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The next big IT wave to hit India
Amit Ranjan Rai | November 23, 2005
After software, call centres and business processes, it's now the turn of IT departments to be offshored to India. That's right, IT departments. The IT infrastructure - everything from data centres, networks, servers and storage to desktops - of a number of the world's top corporations are now being "remotely" managed from India.
Technology research firm Gartner calls remote infrastructure management services "the next big wave" of Indian outsourcing deals; Deutsche Bank believes it will be the "growth engine" for Indian IT services companies over the next few years. The trend has picked up in the past two years, and the potential estimated is huge.
According to industry body Nasscom, different estimates put the global IT infrastructure management services market between $86 billion and $150 billion; and since up to 60 per cent of the overall IMS pie may be delivered through the "global delivery" offshore model, the current market potential for RIM translates to no less than $55 billion.
Last year, IMS-related IT exports from India were worth approximately $300 million, which means less than 1 per cent penetration - that's huge potential, indeed.
Deutsche Bank projects exports in the segment to grow at around 50 per cent over the next three to four years, while Nasscom estimates the growth could be in high double digits or even triple digits for the next several years.
So what makes Indian vendors hot contenders for a much bigger pie and why are corporations the world over preferring the offshore delivery model through RIM?
To start with, outsourcing infrastructure management is nothing new. In fact, global IT services giants IBM and EDS have been doing it since the 1970s and 1980s. Even today, IBM, EDS, HP and CSC dominate this business.
A number of mid-sized players such as Perot and Unisys, too, have strong presence. The traditional business model that these companies follow - what some analysts also call a lock-stock-barrel approach - is to take over or buy the IT assets (such as servers, storage and networking equipment) of clients and then sign long-term maintenance contracts with them, taking care of all the client's IT requirements; that is, total outsourcing of IT infrastructure.
Apart from a total solution, where the client didn't have to bother about his IT needs, this model offered clients a significant credit risk arbitrage, where clients with relatively weaker balance sheets - representing a higher credit risk - could rebalance their books by transferring their assets to a vendor with a lower credit risk.
Says Nasscom vice president Sunil Mehta, "Recent trends indicate a distinct shift from total outsourcing to 'selective outsourcing' [the model generally followed by Indian vendors offering RIM services], which has been more successful than full IT outsourcing contracts."
According to a study by technology research firm Forester, selective outsourcing - which implies breaking up the different IT functions and outsourcing them to different vendors based on their competencies and specialised skill in each area - has an industry success rate of 77 per cent compared to total outsourcing, which has a 33 per cent success rate.
Explains Vineet Nayyar, president, HCL Technologies, "Today, IT is so strategic to the business needs of an organisation that most firms don't opt for total outsourcing. CIOs want control over their IT strategies and functions, which, unfortunately, total outsoucing doesn't offer."
Agrees Venkataraman K N K, general manager, managed services, Wipro Technologies, "Many customers want to control the destiny of IT in their organisation. They see IT as a differntiator for business and, thus, do not want others to take over their IT architecture or controls. But then, there are others too who do not want focus much on their non-core competency, and they prefer total outsourcing."
Analysts and studies point out some of the drawbacks of total outsourcing. One, the model doesn't offer much flexibility. The contracts are long-term - between five and 10 years - and the price is fixed.
So if there's a variation in volumes - for instance, if fewer servers or desktops are required at a later date - the pricing doesn't change. Second, the contracts are based on the current pricing of the assets and technology; which means price drops - common in IT - will not benefit the client.
Third, service level agreements are generally based on the prevailing market scenario, so if the market becomes more competitive, again the client benefits nothing. Says HCL's Nayyar, "SLAs don't necessarily get modified. These are take-it-or-leave-it contracts where once the client hands over the keys of his kingdom, he loses control over it. And, of course, he can't take back the key till the contract ends."
HCL Commnet, a part of the HCL Group, and Wipro were two of the early movers into RIM services; both companies began offering RIM services about five years ago. Wipro currently boasts 165 accounts from G7 countries, managed by 7,000 employees, while HCL currently has over 20 Fortune 500 clients and 2,200 employees. Both companies also claim "significant" domestic business in the RIM space. The other major players are Tata Consultancy Services, Infosys, Patni and Satyam.
Many of the players in the RIM business have gained from their early expertise into the managed services or networked management space. TCS, for instance, has been offering infrastructure management services to domestic clients since the 1980s, much before the boom in the applications development market.
Says P R Krishnan, global practice head, infrastructure services, TCS, "The new word added to infrastructure management is 'remote'. And as customers became confident with the offshore model there was a growing confidence in them to look at other models as well."
IMS has been relatively new at Infosys, its unit was established four and a half years ago. Currently it provides services to over 50 clients.
Why would a company opt for RIM, rather than total IMS or even just manage its infrastructure in-house?
The most obvious reason is the cost advantage, of course. Industry estimates place the benefits due to cost arbitrage at between 30 and 50 per cent. Nasscom's Mehta draws a comparison: "For EDS and global giants, it used to be more a game of credit rating arbitrage. Since EDS had high penetration into many of its customers, it was profitable for it to take over the IT assets of clients. Now, with RIM players in this space, the credit rating of traditional outsourcers has completely deteriorated. They are no longer competitive in this space."
Further, according to Forrester, IT budgets have seen no more than 1-2 per cent increase in the past few years. Thus, CIOs look upon outsourcing as one of the way of stretching the budget. IT infrastructure is one of the areas where they haven't been able to derive much benefit and RIM provides them that scope.
Says Priti Rao, vice president and head, Pune Development Center, Infosys Technologies, "Transparency is a big advantage. The services are easily measurable and transparent to the customer. There is no question of charging less or more. They see what they get and, thus, they know what we charge."
The SLAs can now be dramatically improved - because the client is now aware of all the processes and methodologies, and has the tools to monitor fucntions to drive better SLAs.
Integrated monitoring and management tools and advanced correlation tools RIM offer can help anticipate a problem before the user brings it up, and resolve the problems in a faster, structured manner, reducing business losses due to IT downtime.
Unlike in in-house management where employees work only on single shift, RIM vendors monitor infrastructure performance 24x7x365. This helps do away with the costs a delay inevitably brings, since the vendors work across different time zones and can fix problems before the next working day begins.
It also offer customers multiple avenues to reduce costs through headcount reduction by elimination of under-utilised resources, leveraging operations improvements from working with multiple customers and cross-pollination of best practices.
Often processes are not well defined when operations are managed in-house. By outsourcing infrastructure management, clients can make sure that the vendor complies with the standard processes followed by the industry. For instance, ITIL (IT Infrastructure Library) and IS07799 for security.
Says Nayyar, "the whole approach towards savings is quite interactive. In the software industry, the arbitrage cost-savings doesn't impact the rest of the industry, Here, it affects everything - the network bandwidth, the data centre costs, all costs."
How HCL made it big
As an early mover in the RIM industry, says Nayyar, HCL followed a "Blue Ocean" strategical approach. "We focused on uncontested market spaces and creating new ways of offering the old offer - margins were also higher," he adds. This is in stark contrast to the "red ocean" of the software and BPO industries, where competition was intense, margins low and the offerings commoditised.
Realising that the biggest IT space to tap was - surprise, surprise - not software development, but IMS, HCL searched for new drivers and demands in this space, applying its blue ocean strategy.
Early market research by the company and its interactions with players into infrastructure management deals revealed that CIOs were looking for higher flexibility and transparency in IMS.
They wanted more variability in business models, where prices were not fixed and pricing models were transparent. As also, transparency into IT functions. Further, CIOs were against seven- or 10-year SLAs, and preferred SLAs to be modified on a year-on-year basis.
HCL found the answer in what it calls collaborative- or co-outsourcing, where the client doesn't necessarily outsource its control over IT, but rather outsources different tasks to the vendor.
HCL offers RIM services where it acts as a task partner. It manages the entire data centre, but the client decides which technology to use and what to add to or subtract from the data centre. It manages and monitors various applications, but the client decides when to give priority to which applications. Points out Nayyar, "All the major strategic decisions are made by the client; of course, we act as an advisor on strategy."
Still, collaborative outsourcing wasn't enough to create enough differentiation in the market - both in terms of cost and technical strength - and attract substantial international clients.
That's when HCL decided to handle infrastructure management for international clients "remotely" from India. It developed core capabilities and tools, so that sitting in India it could log on to data centres, networks and security devices globally, and manage them out of India.
For instance, the company created two tools called Smart Manage and Dashboard. HCL claims that while Dashboard provides 100 per cent transparency into operations -- the client was able to see what HCL was doing in real time -- Smart Manage provides transparency to infrastructure utilization -- the customer can see whether he needs more network bandwidth and more memory, or not."We hit the jackpot when we offered co-sourcing with remote management," recalls Nayyar, adding, "We created a new market space."