Key Highlights of the NASSCOM-IDC Study on the Domestic

Services (IT -ITES) Market Opportunity

The Indian Information Technology (IT) and IT Enabled Services (ITES) success story
and its paradigm changing impact on global service delivery is now a well acknowledged
fact. However, much of the success achieved by the sector has been attributed to the
meteoric growth in exports – that has overshadowed the latent opportunities unlocked
and growth observed in the domestic market over the past few years.

Spotlight on the Domestic IT Services Market Opportunity

Domestic demand for IT in India is witnessing a gradual transformation from being

predominantly hardware driven towards a solutions oriented approach – resulting in a
growing emphasis on services. In fact, revenue growth in the services segment alone
has reported faster growth than that for the overall domestic IT market (including
hardware, software and services) over the past few years. As depicted in the following
chart, this trend is expected to continue over the forecast period.

Growth of IT Spending in India

The liberalization of Indian economic policy, de-regulation of key sectors and

progressive moves towards further integrating India with the global economy has been a
key driver of increased IT adoption in the country. This is best reflected in the fact that
most indigenous players in telecom and banking, two key sectors with significant
multinational corporation (MNC) participation, have significantly upgraded their levels of
IT adoption to offer best-in-class services comparable to those offered by the global
competition and these two sectors together account for approximately 35-40 percent of
the domestic spend on IT services.

Similar competitive pressures in other more recently deregulated service sectors such as
airlines and insurance, and the uptake in the manufacturing and industrial sectors; and
the several large e-governance initiatives launched by the government under the
National E-Governance Plan (NEGP) are expected to provide sustained growth in
domestic demand for IT services over the next few years. Over the next five years,
domestic spending on outsourced IT services is projected to more than double, from INR
103 billion in 2004 to over INR 238 billion in 2009.

Five Year Revenue Forecasts for Key Service Lines in the Domestic Market (INR Million)

Systems integration and network integration make up a high growth-large size category
within the IT services engagements. These services will continue to be prime drivers of
the domestic IT services market in the enterprise segment due to the increasing growth
in the enterprise application implementation and increased demand for network
integration from telecom & banking verticals.

Domestic IT Services Revenues by Key Vertical Markets (2004)

The financial services, communications and media, and manufacturing verticals

accounted for over 3/4th of the revenues earned by service providers in the domestic IT
services market in 2004.
The growth projections for IT service revenues in the domestic market may be further
accentuated by addressing some basic issues highlighted by the findings of the surveys
conducted as a part of this study.

A significant portion of the domestic corporate IT spends still lies in-house,

predominantly driven by a perceived lack of focus by service providers on the
domestic market and a perceived absence of value generated by outsourcing.

It is estimated that in-house spending on IT services (including training costs, salaries of

in-house IT staff and associated overheads) still accounts for more than half of the
corporate IT spend in India, while the outsourced / vendor addressed spends account for
just 45 percent of the total.

Comparison of the Vendor Addressed Market and the In-house Spend by Key Services (INR Million)

During the research study, IDC undertook in-depth interviews with CIOs. There was a
strong perception among a majority of the CIOs that domestic customers were not a
focus area for IT service providers and that the IT service providers rarely offer Indian
customers the kind of commitment and expertise that they provide their large (and
necessarily more lucrative) global customers. The CIOs also strongly believe that the
potential of the domestic market is still not appreciated by many of the IT services
players.

Further, there continues to be a relative poor awareness of the potential of using IT as

an enabler of competitive advantage. As cost arbitrage is not a strong enough
justification for outsourcing in India, the IT service providers need to clearly articulate
their value proposition and relate it to business benefits.

IT services vendors should be able to assist the CIOs to focus on generating

business value from IT investments, by offering total solutions and end-to-end
services.

As the level of IT investment increases, there is a change in the perceived role of IT from
a support function to an enabler of competitive advantage. There is increasing pressure
on the CIO(s) to justify the IT investment by demonstrating the value delivered from IT
investments. The increased expectations from IT, requires them to move from routine IT
operations to strategic IT management. The challenges they face in making this
transformation has to do with the existing complexities in their IT environments, which
make the IT departments and the CIOs spend most of their time and effort in day-to-day
operations.

The IT services vendors have a key role to play in helping the CIOs make this
transformation. New offerings and service delivery models need to be developed that
can assist the CIOs in streamlining their IT operations to such a level that they can then
devote their IT investments and efforts to transformational initiatives.

Verticalised solutions are becoming increasingly important, and IT service

vendors need to develop domain skills and offerings.

Verticalisation of IT services is a definitive emerging trend and users are demanding

services tailored to their needs. Mature IT customers are today looking for total solutions
that can solve their business challenges rather than at IT hardware, software, and
services as discrete elements.

IT vendors today, need to develop new or customize existing offerings to address the
specific needs of each vertical/market segment. Such an approach, based on solution-
orientation, is enabling IT service providers to offer sustainable value to customers.

While the larger services vendors have specific vertical practices and teams, the
medium- and small-sized IT services vendors need to focus on select verticals and
develop their skills in these.

Service providers need to extend strong end-to-end service capabilities to

domestic customers, as the IT services market moves to high-value, annuity
engagements.

The evolution of the IT services landscape is defined by the market graduating from low-
value long-term services (such as basic maintenance and support) to high-value one-
time services (such as system integration) and then on to high-value long-term services
(such as discrete and end-to-end IT outsourcing).

The vendors who will gain from this shift are those who will have the capability to offer
end-to-end services.
The transformation that is needed
Larger and mature IT users are increasingly looking for end-to-end IT services and this
will be a major growth engine for the market. This market segment will be dominated by
a few large IT services vendors who have the size and the capabilities to address this
demand.

The development of the domestic IT services market will need to become more
broad-based. To achieve sustained development, new verticals will need to be
penetrated as it is not sufficient to increase business from only the currently
addressed verticals.

A large proportion of the current IT services market is predicated on the banking,

financial services and telecom verticals. While IT services for these verticals will
continue to show strong growth, new verticals will need to be developed to increase the
rate of growth of the IT services market in India.

As the Indian economy opens further opens up, other verticals including manufacturing,
travel and tourism, healthcare, entertainment will increasingly look towards IT to
increase competitiveness. For both new and existing verticals, the small and medium
business (SMB) segment will represent an important source of growth for the domestic
IT services market.

Spotlight on the Domestic ITES-BPO Market Opportunity

ITES-BPO is a very nascent segment of the domestic market, driven by voice based
services with customer care and sales and marketing activity accounting for
approximately 70 percent of the total.

Domestic ITES-BPO Revenues (INR Million)

Currently, the BFSI and Telecom verticals account for over 70 percent of the demand for
ITES-BPO services in the domestic market.

Domestic ITES-BPO Revenues by Vertical Market (2004)

While cost savings have been the primary driver of offshore outsourcing, vendors do not
have comparable differences in labour costs to leverage while serving the domestic
market. As a result, the primary motivation for the domestic market, in its early years of
evolution are not cost savings but access to specialist skills and freeing client resources
to focus on the core business. Scalability and process efficiency is expected to return
some degree of cost savings in the domestic market as well. However this may not
compare with the levels achieved by overseas (e.g. US/UK) clients.

Notwithstanding its relatively smaller contribution to the industry revenues, this segment
has over the past twelve-eighteen months witnessed a noticeable increase in interest
and activity on the part of customer organisations as well as service providers. While the
market activity (contracts announced and deals known to be in the negotiation stages)
signal growth in the segment, like in IT services, future growth may be accentuated if a
few lingering issues are addressed.

Some of the key findings from the ITES-BPO leg of the user-organization survey
conducted by IDC as a part of this study include:

• While BPO/ITES penetration (to external/independent entities) is still very low, a

sizeable proportion of end user organisations have an internal division to focus
on these specific business processes indicating growing adoption of process
based work-flow. This is a critical stage in the maturity of user organisations for
them to consider / be able to outsource.
• Willingness to move from an in-house captive sourcing model to outsourcing is
very low. Satisfaction with existing systems, lack of trust in outsourced service
providers, high cost of services, unavailability of suitable vendors and lack of
skilled personnel (with vendors) being the most commonly cited reasons for not
looking at outsourcing.
• Demonstrated focus on serving the domestic market and showcased examples
of successful engagements with domestic customers are key factors that would
make outsourcing a more attractive alternative for end users.

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About the Document

This document contains the key highlights of a study conducted by NASSCOM in

association with IDC India to better understand the domestic services (IT-ITES) market
opportunity. This study comprised primary interactions with over 390 user organisations
and over 40 service providers, and also leveraged IDC India’s existing knowledge of
trends in the domestic market context.