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Growth opportunities in IT services

As the world adopts newer digital technologies, system integrators and services companies are playing a key role in assessing, road mapping and implementing that journey with their clients.

The Indian IT services industry is actively involved in this digital journey and as a leading player in many segments of services, is a pivotal player in the growth of information technology adoption across the globe.

This being the case, why is this industry under pressure from slowing growth, announcements of workforce reductions, choppy stock prices, and recent activism from shareholders.

Is this an industry in transition, and will it regain its place in the limelight?

A short walk through history

In the last 3 decades, while overall spending in IT services was growing at 3 – 5 % a year, the Indian service providers were growing at multiples of this.

The elevated growth was happening because they were picking up a significant market share of the total spend from the Western IT service providers as well as from the in-house IT teams of corporations.

Today, this is a $ 125+ billion industry, with over 15% share of global spending on IT services and likely over 20%+ of services spend from the USA and Western Europe.

Market shares of the Indian outsourcing companies vary by the type of technology stream. Factoring in both service providers and captive centers, shares are high in application, product, and infrastructure management, lesser in application and product development as well as assurance services.

Macro Outlook

The Gartner Group estimates that the global IT services industry is $922 billion this year, with a growth of 3.2% YOY. It also estimates that growth will be 4.5% compounded in the 2015 – 2021 period.

Given the high market share which the Indian companies have in many streams of services, the growth boost through market share gains is becoming lesser. What will drive future growth will be active participation in the new technology initiatives and at the same time a retention of the many streams of existing work which is being delivered to clients

There are many streams of work which are growing very rapidly and provide opportunities for future growth to companies, and those employed by them.

Growth opportunities

1. App (and analytics apps) development

Participation in the build and test of new gen applications – modernization of legacy apps, ground up build using current digital technologies, connectivity solutions to IoT platforms, and data management / analytics of large streams of both structured and unstructured data.

A significant part of the early work in these new application streams will be done at client locations. This will provide opportunities for tech professionals in USA and Western Europe as well as companies which have the supply chain to be able to grow teams there.

Footprint will matter – the digital and cloud pilots will scale up and as they do, there will be much greater participation of the IT services companies - those who built a footprint in the early pilots.

2. Cloud migration (SaaS and IaaS)

The migration to SaaS applications continues to gain momentum, as can be seen in the growth rates of SFDC, AWS, Azure, and the cloud portfolios of SAP and Oracle.

Migrations are complex – requiring assurance of performance, security and interoperability. This needs active contribution from IT services companies in the architecture, roadmap and to the cloud. Moreover, for many applications and infrastructure the IT service provider may be the only one which has the expertise & knowledge of it, and hence has to be a necessary participant in any modernization or cloud migration

3. Management and integration of cloud infrastructure/apps

Those who have migrated to the cloud have discovered that cloud providers offer limited services beyond the core platform. It then is an opportunity for SI’s to be active participants in the ongoing support services. While AWS and its peers are rapidly adding new services to their cloud portfolio, there still continues to be a larger opportunity for the service providers to offer more value added services.

Similarly there is an ongoing demand for feature functionality to be built around SaaS software platforms as well as integration of new and existing applications. Evidence of this is in the large and growing teams of SFDC developers working with enterprises which were early adopters of this SaaS tool

4. Product development & assurance services

There continues to be significant growth in the build and test of the new gen products –SaaS solutions for platform software, social media, e-commerce, web content delivery solutions, and the business operations software supporting them.

Just as it is with the new age app development, this stream of new product and platform launches, provide significant opportunities for both professionals and companies who are able to participate in building and launching them.

5. Legacy product sustenance

As product companies concentrate on building their next gen products, there will be active engagement with partners to sustain the large existing product base. The recent large deal between IBM and HCL is an example.

These engagements will come at competitive pricing though and service providers will need to drive reductions in defects, ticket volumes and new releases to ensure healthy profitability.

Emerging growth

Application assurance services

Testing and assurance services will follow the widespread growth in the new age application development. While the application assurance is being tightly integrated with the dev teams during the early pilots, this will change as the initiatives scale and create large opportunities for assurance services, driving more work to global locations.

Modest to flattening growth

Existing infrastructure management

Cloud is not cheap or easy. The costs and complexity of cloud migrations add up for enterprises with stacks of application layers, multi-site integrations, and security. Many will find that if they have the right scale – private clouds may be as competitive as a public cloud and without the hassle of migrations.

Hence the opportunity to sustain/maintain corporate IT infrastructure will continue. With high penetration already, growth is slowing though and much of the activity will be in rebids which will be hotly contested, putting margins under pressure. Automation, self-healing, and reduction of ticket volumes through preemptive fixes will be measures taken to protect and improve margins.

Declining growth

Legacy application support

App sustenance will shrink in the short term.

Because of high level of outsourcing, much of the action here will be in re-bids to get better pricing and squeeze costs. However, switching vendors is a much more complex task with applications than it is for infrastructure. Incumbents have the opportunity to retain a significant part of their application sustenance engagements – except at lower overall costs. As with infrastructure sustenance, stabilizing the applications to reduce ticket volumes, driving greater automation, and managing the pace of patches and releases will be key to profitability.

In the 2 – 3 year horizon, the current surge of new applications being built will get into the sustenance phase and in turn provide a boost to growth of application sustenance

In summary

At the already high levels of market share in different services, future gains will be modest and the organic growth of Indian IT services industry will be driven by increasing participation in the new age initiatives in application, infrastructure and products – while at the same time ensuring that the existing client and engagement base does not erode.

  1. The growth opportunity lies in building out, testing, and migration to the new age apps, products, and infrastructure.

  2. Migrations to cloud will be an opportunity for SI’s during the migration and also subsequently to ensure ongoing integration, enhancements and management around the cloud apps and infrastructure

  3. Product sustenance will continue to be an active opportunity – there is a large installed base to be sustained

  4. Application assurance services will see renewed growth

  5. Management of corporate infrastructure and applications will diminish – but slowly. However both streams will be under pressure for cost reductions. Companies will need to drive ‘first time right”, stabilization, tool usage and automation aggressively to maintain profitability.

Keep swinging!

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