SERVICES: Show Me The Money, Honey!

Faced by grim margins in the AMC kind of service opportunities, partners are
scouting newer arenas. Some have already forayed into offering value-added
services like FMS, network management, consultancy and so on, while the majority
still wonder which domain to get into. The key to making healthy margins in
services is to invest in skill sets and infrastructure while offering
differentiated services by building expertise in niche areas.

Jayessh Mehta of Bangalore-based Future Businesstech was a happy man selling
PCs, servers, and peripherals and topping it with annual maintenance contracts (AMCs).
While he used to easily make 10% on the products, AMCs would fetch him another
10-15% margins. But that was a few years ago, till the inevitable happened. The
product margins began to come under severe pressure and the scene with AMCs got
even worse.

In an attempt to sell the products in a cut-throat competitive market,
partners started compromising on AMC rates, at times even offering it for as
good as free-kind-of-rates. Jayessh too had to face the heat of competition and
hence take a cut on his profitability. What started off as a great service
opportunity once, now held promises of nothing but a bleak future.

Incidentally, his is not a stand-alone case. The better part of the channel
community today is faced with the crisis, that of AMC services no longer
fetching them sustainable revenues. So while unit sales of PC and servers may be
steadily increasing, the way AMC rates have crashed over the years, it hardly
leaves any motivation for partners to continue offering these services. From a
time when partners could happily charge between Rs 3,000-4,000 per PC for
maintenance, today in many cases it has come down to dismal rates of Rs 500
annually. A rate that is not just unsustainable but also something that doesn't
even recover costs of two on-site visits by service engineers.

But in order to retain the existing customer base and also to fight off the
competition, many partners continue to offer these services at very low rates.
However, there exists a sensible group of partners, who are slowly graduating
from just offering plain vanilla-AMC services to more high-value professional
services. And this group is only getting bigger. These services are no longer
PC-centered, instead they are being offered in the areas of storage, security,
software applications, networks and even going to the levels of consultancy in
some cases.

THE CHANGING FACE OF SERVICES

The value-chain that has currently evolved in the domain of services is of
immense promise. Already top-of-league players like HP Services, IBM Global
Services, Wipro Infotech, HCL Infosystems, CMC and Datacraft are present in this
space, offering a wide spectrum of services, not just in domestic but also
international markets. These services start at more fundamental level like
facilities management services (FMS) and goes into the areas of network
management, application management, application development and consulting.

According to estimates, the overall Indian services market for 2003-04
touched Rs 10,000 crore and could well grow at a healthy 25-30% rates over the
next couple of years. Essentially, partners in the lower tiers, especially
mid-sized systems integrators are not going to let go of this huge market.
Hence, they too are re-engineering their business models with changing demands
in services.

MARKET SIZE OF SERVICES
Service Area	2001-02	2002-03	Growth %
Facilities management	160	300	87.5
Maintenance-own systems	750	863	15
Third-party maintenance	920	1,100	19.6
Customized software	1,924	1,900	(-1.2)
Turnkey projects	1,815	2,541	40
Consulting/others	979	1,155	18
IT-enabled services	500*	950	100
Total	7,047	8,809	25
Source: Dataquest

Today, many partners would be delighted to know that AMC has taken a shape of
FMS kind of activity for many a customers, who want the suppliers and
implementers of their IT infrastructure to take complete service and support
ownership of the same. What this means is that customers are looking at SIs or
solution providers who can't just provide hardware/software solution but also
manage it over a period of time. This could mean that partners are now expected
to look after the proper hardware/software functioning and provide with an
appropriate solution if it is not.

Typically, in an FMS kind of arrangement, the SI is expected to provide with
some resident engineers at client site. "However, SIs should not mistake
AMC plus a few resident engineers to be FMS. True FMS involves more complex
activities like resource optimization at client site and managing the IT
infrastructure with a sense of ownership," remarks Bimal Raj, CEO, Allied
Digital Services.

He also points out as to why such a service concept appeals a lot to
customers. "If they were to do it themselves, they would appoint couple of
in-house engineers. But what happens if their engineer quits or goes on a long
leave suddenly. Do they have a backup option? No. That's where SIs can play an
important role by saying, look we will provide engineers and even if one doesn't
report to work, we have a pool of other engineers to look after the
issues."

Hence for Allied, of its service revenues (which contribute about 30% to the
total revenue and 50% to the bottomlines), FMS makes for the majority portion.
The company also offers third-party maintenance, hardware/software migration
services, test and repair services and network management services. With a
strong expertise and nearly two decades of experience in the business, the
company is now also undertaking consultancy-level activities like project
management (involving design, sizing, testing and roll-out), business continuity
services and customized software development. And quite a few companies like
Allied seem to be taking the same path to prosperity.

EVER-EXPANDING SPACE

Unlike product business, where one tends to hit a full-stop in terms of
variety, USPs, differentiation, innovation, etc; in services the room to expand
one's value-proposition is immense. Take for example FMS itself. As mentioned
earlier, few years ago FMS implied few resident engineers at client site taking
care of AMC activities. Today, however, the overall ambit of FMS itself is
expanding to include new specialized strains like managed services and technical
help desk.

Again take the example of network integration. Until few years ago, it would
mean providing required hardware and software for setting up a network. Today,
it has come to include activities like network design and audit, capacity
planning, network management and going to higher levels like remote management
as well.

Network Solutions (Netsol) is one such company that has shown the way to
escalate in the services value chain. From being a simple network integrator,
today the company manages business-critical networks of many of its clients
through its remote management center (RMC). And these are not just domestic but
also international clients.

Today, 40% of Netsol's revenues comes from offering these high-value
services. And it is betting heavily on remote management. "Markets in the
US and Europe are already used to such a concept and pretty soon in India too
remote management will become a norm. This would be largely driven by the
phenomena of enterprise's IT infrastructure management being outsourced to
third-parties like us," opines Sudhir Sarma, MD, Netsol.

Other progressive SIs like Apara Enterprises and Omnitech Infosolutions too
are putting their money on remote management. Avinash Pitale, Director, Omnitech
feels that customers would soon want to get rid of non-core processes and in
turn expect a third-party to manage and maintain their IT infrastructures,
preferably from a remote location. "Customers now realize that it is more
important to focus on their core strengths and business areas than devoting
in-house resources to business-enablers like IT," says he. Omnitech is
already remote managing IT infrastructure for some international clients from
offshore locations.

Customized software development and maintenance is another service area,
where many SIs can be seen venturing

these days. While packaged software implementation continues to bring in large
revenues, partners are able to provide a great value to SME kind of customers,
who find it difficult to invest heavily on application like ERP, CRM and
business intelligence from MNC vendors. They prefer low-cost yet effective
solutions, which can meet their business needs in an optimal fashion. And SIs
have been doing a great job in providing them with specialized ERP/CRM
solutions.

MONEY MAKES MONEY

Unlike product business, where a partner could expand his portfolio by
enjoying credits from his distributor, service business is investment-intensive.
The more you invest towards people, skillsets and service infrastructure, the
more higher you can climb on the value-ladder. Also, what needs to be kept in
mind is that services is a people-driven business. And this calls for not just a
one-time but constant investment to ensure that best of the manpower is retained
by the organization.

What is more significant in the services business is that business is largely
won not on price but on differentiation. How well can an SI offer differentiated
service from his competition is what will determine which way the customer would
go. "In our organization, the emphasis is on imparting niche training to
our staff. So in our portfolio, while we may not be offering the entire spectrum
of services, the company would be very strong and credible in the areas that it
does," points out Avinash.

He further informs that Omnitech invests between 5-6% of its services revenue
back towards training its service professionals and that it would only be hiking
up this number in years to come. Allied Digital on the other hand, has made its
training and certification activity process-driven and the decisions on the same
no longer are taken on an ad hoc basis.

Talking of differentiation again, companies are now investing on acquiring
standards certification like BS 15000 as well. Some have in fact gone a step
ahead to work on global frameworks for service deliveries called ITSM (IT
service management). What is also giving many SIs an advantages over their
contemporaries is their decision to invest on establishing a wider geographical
presence. Customers, especially, large enterprises with multi-location presence
today prefer an integrator/service provider, who can manage all his branches
across the country.

As a matter of fact large MNC service providers like IBM Global services and
HP Services too take help of smaller SIs to ensure last-mile implementation and
services. Something that should be a food for thought for the small or mid-sized
SI organizations. The very fact that giants like IBM or HP cannot go about
building up their own service set-up in a geography as diverse as India, gives
an opportunity to partners to quickly ramp up their presence either on a
regional or a national level to offer partnerships to larger player or if
infrastructural capabilities permit, compete as well.

THE ULTIMATE CHALLENGE

Realizing the need to upscale themselves in terms of service capabilities,
while many partners may decide to invest towards offering high-value services,
the big question that haunted the AMC business-and eventually killed it-still
remains. Will the customers realize the true worth of an intangible offering
like services and pay up?

That's a challenge, which every partner looking to make a significant mark
in the services space will have to face. Because unlike products, where one can
win a case on comparative pricings, product specification and many other
tangible factors, in services one has to win customer's confidence in his
ability to deliver a per the expectations. Only then the client would be willing
to pay.

Also the fact, that competition will always try to bring down its pricing,
and at times offering services dirt-cheap by bundling it with product sale, the
genuine service-oriented players will have to do a lot of convincing to make
their clients pay.

With the concept of SLAs (service-level agreements) more becoming a norm,
customers now demand a far higher accountability on service deliverables. And if
partners really want to make services a profitable proposition, they will need
to differentiate themselves at the same put in place skillsets and
infrastructure to support the differentiated offerings.

GOLDIE

GLOSSARY OF SERVICES

AMC or annual maintenance contract is one of the oldest and most widely
practiced forms of services offered in the field of IT. However for many years,
it has essentially meant installation and maintenance of PC, servers and
peripherals. Customers typically assume AMC to take care of anything going wrong
with the hardware or software. Once a high-margin activity, today it is a
bleeding business proposition.

FMS or facilities management services started off as AMC re-defined. It
implied that a service provider/SI would give a fixed number of resident
engineers to look after day-to-day maintenance of PCs/servers at client site.
Has evolved a lot since then. Today includes activities like help desk, resource
optimization, managed services and so on. 

NMS or network management service is essentially an FMS-kind of activity to
manage the networks. It involves monitoring of networks, ensuring application
uptime and bandwidth management. Specialized NMS includes disaster recovery
services, a trend very soon to become a norm across large enterprises.

Remote Management comes into picture when a network is managed from a remote
location. Only a handful of players offer this currently. But with
infrastructure management becoming increasingly outsourced, it's set to become
the hottest thing around.

Application maintenance is another area that is fast becoming a good
opportunity area for partners, what with more and more business-critical
applications being deployed across enterprises. A growing need for enterprise
application integration (EAI) too is imparting momentum to this activity. 

Customized application development as part of systems integration business is
quickly picking up. Many a times, there's a wide variety of deployment in
terms of hardware and software and customers want some customized solutions to
ride on top of these deployments to meet their certain business objectives.
Quite a lucrative line of services.

Implementation service is becoming hot with more and more deployment of
storage and security solutions. This is a mix of hardware and software-centric
activity.

Specialized security service includes offerings like formulating security
policies and procedures, conducting security audits, implementing secure
identity management and security certifications.

Consultancy is the highest level in the value-chain of services that one can
currently reach. Can be offered at various levels starting from application
consulting going as high as business consulting.