IMS: The Hot ‘Revenue Mantra’!
Date: Monday , September 01, 2008
The CIO of a global company sits in his U.S. office just a few floors above the company’s key data center. But many of the people who manage that infrastructure are located thousands of miles away from his company. May be in Bangalore or in Chennai in India. “All infrastructure is managed remotely and no one’s ever sitting inside the data center anyway,” says an Official in Bank of America. Today, Infrastructure Management Services (IMS) or Remote infrastructure management (RIM) is something that virtually every organization does every single day. But there’s a material difference if that work is done offshore. In fact, the offshore delivery of IMS — from network services and helpdesk support to server maintenance and desktop management — is gaining momentum nowadays, especially for Indian IT, due to the decline in the growth from application development outsourcing and other offshorinng activities owing to the economic downturn in the U.S.
Hence, Indian players are conceiving more aggressive strategies to tap IMS segment to generate constant revenue, because IMS is a high margin business, which allows considerable offshoring. Now, both top and mid-tier Indian IT services players are looking to IMS as a solid opportunity to earn constant revenue, as IMS deals are of longer duration of around 5-10 years, compared to IT services deals of around 1-3 years. “Vendors feel that IMS puts them in the comfort zone,” says Anil Kumar, Engagement Manager, Zinnov Management Consulting.
IMS is already a growing business for Indian companies. Indian IT conglomerates like Wipro and HCL have signed many IMS deals with companies including Fortune 500 organizations. Companies like AMD, Nike, NCR, Shell, and Honeywell now depend on Indian vendors to manage their IT infrastructure, usually spread across the globe. Furthermore, IMS growth is augmented by the rapid evolution in technologies like virtualization, cloud computing, unified communications, standardization of IT infrastructure, and the availability of sophisticated tool sets. “And we believe its effect on IMS will only unravel in the next 24-36 months,” states G. K. Prasanna, Sr. VP, Technology Infrastructure Services, Wipro. It has also been driven by changes in customer demands and a mature offshore supply environment. “Indian IT players now have efficient tools to access clients’ infrastructure. Importantly, success of Application Development and Maintenance (ADM) and Business Process Outsourcing (BPO) helped India establish its credibility among the customers,” adds Upinder Zutshi, CEO, Infinite Computer Solutions.
A Joint study by NASSCOM and Mckinsey claims that the $524 billion IMS industry soon could become as important as the ADM and BPO industries that have dominated the rise of offshoring since some years. Out of this $524 billion, the study pegs the global addressable market for IMS to be in the range of $96-104 billion, with North America accounting for 60 percent of the global IMS demand followed by Europe (25 percent) and APAC (15 percent). If one takes out the $7 billion that is already being addressed by vendors and captives in the low-cost locations like India, the unaddressed market pie works out to $89-97 billion. With an opportunity of 70-75 percent of infrastructure management roles available for offshoring, IMS as an industry could realize $26-28 billion of the global opportunity by 2013, and India is strongly positioned to capture $13-15 billion of the global opportunity. As of now, IMS revenue of India stands at $3.2-3.6 billion. However, says David Appasamy, Chief Communications Officer, Sify, “The Indian IMS market is still fragmented, with the majority of the market being serviced by smaller local players that account for close to 40 percent of the IT services market.” In terms of revenue distribution across the verticals, the banking, financial services, and insurance industries (BFSI) would lead this growth with 43 percent of contribution, followed by telecom with 12 percent. Manufacturing and retail sectors contribute 12 percent each, media and entertainment industry and energy and utilities contribute 5 percent each. Pharma and health care contributes about 4 percent whereas others contribute around 5 percent.
According to Zinnov Analysis, small and data sensitive companies are not going to outsource their IMS processes. But mid to large size companies are increasingly outsourcing their IMS activities in order to reduce the costs and exclusively focus on their core areas. “In today’s business scenario IT is not just a support function, it is a business enabler and could very well provide competitive advantage over others,” says Satish Kumar, Founder Chairman and CEO, Glopore IMS. Traditionally a big portion of IMS is kept in-house or outsourced to near-shore locations and this trend is now changing with IMS industry moving towards a remote delivery model where services are increasingly delivered by vendors and captives from low-cost locations such as India. Notes Nareshchandra Singh, Principal Research Analyst, Gartner, “India’s ability to provide and conduct IMS through a remotely placed delivery team is consistently getting better. In the last five years, Indian companies have also relatively proved that an offsite and offshore model is viable and beneficial.”
The question is, what pulls customer organizations to outsource their IT infrastructure? Undoubtedly, India is now seen as a reputed offshore destination. Along with well-honed business processes, the availability of low-cost talent is a key factor. Says Singh, “IMS being a skills-intensive offering, India is in the best position to provide reasonably skilled people at affordable rates of cost to company in good numbers.” Since Indian vendors today possess great process maturity and offshore service delivery capabilities, most client companies, who had been working with a third party vendor for functions other than IMS, are keen on extending their scope of relation to include IMS as well. “This enables the vendors to extend their transformational capabilities by partnering with the client,”opines Manoj Appully, President, IMS, 3i Infotech.
From the client’s perspective, savings emanating from offshoring IM activities to a third party vendor can be in the range of 40-60 percent. Says the Bank of America Official, “We are paying a flat rate over the period of contract to manage our infrastructure and saving more than $5.5 million per annum (at the level of 100 member team).” Also, most outsourcers are not able to find the appropriate talent for fitting into these functions and they want to write off non-core works like IM. In addition, with increase in competition and growth of reliance on IT, especially in BFSI, the government bodies such as Reserve Bank prescribing other banks to keep their system updated, client companies are increasingly looking toward partners who can help them in managing their IT effectively.
Well, IMS outsourcing started with network infrastructure support and has moved on to wider processes. Today, India boasts of several global colossuses like IBM, EDS, HP, and Accenture who are giving tough competition to Indian SWITCH players (Satyam, Wipro, Infosys, TCS, Cognizant, and HCL), mid-tier players like NIIT Tech, L&T Infotech, Tech Mahindra, ITC Infotech, 3i Infotech, Microland, Infinite Computer Solutions, Sify, Netmagic, and niche players like Glopore IMS, CSS, and others. “The trend is that most customer firms are nowadays adopting multi-vendor strategy and those who want to explore the niche capabilities of mid-tier companies are outsourcing their IM works to these companies,” says Zutshi.
In 2007, Indian vendors have grown their IMS revenues by 70 percent. IMS still accounts for a small percentage of total revenue of IT players. For instance, Wipro’s revenue from IMS had grown from 11 percent to 17 percent in last one year. Its competitor HCL had 11.5 percent, Infosys- 5.7 percent, Mphasis-8 percent, TCS-6 percent, Satyam-4.6 percent, Patni- 4.4 percent, and Cognizant-2 percent, with average duration of contracts ranging from 5-10 years.
In the anticipation of huge potential many Indian biggies like Wipro and Satyam have acquired several IMS players across the globe to grow their size and get international footprint. In September 2007, Wipro acquired Infocrossing, a U.S. based data center management provider, for $600 million, which is the biggest acquisition in this segment so far by an Indian company. In October 2007, Satyam acquired the U.S. based Nitor Solutions to catalyze its European IMS business growth. In September 2006 Cognizant acquired the U.S. based AimNet Solutions to fill gaps in their offerings and reach. On the contrary, in November 2005, IBM acquired India based Network Solutions reportedly for $40 million.
Also, there have been some big deals bagged by Indian players. In 2006 Wipro bagged a deal of $90 million with a deal duration of 10 years from HDFC bank. In the same year it bagged another deal of $80 million with deal duration of 10 years from Dena Bank. In 2006 HCL bagged a $70 million deal with five years of deal duration from Teradyne. HCL’s other clients include Autodesk and retail group DSG International. In 2007 Satyam bagged a $200 million deal with deal duration of five years from Applied Materials. In the same year it pocketed a mega deal worth $1,000 million with deal duration of 10 years from Reuters/Fujitsu.
However, such mega deals are not happening any more as customers prefer slivers of services from different service providers. As a result, deal sizes and deal durations have come down over the years. Anand Nataraj, Head of Infrastructure Management Services, Infosys, informs, “In 2003, of the top 100 deals, the average deal duration was 8.1 years. In 2007 it came down to 6.4 years. If you look at the top 25 deals, it was 8.6 years in 2003, and it came down to 6.9 years in 2007.” This is true in terms of value perspective as well. The average of $709 million for the top 100 deals in 2003 came down to $205 million in 2007.
To be able to sustain the current growth in IMS, it also has its own set of sweet challenges. Though India possesses good IT talent with the average experience level at around 2 years, availability of ‘right talent’ for the ‘right level’ is still in short supply. “Going forward, talent is a challenge that Indian service providers might face,” says Johri. And since most of the works in levels 3 and 4 (See Panel) require constant on-site presence and continuous coordination with the client, vendors are finding it difficult to incur the high cost associated with it. And lack of infrastructure as per the expectations of the global customer in these ‘levels’ is one of the key capability gaps with Indian vendors.
Data confidentiality is one of the key issues in outsourcing work to an offshore location. In India, the currently installed data security infrastructures are still not upto the international standards. Anil Kumar Observes, “Distributed denial-of-service (DDoS), information theft, and worms and viruses are some of the key issues faced by Indian organizations.” Also, Indian vendors are not able to act according to the compliance standards. Security compliances such as Network Admission Control to enforce security policy compliance on all devices seeking to access network-computing resources are absent with Indian vendors. While compliance-related risks are coming down, thanks to SOX (Sarbanes-Oxley Act of 2002) and SAS 70 (Statement on Auditing Standards No. 70), the RIMS business lacks mature governance models. The challenge is to develop these models and take them through their places in a joint effort between vendor and customer.
The biggest challenge vendors face is in terms of managing customers, as it would be different from working on a usual project scenario and is totally different from BPO. As in IMS, things have to happen in real time. For example, if a server is not working, it has to be troubleshot at that point of time. And nowadays companies are finding it hard to make people work in nightshifts and it is becoming a costly affair. When it comes to international IMS opportunity for Indian players, onsite presence is what many of them lack. Certain functions and situations will require IMS to be delivered onsite. Singh asserts, “The big challenge for Indian service providers is to strike the right balance between onsite-offsite teams. Large IT service companies, which have built up a good global brand and a presence in multiple countries, will have an edge in providing IMS.”
Pricing Models and Engagement Models
Unlike ADM and BPO, IMS is a service with varying pricing models. The trend is toward a model where device-based pricing is going to be the practice. Today, a variety of pricing models continues to be available, from the more traditional time-and-material-based model to element or device-based pricing, outcome-based pricing, and a shared-risk-and-reward-based model. Microland is a pioneer in the concept of device-based, or transaction-based, pricing. This method fixes cost and reduces it year-on-year for customers, putting pressure back on the vendor to innovate newer ways of delivering the same set of services.
When it comes to the engagement models, Offshore Delivery Center (ODC), Shared Services, and Managed Services are three prime common models. Vendors are still finding it challenging to adopt a proper model, as all of them have their own pros and cons. In ODC, even if the vendor doesn’t have deep expertise, the ODC model works, and data security threat is less as clients integrate ODC in their own environment. But higher time involvement of clients due to direct management of resources, problems of attrition, hiring, training, and sub-optimal usage of resources because of minimal planning are the key drawbacks. In Shared Services, cost involved is low as the vendor optimises the resources, but though the time involvement of client is little high it is lower than in ODC. In Managed Services, the time involvement of client is the least. Setup cost for a client is also less and there is no hiring or training related costs as the client has minimum controls on the vendor processes and lesser flexibility due to long-term contracts.
Despite all these, in future, who will adopt IMS? The McKinsey study says that Fortune 3000 companies have increasingly started signing larger deals than their Fortune 250 counterparts, which is a total reversal of trend established by ADM and BPO few years back, when the trend was led by Fortune 250 companies. So, this shift will lead to a major overhaul in the survival strategies of the Indian IT-services-providers- turned-IMS vendors as well. An analyst believes, “Five to ten years from now, everyone will be going to India as these skills may no longer be present in the U.S.” Again, Indian IT space is set for another occupying makeover.
IMS caters to infrastructure ranging from PCs to telecom network. If we look at the activities that could be outsourced under IMS, they can be categorized into three segments. First, IT Desk Services, which caters to the first layer of IT Infrastructure (PCs), i.e., desktop management, a comprehensive approach to manage all the PCs within an organization and desk-side or on-site support services. Application Management Services forms the next level of services and covers the application layers of the network such as Business objects, SAP, and Oracle. These are services to maintain, enhance, and manage all types of software applications, which might include maintenance, upgrades, and performance analysis. Thirdly, Hardware Supports Services that cater to the core network (hardware parts) and require deep technical know-how of the components like databases, servers, and storage systems.
Predominantly, Hardware Support Services include three categories. First, Data Center Services, where the data center could be a centralized repository, either physical or virtual for storage. And management, dissemination of data, and information are organized in relation to a particular business or main purpose of a data center is running applications that handle core business and operational data. Second, Hosting Services, services are designed to transform legacy solution into a fully Web-architected application, which can be deployed as a hosted application. Thirdly, Server Management, which could be an Intelligent Platform Management Interface, a specification for the equipment that monitors the physical environment and behavior of a computer hardware server. Hardware Support Services also includes managed network services, which includes services like LAN, WAN, Voice, Voice over IP (VoIP), and telephony. Plus, administrative and consultative services performed in managing, planning, or building a network; Security management services, which include firewall management, access control management, identity management, and mainframe management services.
All the three categories of the IMS are further sliced into four levels on the basis of complexity of the services, as Level-1, 2, 3, and 4. Level-1 includes less complex works like IT help-desk, end-user support, asset management, and scheduled tasks. Level-2 includes OS upgrades, server management, and patch rollouts. Level-3 includes higher end technical support, application management, storage optimisation, and capacity planning. Level-4 includes more complex works like security compliance, onsite selective staffing, and application migrations.
“Indian vendors have their strength in level-1 and level-2 set of services. That means, India is still in a maturing stage as far as IMS is concerned,” says Anil Kumar. Hardware support services are the most widely offshored service accounting for three fourths of Indian IMS revenue. Under this, services like Network Services, Mainframe Services, Server management, Information Security, and Data Center Management are commonly done from India. Though IT Desktop services is a less complex service, it requires higher on-site interaction, and hence it has second highest share of –15-20 percent. Swapan Johri, Sr. Vice President, IT Operations and Emerging Services, HCL, says, “Hosted services and applications have been experiencing an ascending double digit growth year-on-year for the last three years. These services enable moving a business or information to the Internet, thereby reducing the costs of the service provided through this model and acting as catalysts for utility-based models like SaaS.”