The domestic IT services market grew at a robust 39% to touch Rs 16,072 crore, growing faster compared to the previous year's growth rate of nearly 31%. Leading the growth clearly were three categories of services-facilities management, managed services, and total outsourcing, each getting to be sizeable market segments. Packaged software implementation, domestic BPO, and turnkey projects are the other significant growth drivers.

Facilities management became commoditized and margins were, therefore, extremely squeezed. A more comprehensive model emerged, with consolidation of different activities like datacenter management, access control management, and database management, besides the traditional personnel acquisitions for managed services.

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. It has in fact helped a large number of system integrators in India 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 whereby they are looking at different models of outsourcing different levels of IT-related activities.

Changing from the earlier model of facilities management, where vendors were taking manpower on their own, to the current model of asset stripping, whereby device-based resources are outsourced, have changed life for most enterprises. IT is now looked in the balance sheet by most corporates as operational expenditure instead of capital expenditure. The shift has been good for the vendors too. According to services vendors, facilities management had become commoditized and margins were therefore getting extremely squeezed.

Another new trend that has emerged out of this new model of outsourcing is the shift towards comprehensive outsourcing wherein there is a consolidation of different activities like datacenter management, access control management, database management, besides plain vanilla people acquisition. 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).

The industry moved from pure uptime SLAs to SLAs that managed professional and training services from the service provider. A lot of this shift was attributed in part to the emerging competitive necessities. In the case of large networking orders, clients demanded a partner who could offer end-to-end services (from consulting to project management, and integration to network management).

As the market began to mature, service providers added services like disaster management and bandwidth management to their portfolio. The overall NMS market registered a 33% growth to reach Rs 311 crore in FY 2004–05. New services like bandwidth management, application response time management, network management services with guaranteed bandwidth savings were the flavor last year and still continue to be. PSUs, private sector banks, and retail had significant traction.

The network and systems integration market maintained its steady growth in FY 2004–05. The market jumped 40% to Rs 4,640 crore as against Rs 3,300 crore in FY 2003–04. Last year saw a major shift towards services and many integrators added or expanded their services portfolio. This year also saw many small players making it big in the integration market. The larger integrators differentiated themselves with end-to-end offerings with more managed service kind of solutions. Notably, there is the rise of a healthy mid-market segment in the services business.

The market also shed its burden of low margins and freebies, as the companies realized that free offerings would not bring them business in the long run. Consequently, the equipment margins have stabilized and the ever-expanding networks are making the deal sizes larger. Last year also saw emphasis on applications- and solutions-based integration. This increased the solution vs hardware ratio. While larger integrators, with revenues of over Rs 200 crore, reinvented themselves with managed services, the equipment vendors were seen promoting smaller players because of their cash-and-carry business. The network integration market is expected to gather steam in the current financial year with more organizations going in for networking their businesses. All verticals are expected to maintain their contribution to the integration business.

Telecom service providers would continue to give MPLS and other data network implementation to the integrators. They would be incorporating IP on their networks in a big way and the ISPs would be implementing IP-VPN for their clients. On the other hand, service provider-network integrator partnerships would also flourish and they would bid for larger projects together.

On the technology side, IP networks are already being rolled out and after years of hype we might finally see convergence of voice, data, and video happening on a single network. Bandwidth prices have crashed and they are expected to go down further. So, bandwidth intensive applications would be implemented and for this, networks would have to be made more resilient and secure. VoIP is also expected to make inroads and conferencing equipments would be included in the networking deals. High-speed networks, with multimedia applications running over them, would be deployed.

On the last-mile side, wireless networks and access points have proved their usefulness. Deployment and implementation of Wi-Fi on the last mile and WiMax as the backhaul is expected to take place. However, Wi-Fi deployment on the existing networks would have an incremental effect on the revenue side. With the government taking up rural connectivity in a big way and wireless networks having proved their efficiency in places like Mallapuram, more such networks are expected to come up. Educational institutions with large campuses are also opportunity areas.

With most of the networks migrating to IP, technologies like VoIP are making inroads. There was also an increased awareness about security services, and security policies and solutions were being implemented during the network rollout itself.

The complexity of technologies has increased enterprises dependency on integrators. Enterprises require more hand-holding now than ever before and all this has moved the market more towards managed services. Managed services are a huge opportunity because the network integrator assumes full responsibility for operating the network of the customer on an on-going basis.

Last year, remote monitoring of networks was accepted by the customers and comfort level on offsite management was seen to be rising. For the integrators also, the remote management deals proved beneficial as they could manage more than one customer from the same premises. It led to overall lowering of costs for the customers and the operating costs for the integrators also came down.

The banking, financial services and the insurance (BFSI) sector were the drivers for growth in FY 2004–05 for network integrators. BFSI companies did good business and did not shy away from diverting investments into the expansion and upgradation of their network. From core banking applications, these institutions adopted other applications to streamline services like the real-time gross settlements. Almost every integrator had majority of their revenues flowing from the BFSI sector. Some like HCL Comnet had almost 17 banking clients with deal sizes which ranged from Rs 15 crore (Indian Bank) to smaller ones in the Rs 7-8 crore range. Datacraft closed a $1 mn 50-office deal with SBI for its international operations.

Similarly, Wipro Infotech had Indian Overseas Bank and Union Bank of India as its clients. The Rs 35 crore PNB deal concluded by Tulip was among the largest contracts in the banking sector.

Pure customized software development continued to decrease with a 29% dip. At Rs 1,210 crore, bespoke software development activity has reduced considerably due to extensive use of packaged application software in various areas like core-banking applications, insurance solutions, retail back-ends, ERP, SCM, CRM, and business intelligence. Organizations have cut down the IT department staffing levels and are outsourcing more. The first casualty in this move was the customized software activity that used to get done in-house.

And that's the reason for the phenomenal rise in implementation revenues. Packaged software implementation led to an overall rise in service revenues in three areas: pre-sales consulting, implementation services and software/application maintenance. Of these, the market size for implementation of packaged software is estimated to be Rs 1,530 crore, excluding the license fees. Revenues from software/application maintenance have not been estimated. Consulting revenues made up by large IT consulting organizations and numerous smaller consulting outfits are pegged at Rs 1,675 crore, up by 24%. These include pre-sales application software consulting; technology-specific consulting in areas like storage, security, data management, supply chain and others; vendor appraisals; regulatory compliance and standards like BS 7799; business continuity; and disaster recovery.

Traditional hardware maintenance comprising maintenance of own systems and third party maintenance regained their pace of growth at nearly 30% to reach Rs 2,966 crore. Most often these services were not sold on a standalone basis, but as a part of overall IT management deal. Deployment of equipments beyond servers, desktops, and network elements in the form of storage, ATMs, kiosks, and others is providing growth to this area.

Finally, the domestic ITeS segment-driven by outsourcing of business processes, primarily customer service, document processing, and outbound marketing-saw more people getting added. On a small base, the domestic BPO market grew nearly 70% to touch Rs 2,428 crore.

Easwaradas S Nair