop-shop. MNCs like HP and IBM are better equipped in terms of capabilities, methodologies, tools and process, transition management and in implementing the SLAs, in catering to the requirements of Indian corporates, says Sundaram.

According to him, collaboration between foreign and desi vendors will hold the key to the Indian market. "We had teamed up with Infosys for their system integration capabilities and core banking solution in the BoI deal," he says. There is a significant shift in the marketplace from infrastructure-centric to becoming service-centric and collaboration between vendors is of significance, as no one vendor has all the capabilities. And as Jain sums up, "Collaboration between vendors brings out best-of-breed solutions."

Rajneesh De in Mumbai

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Outsourcing Deal Sheet

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