Rise of Managed Services
By Radhika Nallayam on Oct 15, 2009
As a large battalion of Indian enterprises opt for managed IT services, the industry witnesses a new wave in outsourcing.
India is synonymous with outsourcing, with most of its business coming from the US and European markets. But its growth is not as fast as it once used to be. Many factors, including the slowdown in the US and Barack Obama’s ‘anti-outsourcing’ statement, have created a lot of uncertainties in this industry. However, we really can’t close our eyes to something that is sometimes being termed as a ‘reverse trend’ in outsourcing. Some of us call it ‘managed IT services’, a burgeoning trend in the IT sector driven by domestic companies. Today, the biggest opportunity in outsourcing comes from within India as a flurry of companies of all sizes have willingly come forward to outsource the management of either parts or their entire IT infrastructure so that they can focus more on their core business objectives.
Interestingly, the managed IT services market is projected to outpace the growth of the overall services market in APAC. A recent report released by IDC predicts that the growth for the APAC (excluding Japan) IT services market will slow down in 2009. The research agency says this slowdown would be mainly because of organizations’ increased attention towards balancing cost savings and cutting down on business transformation projects. It also lowered its previous growth forecast from 11.2 percent to a post-crisis projection of 9.6 percent, leading to a slice off of $6.5 billion from the Asia-Pacific IT services market between 2008 and 2012. However, the research house further reports that this market is still expected to expand to $49.4 billion in 2009, primarily fueled by the continued demand for managed services and outsourcing.
India is clearly riding on this wave and is becoming one of the fastest growing markets for managed IT services. Aroop Roy, Senior Research Analyst of Gartner, says, “According to our research, the Indian market for managed IT services is $ 1.1 billion and it is growing at a faster pace of 28 percent.”
IDC gives similar figures. According to the research firm, the India domestic managed IT services market is expected to grow at a CAGR of 24.9 percent to become a $ 2.78 billion industry by 2010, making it one of the fastest growing markets in the Asia/Pacific region.
Why managed IT Services?
Interestingly, managed services as a concept has been around for almost two decades. The first generation of managed service providers emerged in the late 1990s. However, the market for the same did not really pick up during those initial years. Today, with more and more businesses willing to outsource their IT infrastructure management, a new set of managed service providers are benefiting from fresh opportunities. With the sluggish economy, managed services have become a cost-effective way to manage the IT infrastructure of an organization. However, many vendors opine that more than just the cost savings, it’s the need to improve efficiency that makes CIOs think about managed services.
Shiv Kumar, Executive Vice-President, Business Development, Zylog Systems, says, “The current economic situation is certainly contributing to the growth. However, one of the top reasons for managed services use wasn’t just to save costs but to use managed services in order to focus on their core business competencies instead of worrying about the technology infrastructure.”
Girish Krishnamurthy, Managing Director, Kaseya-India, shares the same opinion. He believes that the drive from a capex to an opex model or the unending recession is definitely not the reason for the growth of the managed services market. “I would say the concept of ‘capex-to-opex’ is a myth. This is true only for assets that are not long term to your business. Management of IT infrastructure is a critical issue. There are better reasons than just cost savings for a CIO to outsource his company’s IT management. The most important reason is the fact that today CIOs are not able to measure the accountability of their IT infrastructure. They want to have more control over their IT and are looking for a single IT score card for their entire IT infrastructure. Managed services is the answer for all these. It provides a proactive and automated solution for all their IT related issues.”
However, there is no denial of the role of recession upon many decisions taken by the CIOs. “Recession is one of the reasons for the growth of managed services market in India. But most importantly, the urge of the Indian businesses to attain global standards is something that would drive this market forever,” says Roy of Gartner.
At the same time, downturn is one of the major drivers for managed hosting services. A recent article in CIO quotes Forrester’s principal analysts Bill Martorelli and Galen Schreck as saying, “The popularity of managed hosting will likely increase because of the current economic pressures. If you needed more office space, would you build an office from ground up or would you look for a larger, more modern office building to lease? A new datacenter represents the same kind of choice, and increasingly it makes more sense to lease datacenter space.”
Sharad Sanghi, CEO & Founder of Netmagic Solutions agrees. “Recession has definitely made managed services an attractive option to CIOs. A combination of managed services and cloud model is accelerating the shift towards an opex model from the traditional capex model.”
Precisely, the benefits of outsourcing are numerous. To begin with, it helps organizations reduce the total cost of ownership (TCO) of their IT assets. Additionally, it ensures the availability of skilled manpower on a 24/7 basis. As businesses expand their arena and become more competitive, they are looking for unlimited scalability, diverse connectivity, constant power availability, and a controlled environment.
Shankar Vishwanathan, Vice President and Head of Application Services, CSC India, says, “As the maturity curve of the industry moved up, businesses have started realizing that it is better to switch to an output-driven delivery model and outcome-based pricing to manage their services and instead of worrying about how the work gets done.”
Most importantly, companies would be able to use their manpower for better and productive roles, which will ultimately lead to reduced HR issues. With the new mantra of ‘do more with less’, managed services will become all the more important for enterprises in enhancing an organization’s productivity.
It also addresses one of the growing issues among enterprises, especially among medium and small enterprises — of retention of skilled employees. “As the Indian enterprises deploy more and more complex applications, internal expertise becomes mission critical for them. Unfortunately, internal skills sets of Indian enterprises are still not adequate enough to address all their needs. So, it makes more sense for these enterprises to depend on a third-party specialist for maintaining and managing their IT requirements,” adds Roy of Gartner.
Choices in profusion
Managed service is a vast segment and encompasses various areas like desktop management, server management, network management, security management, application management, storage management, and mobile management. Enterprises have the flexibility to outsource their entire or parts of IT infrastructure based on their needs. In terms of the delivery models, managed services can be onsite, offsite, or a combination of these two (hybrid model). The hybrid model is well accepted by customers as they may not always want the MSPs to deliver all the services from a remote location. As a result, MSPs today provide a plethora of flexible options to their customers rather than strictly taking a single route approach.
Managed services are typically delivered based on a service level agreement (SLA), which is a key part of this business model and usually applies to all the different types of managed services. Maintaining the SLAs is critical for both the customer and the MSP. SLA will generally specify the exact service that the customer organisation can expect from the MSP, including the stated maximum amount of downtime, escalation procedures, and the quality of service delivered. There are penalties for non-compliance and failure in delivery and sometimes an incentive if service levels are exceeded beyond the agreed levels.
Onsite managed services or facility management services (FMS) have been prevalent for a few years now and companies of all sizes are already using or planning to use FMS. The growth potential today lies in offsite managed services. Within this, remote infrastructure management (RIM) is one the biggest growth areas. RIM, for many, is an independent market and for a few it’s even synonymous to managed IT services. We, however, cannot deny the fact that RIM is just one of the delivery models of managed IT services. But RIM has become big enough to be considered as an independent market.
A Nasscom report says that RIM, as an independent industry could realize $26-28 billion in revenues by 2013. The majority of growth is likely to come from offshoring midrange services and network towers likely to account for approximately 70 percent of the overall opportunity during this time. In terms of industries, says the report, the banking, financial services, and insurance industries will lead this growth followed by the telecommunications industry.
In India, this market has witnessed a tremendous growth in the last two years. In the initial stages, RIM was used only for network management whereas now customers are looking at RIM for datacenter and end-user support, application management, security management, and so on. Concerns about the security of such a model are slowly diminishing as more and more companies have started realizing the benefits of RIM.
However, awareness levels is still an inhibitor for the growth of this market in India. “Everyone has got his own definitions of RIM and there is a perception that if your IT management is not within your premises, it is not secure. As a result, this market has not picked up the way it should have. In fact, remote management is the most secure way to manage your IT infrastructure. We believe, it would take at least a year before we see enterprises embracing this model with an open mind,” says Krishnamurthy of Kaseya.
Within RIM, a vast number of delivery models are becoming popular among the enterprises. The most prevalent model in RIM is the combination of offshore/near-shore/global delivery center, which is often termed as an Operations Management Centre (OMC). In this model, the skilled resources of the service provider monitor and manage the infrastructure, ensuring uptime and availability. Pricing models in managed services can be based on seats, results and SLAs, assets, users, tiers, and much more, depending on the service and the level of customization.
Buyers of Managed Services
According to Sanghi of Netmagic, we have just seen the the tip of the iceberg and the opportunities that are present in the Indian managed services market are huge. Although this market has accelerated quite well in the past three years, the players in the managed services domain are expecting to see several opportunities in the coming days. “When we actively started talking about managed services about three years ago, there was a prevalent concern among customers about such a model. However, it witnessed a tremendous acceptance within a couple of years by all kinds of companies cutting across sectors like banking, telecom, IT, ITES, government, manufacturing, and many more industries,” he readds, revealing the approval factor from various verticals.
Large corporations with savvy CIOs are willing to take the risk. Also, businesses that have gone up the maturity chain in terms of IT outsourcing and gained sufficient expertise in their work processes are adopting it because of their confidence in suppliers and also because their internal processes have matured over a period of time.
Most of the corporations, which face extreme pressure on reducing IT costs, are turning towards service providers for an end-to-end managed services solution. Customers with disparate IT process across their IT environment and the customers who failed to put their house in order after several attempts are now tuning to managed services to optimize their IT environment.
Vishwanathan of CSC adds, “In addition, large corporations with extensive offshoring experience have met their goals in outsourcing through labor arbitrage and they are under continuous pressure to reduce their IT spending. These corporations are now moving away from conventional T&M/staff augmentation contracts to managed services model, to gain further cost efficiencies by transferring the business risk to service providers, which will have stringent business level and service level agreements with rewards and penalties.”
Managed services is getting acceptance among SMBs as well because for these companies availability of skilled staff is one of the biggest issues. However, instead of outsourcing their entire IT infrastructure, SMBs start by outsourcing parts of their IT to third party experts. Security is the first thing that has been outsourced by SMBs. “The larger enterprises were the early adopters of managed services due to the distribution of their network, datacenter assets, and workforce. But SMB market picked up the value of managed services very fast in last few years and the market is expected to top $60 billion by 2011 worldwide. Businesses which cannot afford to have dedicated IT resources to manage their IT infrastucture on day-to-day basis are the prime adopters in the SMB space,” explains Kumar of Zylog Systems, highlighting the pace of SMBs in making use of this opportunity.
Although a considerable part of large enterprises have already adopted managed services, Krishnamurthy of Kaseya opines that these companies use managed services as ‘bits and pieces’. “Large and even medium enterprises have multiple tools and options as part of managed services, but none of these tools talk to each other which results in unavailability of a centrally controlled system. However, in the coming days we would see more and more such companies going for a full-fledged managed IT services model,” he says. “In the coming days, CIOs are going to look at more control over their IT infrastructure and would want to connect the performance of IT with their business and finance information systems. So we see a lot of traction towards managed services in the next three years.”
With leading players witnessing a whopping 50-70 percent year-over-year growth, the market is all set to boom in the coming days. Managed service providers believe that as cloud computing gets acceptance, the need for a managed environment would also go up, resulting in a swamp of companies that go for a managed services model.
In the coming days, vendors are expecting to see a lot of enterprises moving away from the traditional break/fix model to a SLA-based managed services model. Sanjay Padode, CEO of Religare Technova, says, “Tough times have resulted in uniform thinking across the board and this is to get maximum benefits out of IT. Therefore, people are open to exploring new business models that are based on success or outcome fee rather than the traditional T&M model for managed services. Contracts based on SLA-linked payments are being preferred over the traditional monthly payments.”
“The adoption of unified communication (UC), SaaS (software as a service) and cloud-based computing models are also demanding for better and pro-active infrastructure management services,” adds Kumar of Zylog.
Bumps in the Road
Though there are multiple reasons for enterprises to consider managed services, this market is still witnessing a few road blocks. Despite the fact that the positive environment for managed services has been around for almost five years, managed services market is still in its nascent stage, especially in India. First and foremost, managed services is not a ‘hire-and-forget’ option and makes it a ‘restricted’ place for SIs.
The active involvement of third parties has created a multitude of considerations that must be taken into account before committing to and developing such a strategy. Commitment is required at all levels to make the managed services model work successfully for an organization. Several enterprises are skeptical about the workability of an outsourced model because of few dreadful experiences they encounterd in the past.
“Sometimes, customers hold unnecessary expectations about their MSPs. These expectations result in bitter experiences. There have been number of cases where SLAs were not defined properly, which led to clash in expectations and results. Areas such as ‘innovation’ and ‘cost saving’ must be defined appropriately. Lack of proper communication can lead to an unsuccessful model,” explains Roy of Gartner.
Apart from this, in the current scenario, there are few other challenges for players in the managed services space. The biggest of these is the mindset of the customers. There are concerns about security among the enterprises while outsourcing their IT infrastructure. As a result, increasing the awareness about managed services and its benefits is going to be a tough errand for managed service providers.
“Enterprises with lower maturity in their internal IT environment are reluctant to look at managed services. Apart from that, there are CIOs who are happy to let their business run as it is, without any upgradation. And some customers simply want to manage IT on their own, while there are others who are well entrenched in a multi-vendor operating model. The other inhibitor is the prohibitive transition costs to move to the managed services model,” explains Vishwanathan of CSC.
Other challenges is to remove the skepticism and ‘perceived lack of control’ in operating in a outcome-based service model, that is not owned by internal IT organization. However, despite the roadblocks, managed services market is set to be the bright spot in 2010. “Managed IT Services is on an upward trajectory as IT is going to continue providing an edge to competitive businesses and managing IT infrastructure and applications is only going to get more complex,” Padode of Religare winds up.
- Page 1 : Rise of Managed Services
- Page 2 : Why managed IT Services?
- Page 3 : Choices in profusion
- Page 4 : Buyers of Managed Services
- Page 5 : Bumps in the Road
