ITO Insight
NelsonHall's ITO Insight newsletter provides commentary and insight on key IT outsourcing industry developments and vendor actions which impact your sourcing decisions.
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Latest Edition - January 2010
Contains commentary and insight from NelsonHall analysts on key IT outsourcing industry developments that impacted your sourcing decisions.
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Growth From Software Testing Revenues Of Tier-One Indian Vendors Slows Down In Q4 2009
TCS, Infosys and Wipro have all announced their revenues for the quarter ended December 31, 2009. In 2009 these three accounted for 50% of all India's export IT services industry. They also represent an estimated 40% of all software testing delivered from India. NelsonHall thinks that trends affecting those three vendors reflects the whole Indian software testing industry.
The information provided by TCS, Infosys and Wipro indicates that software testing revenues are up in local currency by c. 2% in fiscal Q3 2010.
- This reflects a significant slowdown in revenue growth after growth in fiscal Q1 and Q2 of respectively of 18% and 7%
- Nevertheless, growth during the first three quarters of fiscal 2010 is estimated to be 8% (in local currency). This compares with c. 10% in fiscal 2009.
Analyst comments:
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IT Services Spending Down By Over 7% in 2009; 2010 Expected to Be Stable
By now, several of the largest IT services vendors in the world including IBM, Fujitsu, CSC, Accenture and Capgemini have announced or provided their guidance for calendar year 2009 with enough granularity to provide an analyisis of IT services during the past year. Together those five firms account for 25%+ of overall IT services spending.
The information provided by those vendors suggest, based on constant currency, constant scope figures:
- IT services spending overall was down by 7%
- Consulting and systems integration was down by 12%
- IT outsourcing (excluding BPO) was down by 3% with IT infrastructure down by 2% and application management by 3%.
Early analysis suggests that overall CSC is the vendor that at constant currency declined the least during calendar year 2009. NelsonHall estimates that revenues of CSC declined by 2%. This compares with a 4% decline estimate for IBM Global Services, a 5% decline estimated for both Capgemini and Accenture.
Analyst comments:
Interestingly, in 2009, firms with historically a profesional services background such as Accenture and Capgemini achieved overall a revenue growth at constant currency that was similar to those vendors, such as CSC and Fujitsu, who have an IT outsourcing and IT infrastructure background.
CSC has performed slightly better than the rest of the competition. That performance is however not due to its resiliency in outsourcing (down by an estimated 6%) but thanks its software and professional services arm (down by an estimated 1%) and the high proportion of revenue coming from the U.S. government sector.
Compared to the previous IT-led economic crisis of 2001, this current downturn has led to similar effects, despite very different backgrounds:
- A collapse in professional services with consulting declining by 15%+ and systems integration by 10%
- IT outsourcing spending showing stability but less than during the previous crisis. This reflects clients in large ITO contracts freezing the discretionary spend embedded in those long-term contracts and renegotiating prices downwards.
Looking ahead in 2010
- Professional services spending is expected to be flat
- IT outsourcing should be up by 2 to 3%
- Overall IT services spending will be flat.
- In terms of vendors: Indian vendors are expected to benefit first from the improving economic conditions
- The recovery in spending is still being discussed by clients. Clients seem to have finalized the renegotiation of their existing IT outourcing contracts. They now are discussing their discretionary spend.
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NelsonHall ITO Index Shows 32% in Bookings in 2009, Driven by 3 Mega-Deals; Underling Growth Much Lower
NelsonHall ITO Index shows that in 2009 ITO bookings were up 32% to $42bn.
- Commercial sector i.e. excluding government, was very dynamic, with bookings up 45%, driven by transportation and retail
- Europe was, for the third year in a row, the largest geography for IT outsourcing. Levels are high and rising: bookings were up by 55%. Commercial sector in 2009 was up by 49%
- In 2009, multi-scope IT outsourcing represented 24% of all bookings. This compares with 19% in 2008. Standalone infrastructure management accounted for 64% of all bookings.
However, the high increase in ITO bookings hides several facts:
- ITO booking level is back at 2004-2005 level
- The growth in ITO bookings was driven by three deals with a TCV over $2bn. Excluding those contracts, ITO bookings during the year were up by just 4%
- North America is still weak and down by 11% to its lowest level of bookings since 2002
- The high increased in ITO bookings has been to a large degree led by contract renegotiations and renewals. New business level is lower than in the past.
Analyst comments:
ITO bookings in 2009 are still below those of 2003 by 28%
- In 2003 bookings had reached almost $60bn in value driven by the 2001 burst of the Internet and telecom bubble and overspending in ebusiness and ERPs. 2003 is strongest year of bookings ever and is a reference year
- The 2008 economic recession has triggered contract signings too but to much lower levels
- The high level of renewals and renegotiations suggest that ITO spending in 2010 will be flat.
For more information on the ITO Index and the quarterly ITO Index Calls, please refer to rob.hughes@nelson-hall.com
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Patni Looks At Cloud Computing To Provide Non-Linear Revenue Growth
Patni has recently unveiled its roadmap for cloud computing.
The company sees cloud computing as one option to provide non-linear revenue growth, thus lessening its dependency on the personnel number growth that has been the foundation of the business model of many Indian IT services vendors. The initiative is therefore strategic for Patni, which is targeting those firms in its client installed base with revenues in the $1bn to $5bn range.
Initially, Patni's cloud computing offering is consulting-led, helping clients design and build their private or public cloud strategies. It includes Cloud acceleration program (CAP), an assessment service measuring the maturity of the client, determining what applications are ready to be move on the cloud, building a business case and helping on vendor selection. The company, however, intends to manage cloud computing contracts including vendor and third party management. In addition, the company provides private cloud build services.
Patni has announced several specific offerings:
- Disaster and recovery services for clouds
- Management of application licensing issues
- Point solutions such as cloud-based testing environments
- Testing of IT hardware and applications to be used in a cloud environment. The company is seeing client interest in Patni providing performance testing services of cloud environments integrated with back up services
- Migration services for clients that need to port their applications to the operating systems, databases and middleware available on public clouds.
The company is currently involved in five pilots.
Patni also has a SaaS-enablement offering for ISVs that are expanding their offering from on premise software to SaaS. The offering includes not only SaaS transformation but also additional features such as metering based on usage and platform migration. Services provided by Patni therefore are designed for metering and helping in billing the final consumers of its ISV clients' software. The offering is also available to enterprise clients aiming to reengineering their homegrown applications towards SaaS.
Patni has a roadmap to expand its service offering. Currently, it has no intention to launch an infrastructure public cloud offering and will rather partner with vendors such as Amazon, SAVIIS, Rackspace and GoGrid. The company has also working on a pilot based on Windows Azure beta. Patni however hints it has ambitions to expand into SaaS and platform-based BPO (business process as a service) for specific vertical industries such as telecom.
Analyst comments:
Many IT services vendors are looking at IT infrastructure public cloud computing with caution. That caution is a result of both the required investments to build a public cloud and also the financial return that they would bring. Amazon Web Services with its low prices has set an industry standard that is hard to match. Patni is therefore accompanying the move towards public clouds.
Looking ahead, a number of vendors have been developing and are going to market with platform-based BPO offerings. (NelsonHall covers platform-based BPO within its various BPO research programs). This would appear to be attractive to the mid-market; however, platform-based BPO implies that clients surrender some of the customization work they currently ask for with their on-premise software.
More attractive to the market may be the B2B2C model where an IT service vendor provides a service to the client's end-consumers. Telecom service providers are happy to accept standard BPO service for activities such as billing. This is probably where Patni wants to develop its offerings.
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HCL Outlines Its Cloud Computing Achievements
HCL Technologies has recently outlined key contracts for its cloud computing offering. The company has been involved in building and sometimes operating private clouds for technology vendors and ISVs, combining its product engineering, application and IT infrastructure capabilities. The company has been involved depending on the client from the business and IT strategy phase to the project delivery.
The range of services that the company has provided is wide: it has been involved in redesigning the internal infrastructure of several ISVs or helping with the software product strategies of its clients to external clients that include first-tier ISVs and technology vendors with headquarters in the U.S. and in Europe and others.
For a U.S. Fortune 1000 ISV: HCL has been involved in several initiatives including simplifying the application architecture of its internal ERP applications, upgrading SAP applications and supporting servers. As part of the SAP server transformation, HCL Technologies has migrated the physical servers from a competitor's datacenter into its own in Georgia and virtualized those to build a private cloud for the production environment. The company established a back up site to Sungard that is used for testing environments. The client favored building a private cloud rather than using public cloud services for several reasons including its requirement to provide a recovery within 15 minutes. HCL has however wherever possible aimed to share select elements e.g. networks and managed security among several clients.
For a Europe-based Fortune 500 ISV: HCL has helped design the client's strategy for its mid-market clients. The client's mid-market SaaS-like offering includes the license cost and the underlying maintenance & support, help desk and hosting services. The application is however single-tenant. A key challenge for HCL has been to keep IT costs under control to enable the SaaS offering of SAP to be profitable. The service is available for demo, trial and production for a fixed price per user per month.
HCL has provided two solutions:
- It has built a private cloud for the client and is currently providing the application hosting service for the clients of its ISV client
- It has designed a server appliance that provides hosting and storage.
For a tier-one high tech vendor: HCL has designed and built the client's storage-as-a service offering. The client is selling a storage service to the consumer market through resellers such as telecom service providers in the U.S. The storage service is subscription-based. HCL has therefore set up a private cloud and developed multi-tenant CRM and billing applications.
In addition, the company has a created several cloud offerings including
- A SAP server public and private cloud offering: which is priced on the number of SAPS and scales up and down. It has a minimum duration of three years and has a client-agreed minimum usage for storage (10GB),compute power (one virtual server) and SAP named users (more than 25). The offering includes a reporting portal. It is available for enterprise clients with revenues higher than $1.5bn
- A SAP server public cloud offerings for mid-market clients. The offering is dependent on a number of requirements e.g. using four modules and a limited number of industry verticals; Such requirements allow HCL to provide a standard service
- An India/emerging country offering that enables legacy applications to be phased out and replaced by an enterprise packaged application
To support these three offerings, HCL uses its datacenters in New Jersey in the U.S. and India or those of partners across the world.
Analyst comments:
The value proposition from HCL is interesting:
- Its client base extends from the enterprise segment to technology vendors. For technology vendors, the company assists in servicing the clients of its clients. The SAP cloud offering is unusual and competing services are only offered by 2 U.S. headquartered vendors and half a dozen European IT services vendors
- It includes the infrastructure and to some degree reengineering the application into a multi-tenant application
- It is contract-based rather than strategy based, unlike a number of competitors
- It includes both build and run activities.
NelsonHall started researching activity in utility computing at the start of 2008. At the time it was clear that most Indian vendors had other priorities than marketing their private cloud achievements. They had enough work opportunities around RIM. The situation has now changed and vendors such as HCL Technologies are clearly marketing their private cloud capabilities. This is a welcome move. Offerings mixing some level of offshoring with infrastructure transformation and automation is much more acceptable than those based purely on labor arbitrage.
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Infosys Expands Operations and Service Offerings In Infrastructure Management Services
Infosys' Infrastructure Management Services (IMS) horizontal unit had revenues of $293m in its fiscal year 2009 (ended March 31 2009), up 42%.The unit, which has c. 6,000 personnel, now contributes nearly 8% of Infosys' total revenues. The client base is distributed across North American (58% of revenues), with Europe and APAC respectively contributing 39% and 3% of revenues. IMS supports half a million desktops and manages 100,000 servers.
Infosys' offers is wide and ranges from monitoring of networks, severs, databases and workplaces to service desk, hosting and infrastructure consulting. The business unit also offers to its enterprise client mainframes, middleware support and database monitoring as well as network management for key telecom operator clients. In addition, Infosys is emphasizing high-potential offerings such as server virtualization, cloud and grid computing, infrastructure as utility, green IT and ITIL v3 compliance. The company is also involved into datacenter transformation. Typically, IMS aims to lower the total cost of operations of its clients by 30 to 45%.
Recently, the organization expanded its delivery facilities in India and the Czech Republic (Brno) for level 1 support and in Mexico for level 1 & 2 support. Infosys recently opened a delivery center in Brazil, which IMS planS to use as well. Currently 70% of the delivery personnel are located in India, 16% in N.A., 10% in EMEA and 4% in APAC, largely in nearshore zones but also onshore for client-facing activities and transformational work.
Recent contract activity reflects this expansion of geographic coverage and service offerings. Infosys has signed contracts in the U.S. and the U.K., and also in geographies like Continental Europe, Canada, ANZ, India, Middle-East and Nordics. The range of services being provided in recently awarded deals is also expanding from core server monitoring to mainframe services (for a U.K. bank), and hosting and monitoring (with a hosting partner for a U.S. client). For a retail client in Nordics, Infosys is hosting and monitoring the client's merchandising and replenishment applications with hosting done (through a partner) in India.
Analyst comments:
The expansion of tier 1 Indian vendors such as Infosys into IT infrastructure management services for their international clients has only recently started. IT infrastructure management spending with tier-one Indian vendors represents less than 1% of total client spending worldwide. Yet, just as in application services five years ago in the U.S. and U.K., clients are gradually moving to a state where they are systematically inviting tier-one Indian vendors in their RFIs/RFPs. Tier 1 Indian vendors have been investing in developing capabilities in infrastructure services as part of a range of service offerings that are not dependent on headcount; this year it has proven to be a resilient part of the portfolio.
Their services offerings are expanding fromlabor arbitrage for offshore-delivered remote monitoring into operation automation and new offerings. Infosys in particular is focusing on service quality and its ability to help clients in their IT infrastructure transformation in terms of hardware standardization, rationalization, ITIL compliance and process standardization. The BU has a partnership with Microsoft on Azure and is also investing in cloud consulting.
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Capgemini Announces Application Lifecycle Services Offering
Capgemini has announced a new global service line named Application Lifecycle Services based on managing the full application lifecycle with services ranging from development, testing and maintenance to application environment optimization in an integrated manner as part as a muti-year contract.
The offering will be supported by 15,000 specialists, of whom 10,000 in India, half of its workforce in the country. The company is to retrain 5,000 aplications personnel over the next six months in new methodologies and techniques for driving simplification of the application landscape.
The new offering will cover all of Capgemini's major geographies and all mainstream technology platforms.
This announcement is the second stage of Capgemini's 'Business as Unusual' growth initiative unveiled on November 5, 2009, and follows the news of a major investment in the Group's Business Information Management capability (see separate articles). Through these strategic initiatives, Capgemini aims to generate €800m of additional bookings in 2010.
Analyst comments:
The proposition is based on the premise that entrusting the management of both maintenance and new apps development to a trusted third party should help in addressing the well known challenge that for many organizations the budget for maintaining and stabilizing the existing IT landscape has dwarfed the budget available for new initiatives.
Capgemini's new service line is a response to the large application services contracts combining build and run work, of which an increasingly large share in the last few years has been won by Indian tier-1 vendors. Such contracts are significantly different from pure application maintenance & support work as they include systems integration activities.
Capgemini with its many P&L centers addresses such contracts from at least two business units: from its global outsourcing services unit and from its country-based systems integration units. Overall its global Outsourcing Services has tended to address multi-year contracts, initially on maintenance & support, but also on systems integration follow-up work. Meanwhile, Technology Services in the different countries derive much more of their work from professional services.
The move is, however, much more than an attempt for Capgemini to capture a market that it has not been structurally fully aligned to capture. With this new offering, Capgemini is emphasizing its build and run experience and its capabilities in areas such as pre-developed solutions and templates, industrialized solutioning, collaborative governance as a services integrator, and continuity and de-commissioning technologies.
Capgemini is thus taking another step towards the more centralized and also more industrialized approach that tier-1 Indian vendors have adopted. Some of the differences are that Capgemini has a much larger pool of onshore personnel, is closer in terms of culture to many clients, and has more experience both in transformational large scale programs, and also as a services integrator in major multi-sourcing engagements.
The stated number of 15,000 personnel is a clear indication of the importance being placed on this offering. Capgemini has c. 28,000 personnel in OS engaged in BPO and ITO work, of whom an estimated 8,000 in application management services, plus 38,000 personnel in its systems integration units. Out of these, c. 15,000 personnel are engaged on on multi-year contracts and will be involved in the new offering.
The slowdown in fiscal Q3 seems more an anedoctal reflection of the typical quarterly variations in service mixes. Nevertheless, what is intriguing is that TCS, Infosys and Wipro have each incurred this slowdown.
All in all, software testing revenue from India is still expected to grow at similar levels to fiscal 2009 at approximately 10%.
Meanwhile, combined revenues from infrastructure services are up 32% in fiscal Q1-Q3 2010. This compares with 25%+ growth in fiscal 2009. Infrastructure whether delivered from offshore or onshore is showing its resiliency compared to more discretionary spending.