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Krishnan Thiagarajan
Bharat Kumar

eWorld meets Forrester analyst Robert McNeill who is bullish on India's prospects.

INFRASTRUCTURE management services promises to be a significant growth engine for the top-tier Indian software companies in 2005. Quite a few high-profile deals signed in the infrastructure management space over the past year-and-a-half by frontline companies have stoked up considerable interest and attention on this segment. At the recently-concluded Nasscom conference at Mumbai, the eWorld team spoke to Robert McNeill, Senior Analyst, Forrester Research, specialising in infrastructure management, on the trends and drivers of this nascent market for the Indian software sector.

Wipro and HCL Technologies have been highly visible in the remote infrastructure management space and other frontline software companies are also catching up. What is your view of the Indian market?

I see a big growth in infrastructure outsourcing. There are two reasons for this trend. The real reason is that in terms of IT budgets, there is zero or just 1-2 per cent growth. Outsourcing is a way of stretching the budget and savings from this source are funded into innovations.

IT infrastructure is a key area for CIOs (Chief Information Officers) to look at. Any investment in infrastructure is one ROI (return on investment) cycle away from actually making a visible impact to end-user.

The last real big investment in desktops was four-five years ago. Companies are looking to upgrade or buy MS tools and hardware. They would need to outsource parts of that to the likes of HP, IBM or EDS that would buy assets and amortise costs rather than having to budget additional capital.

The other reason is that there is a lot of benchmarking going on in the infrastructure space. Some of the service packages and bundles you see in the marketplace are pretty well-defined. Most infrastructure outsourcing deals have benchmarks associated with them through existing deals. Prices are more visible and a lot of commoditisation is going on. So, the risk is reduced and hence CIOs have to build a strong business case, if they intend to keep IT infrastructure management in-house.

Recently, I was with a bunch of user organisations - 30 of them in Dallas - who were looking at help desk outsourcing. 15 of them were building cases for outsourcing - talking about pricing, costs, transitioning and other issues. The other 15 were actually building business cases against outsourcing. These users were looking at service issues, while being aware of prices and vendors for such outsourcing.

Clearly, the big move is towards transparency in offerings and prices for such outsourcing. There is also a growing need and desire to invest in selective sourcing. Companies have realised that there is a lot of risk in outsourcing to one particular vendor. End users want vendors to provide selective sourcing, with best-of-breed companies providing elements of good IT services; you will have separate vendors for hosting applications, one for desktops and distributed systems, another for a data centre. At the same time, in this sourcing strategy, there is link between strategy and business value. The end-users are asking providers (or vendors) to demonstrate business value that they are providing, help them build and communicate a business case. The CIOs (of end-users) are asking this of in-house and outsourced providers.

So, the CIO is not looking so much to reduce cost of discrete operations but also to manage cost effectively and push total business value associated with all this. That's a trend we see - associate spending with business value.

Over the last nine months, we have seen interest pick up from end users over offshoring of infrastructure management. How sustainable is this trend?

First of all, in many organisations, there is an offshoring mandate that is linked to IT spends initiatives. Application outsourcing is the most mature amongst IT activities. So, that is offshored. Infrastructure is also becoming active. There are a lot of questions around this and what is possible to offshore. Lot of assessments are going on. We are getting a lot of requests for help in deciding what to offshore, typically from a more remote management perspective. But the danger with this initiative of an offshore mandate or increase in offshore spend is that CIO is not developing a true understanding of why they want to outsource. There must be a business reason for outsourcing. For instance, if that reason is cost reduction, then you must have a business goal that rewards cost reduction. Increasing spend with an offshore outsourcer is not going to do that.

There is a clear need to understand the business goal. We see this often times, especially with infrastructure as opposed to applications. The latter work is more projects based of say, eight months. But infrastructure is minimum of 3 years, average is 5 years and mega deals are run for 10 years. A deal can sometimes take 9 months, from thinking about outsourcing to signing a contract, if you don't have an idea why you are outsourcing.

If you don't have an understanding of business issues going into a deal, then you are going to be capturing it in technical isolation. For instance, in year two (of such a deal), if the client goes through a merger, suddenly the outsourcer will be fielding calls related to that. These are clear business issues and they need to go back to the contract to measure if the outsourcer is underachieving, over achieving and rewarding or rectifying some of the issues. That's the danger - not understanding true business issues of outsourcing.

Most vendors have been successful with package implementation and built a fair bit of offshore component. Can this be replicated in remote infrastructure management?

The idea of remote management is not new. Doing it from offshore is new. The train has left the station. This is attractive and savings can be made. If I look at end-user organisations, particularly client systems management of Fortune 1000 companies in the US, only 20 per cent of them use client management systems tools such as Symantec. So this is a big area of opportunity for outsourcers. These types of tools are costly and complex. It's still a challenge to hire and attract staff for such services. So, remote management services for a monthly fee for these services with assured service levels is particularly attractive.

Is the positioning of the MNC vendors different from the Indian vendors on the remote infrastructure space?

The MNCs will be increasing their effort in providing remote infrastructure management services to their new outsourcing customers but it won't be packaged like offshore outsourcers are packaging. It would be bundled in on a consolidated front, some of which may be offshored. The savings made there may be passed on to customer or go to increase vendor margins. But a wholesale shift towards offshore pricing will not happen. Clients may be given opportunities to choose price points at risk associated with it based on its depth of capabilities in different areas. It is good. For the offshore mandate, the HPs (and other MNC vendors) are not included in the RFP (request for proposals). They are not seen as offering this, although they have the capabilities. It's a perception issue. They have to change that.

They have 9,000 people in their global development centres. I don't see clients buying their services knowing this and part of the reason is that they are very secretive about their resources. I still don't think they are going to be as aggressive as the HCLs and Wipros.

But do you think that Indian vendors' reluctance to take over assets is shutting them out of infrastructure deals that matter?

Not really. In a study we did last year, out of 78 firms that outsourced - we asked them the top two selection criteria. No. 1 was price and No. 2 was knowledge of business. Only one per cent of surveyed organisations said selection was based on the ability to takeover assets. And I gave them 15 different criteria. I have been talking a lot to Indian service providers and they all seem hung up on this concept that you have to take over assets to be in the infrastructure game. I don't think that's the case. There are a lot of deals that are services only, sub-2-3 million per year where incumbents (such as HP or IBM) do not have the cost of service or delivery to participate in this. It's below their radar so to say. With this idea of selective sourcing opening up, I think it is a good opportunity for Indian vendors.

Overall, what is the size of these deals that you see coming up for Indian players? In how many of them will MNCs also compete over a period of time?

Sub 1-2 million per year for 4-5 years. It may get a bit bigger but that's average. And a high portion of that is staff augmentation opportunity from Fortune 1000 companies. The price is certainly coming down across the board. Most Fortune 1000 companies are going to outsource some element of IT. They are comfortable with the idea.

maverick@thehindu.co.in

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