net.work

The Way Business Is Moving

net.work published by
Issue Date: February 2007

Up to 85% of infrastructure can be run offshore, says HCL

7 February 2007
Patrick O'Brien

Described by India's IT cheerleaders Nasscom as the third wave of outsourcing, remote infrastructure management is causing shock waves throughout the infrastructure services market. HCL now claims that 80% to 85% of the management phase of infrastructure services deals can be delivered offshore, allowing it to offer prices that onshore providers, already on wafer thin margins, cannot hope to compete with.
For years, infrastructure management services was seen as exempt from the unstoppable movement of IT work to India, but the progress that some offshore vendors have made over the last two years has proved this to be nonsense.
Estimating the overall infrastructure management services market to be worth up to $85bn, Nasscom reckons that up to 60% of this could be delivered through a global delivery model, translating into a potential market for RIM of over $50bn. Currently the amount of RIM work done from India is estimated to be less than $300m a year, so there is enormous potential growth available, and the key players in this market are growing at breakneck speed.
HCL Technologies claims to be the pioneer of RIM, and in its most recent quarter it made revenue of $39,8m, up 16,9% sequentially and over 80% up on the year ago quarter, making it the company's fastest growing segment. In terms of profits though, it contributes the lowest margin of any of its businesses, but its earnings (before interest depreciation and amortisation) margin of 17,6% is still at the sort of level that its Western competitors could not even dream of in this space, they typically achieve low single-digit margins.
HCL splits its business into four main areas, data centre services, end user computing, network services and security services. Data centre services bring in around half of the unit's revenue with end user computing contributing around 30%. Its significant infrastructure clients include AMD, Autodesk Teradyne and DSG International (part of its key $330m contract with the UK retailer).
HCL's route into the market began back in 1992 when it sealed its first network management deal with India's National Stock Exchange. This led to the formation of HCL Comnet which expanded into other remote managed services such as security. It was not until 2002 that it began offering RIM services to the global market though, driven by a number of factors including the reduction in the cost of bandwidth, more homogenous infrastructure environment which allows easier remote management.
According to Maninder Singh Narang, associate vice president of HCL's infrastructure services subsidiary, customers are shying away from full infrastructure outsourcing deals to an ‘asset-light selective outsourcing’. This demands a more flexible approach to infrastructure services than traditional outsourcers have been able to deliver. "The traditional one size fits all model leads to a lack of transparency and clients were finding that they lost strategic control over their IT," he said.
While persuading companies to push application-based work offshore has been a relatively easy sell, moving infrastructure services to India requires companies to make a major mental leap, but there are signs of growing acceptance.
While conceding that some large national players, especially outside the US and UK, were ‘slightly nervous’ of RIM services, Narang said that this is not the case with large global organisations. "They have already been so exposed to globalisation, and their IT is already managed in a globalised manner."
HCL now has around 3500 employees working on infrastructure services (with a lower attrition level than any of its other businesses) and manages around 50 000 data centre systems, 350 000 desktop devices, and takes around 1,5 million helpdesk calls a year.
The cost benefits it can offer companies depend on how much the client is prepared to let go offshore, Narang said that if the client was aggressive enough and pushed 70% to 80% of services offshore, HCL could deliver cost savings of greater than 30%.
While HCL has onshore personnel and uses partners (Sungard and Fujitsu for hosting services and Pomeroy and Compucom in the US and Phoenix in Europe for break-fix services), it has increasingly found ways to move more of the work offshore, and therefore offer lower prices. It estimates that even in the architecture and design phase of a deal, it can offshore 60% of this work in data centre and end user computing services, rising to 75% in networking and security services. The implementation phase requires the most onshore work (up to 50%), but, after this is over, 80% of ongoing management can be offshored or 85% in the case of data centre services.
While many of its significant clients also buy other HCL services, Narang said that most of its deals were new clients, rather than ones that it had already won the confidence of through application work. He said that he expects the current level of growth of the business to continue over the next few years, and part of this could be driven by the move to Microsoft's new operating system, Vista. It has introduced a ‘zero-touch’ migration service which it claims can slash the costs of deployment of Vista by up to 50%, though automation of the process involves ‘extremely low manual intervention’.
The opening up of infrastructure management services to offshore vendors poses a significant challenge to onshore suppliers. Unless the growing acceptance to offshoring such services somehow comes to a halt, they have to make the choice between developing their own offshore capabilities, which they have been slow to do so far, or to partner with offshore providers, to deliver services that cannot be provided remotely. Last week Unisys signed a partnership agreement to jointly market infrastructure services with Wipro, and it would seem highly likely that similar tie-ups will be announced in the future.
Source: Computergram


Others who read this also read these articles

  • Remind me why we outsourced?

    IT managers really have to turn into communications specialists, dealing with issues and perceptions within business, reporting on deliverables, changes in IT operations practices, and strategies

    [ May 2006 ]

  • Offshore panacea?

    Offshore BPO has built up unstoppable momentum given its two driving forces: lower costs and greater profits

    [ July 2005 ]

  • Prepare to renegotiate

    80% of outsourcing relationships will be renegotiated during the lifetime of the contract.

    [ June 2005 ]

Search Site





Subscribe

Previous Issues