NETWORK INTEGRATION: Behold the New Savior

For all practical purposes, 2003—04 was a good year for network
integrators, especially the market leaders. Not only did they register decent
growth in their top lines and bottom lines, they also moved quite a bit away
from pure product sales and built a strong offering of professional and managed
services. In many ways, for the top rung of the network integrators in India,
financial year 2003—04 was a year of services. Almost all the big names in the
business built a strong services portfolio. And with margins on products
abysmally low, it was only services that in effect contributed to their profits.
At the lower rung of the market, however, product sales were what mattered. So
in other words, while selling products or building networks was the end for most
of the small and also for a couple of names in the VOICE&DATA top ten
network integrators ranking, for many of the large integrators network was just
a means that allowed them to up sell their services. In fact a network
integrator's ability to offer services emerged as a key differentiator in the
market place.

On the other hand, not everything was rosy in the network integration
business. The market was overwhelmed by abysmally low margin in products largely
because that is a global trend and also because there was an indiscriminate
competition among companies for top line growth. Even though professional
services commanded a premium, many network integrators were accused of messing
up the market by offering services as freebies. For small integrators, timely
payment from customers was a major issue. In fact, even for large integrators it
was a problem, as they had to forgo many big deals because of longer payment
cycle.

Market Moves On

As per VOICE&DATA estimates, the network integration business had a
turnover of Rs 3,372 crore in FY 2003—04 (as against Rs 2,871 crore in FY 2002—03)
registering a 17 percent growth. Of the Rs 3,372 crore, the top ten integrators
accounted for around 70 percent of the market at Rs 2,372 crore. As for the
network integrators' shares, Datacraft again emerged as the number one with
around 10 percent of the market. Wipro ranked second with around 9.5 percent of
the market and a turnover of Rs 323 crore. Tulip IT services with its focus
mostly on wireless remained at the number three spot. HCL Comnet, GTL, CMC, HECL,
Network Solutions, HCL Infosystems and 3D Networks were the other names in the
top ten club. As for growth, 3D Networks registered the fastest growth in the FY
2003—04 at 120 percent among all the integrators. The company ascribes its
growth to the strong relationships that it has forged with both vendors and
customers and the overall positive market conditions. About 42 percent of 3D
Network's revenues came from the BPO-ITES segment. With a 43 percent growth,
Network Solutions was the second fastest growing network integration company.
While for 3D Networks, growth primarily came from product sales (92 percent), a
good 25 percent of Network Solutions' revenue came from services. The growth
was largely the result of its focus in the BPO-ITES space. Network solutions
also attributes its growth to the investments it made in building a strong sales
and support team.

Services: The New Ace

The vanishing margin on product sales was perhaps the biggest factor that
encouraged the large network integrators towards building a strong services
portfolio. However, a few other factors were also instrumental in the network
integrators' tilt towards services. For example, customers looking for large
implementations preferred integrators who provided them with end-to-end kind of
expertise or what many prefer terming as total outsourcing. When it came to
large networking projects, integrators offering the complete value chain
(consulting, project management, integration, and implementation etc.) have a
distinct advantage.

While the market was still immature when it came to paying for services like
consulting or project management, these skills were surely recognized by
customers as premium services. This resulted in a growing willingness among
customers to pay for services. However, the margin on services was not as per
vendors' expectations.

Moreover, there was a growing tendency among network integrators to look for
incremental revenue from the networks they had built. Network management (both
onsite and from a remote network operating center) was one such service that
helped integrators like Datacraft, HCL Comnet, Wipro, GTL, and Network Solutions
gain an extra edge in the market. Network security service was another area of
focus.

Within services, managed service was certainly a favourite
with integrators like Datacraft (which offers managed network management and
security services from its network operations centre in Bangalore), HCL Comnet
(which provided a complex variety of network management services to its domestic
and international clients from its NOCs in Noida (near Delhi) and Chennai),
Wipro (which offers managed network and managed security services from its NOC
in Bangalore), Tulip IT services (which has NOCs in Delhi and Mumbai), GTL (NOC
in Mumbai) and Network Solutions (NOC in Bangalore). All these vendors have
positioned their ability to offer managed services as a key differentiator in
the market. In fact these companies are betting heavily on managed services for
future growth.

Overall, even though product sales still led the topline
growth, services had a clear edge as far as the network integrators'
priorities were concerned. As much as 27 percent of the total revenues of nine
of the top 10 integrators came from services this year. Integrators like HCL
Comnet and HECL had services revenues amounting as high as 48 percent and 41
percent respectively of their total turnover in 2003—04. Also for a company
like HCL Comnet, domestic and global customers equally drove the high growth in
services revenue. Integrators have not only acquired new customers, but also
offer new services for existing ones.

Market Segments

Like in the previous year, the growth in the network integration business
came primarily from four segments, viz., banking and finance, telecom service
providers, BPO and government. There were a few interesting deals in the
e-business and logistics sector also.

With networking of branches becoming imperative for all
banks, the banking sector continued to be lucrative for network integrators.
There were two kinds of deals in the banking sector-one kind included
implementation of network plus core banking solutions, the second type included
enabling of multiple other services on the network besides the implementation of
network and core banking solution.

One of the most talked about and also one of the largest
deals in the banking sector last year was the contract awarded by the State Bank
of India (SBI) and its seven associate banks, have awarded a $29 million phase 2
contract to Datacraft to implement its nation-wide corporate network. The first
phase of the project was also implemented by Datacraft India, commenced in June
2000 and was over in May 2003. Under the phase 2 of the project, Datacraft India
is doing turnkey implementation of SBI's corporate backbone-known as SBI
Connect-from design, provision, supply and project management. In this second
phase, SBI along with the seven associate banks propose to connect 2929
branches, ATMs and other electronic delivery channels. The project will span
over to FY 2004—05. Another major project in the banking sector was Punjab
National Bank's 500-branch networking done by Tulip IT Services. The deal was
worth Rs 36 crore.

The BPO-ITES market was of a different kind. Here network
integrators did not have much to gain from pure network deployments. The cream
of business in this sector came from deployment of technologies and solutions
that enabled BPO/ITES operations like integration of ACDs, CRM, security,
disaster recovery and workforce management solutions among others. In this
sector, both international service providers as well domestic call centres
provided good opportunity.

IP Telephony and Wireless

On the technology front, IP Telephony and wireless (both WAN and WLAN)
gained traction among network integrators. Datacraft alone is estimated to have
installed 40,000 IP phones in 2003—04. Here again integrators like Datacraft
and HCL Comnet among others also focused on helping their customers manage their
IP networks. In the wireless space, integrators did good amount of business in
both wireless WANs and WLANs. There was not much money to be made on WLAN, as it
was a low value business. There was a fair amount of business in the wireless
WAN (based on spread spectrum radios). Tulip IT Services remained the undisputed
king of wireless among integrators with almost 55 percent of its revenues coming
from wireless. There was also a growing interest in network security
technologies.

Integration to Management

The future growth of Indian network integrators is most likely to come from
outsourced network management and maintenance services. In the recent past
companies like SBI, Bank of India, Thomas Cook, Exide, Hero Honda, Shoppers
Stop, and more recently Dabur have taken a decision to outsource the management
of their networks. One of the largest services deals in the networking space in
2003 was the award of $11.4 million contract by SBI to Datacraft for outsourced
management and support of SBI Connect. The service elements include in-site
managed network services delivered from Datacraft's STARtrac centre in
Bangalore, uptime maintenance services and subsequent management of bandwidth.
The list of such deals is likely to grow in the coming months. And with an
increasing trend towards end-to-end outsourcing, while it would be difficult for
network integrators to win end-to-end IT outsourcing deals on their own, they
can surely be valuable partners to large IT outsourcing firms.

Remote network management is another key trend that has
emerged recently and is likely to get stronger in the coming years. Many of the
network management processes can now be automated over the Web. HCL Comnet and
Wipro, Datacraft and Network Solutions clearly have an edge in remote
management. The international market will be the key to growth for network
integrators especially those having the capability to take care of end-to-end
requirements. As of now, HCL Comnet (with around eight Fortune 500 companies as
its clients for remote infrastructure management) and Wipro have first mover
advantage. CMC also has a few wins in the international market.

Ravi Shekhar Pandey