Managed services boom
Corporations in the Middle East are warming to service models because their IT infrastructures are becoming increasingly complex, necessitating highly trained IT specialists and contractors.
Managed services are rapidly becoming a strategic option for IT savvy CIOs in the Middle East and also around the globe. Services vendors are providing discreet outsourced IT functions or a cluster of processes, consolidating execution and supervision of those activities on a turnkey approach by using contingent workers.
A managed service provider saves money for its clients and provides expertise in areas of IT that are rapidly changing, but whose internal mastery is not vital to clients. A report from Kelly IT Resources says corporations view this approach as a way to free up resources to devote to their core competencies. The UAE’s spending on IT services rose by 12.7% to US$308.5 million in 2004. According to global research firm IDC, end users in the region are moving away from the basics of implementation and support to customisation and outsourcing.
In addition, enterprises are warming to service models because their IT infrastructures are becoming increasingly complex, necessitating highly trained IT specialists and contractors. As a result, IDC expects the region’s IT services market to grow consistently at approximately 12% for the foreseeable future, eventually reaching more than US$535 million by 2009.
A private equity group led by Silver Lake Partners’ move to acquire financial technology giant SunGard Data Systems will also push the global services market to another realm. The transaction, which is reported to be worth an estimated US$10.8 billion, is expected to close later this year. Tony Lock, chief analyst at Bloor Research, says the acquisition is one of the first steps that will eventually lead to an IT landscape dominated by service-based offerings, rather than the current practice where most enterprises manage their IT infrastructures internally. "It comes down to economies of scale. The big IT companies are creating more flexible solutions that you can provision dynamically in response to changing business pressures," notes Lock. "In 20 years there will be very few companies running IT infrastructure internally. They'll be buying services.”
The concept of managed services is a growing discipline for a number of reasons, according to the Kelly IT Resources report. To begin with, there is a rapid rise in the number of organisations that provide services. As these companies acquire more corporate clients, they establish economies of scale that allow them to provide services at an extremely cost-competitive price. They also develop an expertise in a particular IT realm, which enables them to deliver more informed and increasingly reliable performance, the report states.
Competition intensified among IT services vendors in the UAE in 2004 and local players dominated the scene. The leading players included Mideast Data Systems, Emirates Computers, Computer Network Systems (CNS), Mercator and GBM. However, no one vendor controlled the market, with the top ten only accounting for 54.2% of total revenue. "Things have really heated up between the main IT services providers this last year and are going to get hotter this year," says Philip van Heerden, analyst at IDC. "Government-owned firms have entered the fray, often winning key government contracts and reducing the available business for private vendors,” he adds.
Applications consulting and customisation was the largest single IT services segment in the UAE in 2004. Hardware support and installation was a close second and systems integration third. These foundation markets together made up just over half of the total IT services revenue.
Of these three, systems integration grew the fastest, with revenue jumping up by more than 18% in 2004. "However, the real barometer of maturity is the outsourcing segment," says van Heerden. "Outsourcing was the sweet spot last year in terms of growth. To take advantage of this, providers will need to re-invent themselves almost continuously, demonstrating clear specialisations that appeal to potential clients. While larger firms may aim to be one-stop shops, smaller firms will be better off finding a niche in which they can excel."
The UAE government was the largest single vertical sector in the region’s IT services market in 2004. Banking was second and telecommunications was third, a step ahead of transport. Together these four verticals were responsible for 45.5% of spending on IT services, the relatively modest number pointing to the diversification of the UAE economy over the last few years. Nevertheless, these top-spending verticals will likely be the most dynamic over the next couple years. "E-government is being pushed hard at all levels," says van Heerden. “Financial institutions have a plethora of regulations and complex IT that will require more services, the region’s telecommunications sector is being liberalised and a new airline is in town. Although competition for IT services customers will be fierce, there will be lots of opportunities.”
Once organisation that is successfully exploiting the managed services boom is Sahm Technologies, a subsidiary of Emaar Properties. In December 2004, the firm secured a deal with Indian services giant Wipro to provide Oracle e-business suite application management services for customers in the Middle East. CEO of Sahm Technologies, Arvind Bhatnagar, believes the regional market is ready for managed services, however, he advises companies to be cautious. “Educating staff is necessary,” he says. “Implementation is one thing, but sustenance is a totally different ball game,” says Bhatnagar.
The partnership is aimed at delivering cost-effective services that are key to a client’s requirements. This is thanks largely to Wipro’s large IT, consulting and research and development (R&D) resource pool. “There is always pressure on your bottom line and such partnerships help ensure that managed services methodology works,” he adds. Wipro has established a regional presence since 2001 and has over 400 consultants at its two regional offices. Back-office work takes place in Bangalore, with the pair working as one integrated team to help deliver service level agreements (SLAs). “The company’s relationship with Sahm is strategic and expands Wipro’s services in the region,” Bhatnagar explains. “Both companies want to bring new ideas to the market. These will take time to get bedded, however just a couple of success stories will make others follow suit.”
Raman Sapra, Middle East regional manager for Wipro, shares Bhatnagar’s optimism. Sapra underlines the importance of the region to Wipro, citing the company’s deals with Dubai Metals and Commodity Centre (DMCC) and Qatar Petroleum. “Managed service is a new concept and customers are cautious and they should be,” he adds. However, Sapra concedes there are challenges like maintaining clear communication between businesses and technical teams associated with managed services. “Customers are taking firm steps and using the understanding of initial pilot projects to build relationships with IT companies,” he states.
Regional integrator GBM says governments in the UAE are investing heavily on infrastructure projects planned for public and private sectors. This not only drives the need for hardware, software and networking solutions but also the need for support, says Jim Massey director of professional services at GBM. “[Regional] companies are starting to [conduct] business via the internet, mobile phones and PDAs. These solutions have to be aligned to business processes and this is [where services come into play]. In the private sector, businesses are aligning to drivers such as OnDemand computing, ITIL best practices and Open platforms. Services are required to get the best return on these investments,” Massey adds.
“High oil prices, private sector investments and the globally accepted legislative framework of the UAE means there is a great deal more liquidity in the market driving the stock markets and financial institutions to growth not seen in the rest of the world. This places pressure on the existing systems which means that services are required to design, develop and support the new generations of systems the market needs.”
Tony Alam, managing director of CNS, shares Massey’s sentiments. The region’s IT industry has matured over the past few years. Today, there are an increasing number of CIOs that entertain the idea of allowing third party organisations manage their day-to-day technology requirements. This approach has proven to be an ideal solution for enterprises that are focusing on their core offerings, he says.
“In addition, if you take a thorough look, the verticals within every large industry are heavy users of IT services. As for the private sector, I would say large multinationals go for [managed services]. Although we have been approached by a number of mid sized private entities that are interested in IT services and outsourcing. Again, it is primarily convenience and proper allocation of resources. For the verticals, especially in the government sector, sometimes there are limitations on hiring additional skilled labour or manpower for specific projects, so the project is outsourced,” Alam explains.
The critical nature of niche markets demands their procedures and process are flowing seamlessly with minimal interruptions and downtime. “As IT becomes less generic and more aligned to the business processes, the need for specialisation and business knowledge is creating the verticalisation. The needs of the education market are different to those of say stock markets or manufacturing, so without this specialisation the client may get a sub optimal solution,” says GBM’s Massey. While the public sector is the biggest user of managed services, GBM says it has seen similar growth and buoyancy in oil& gas, finance& banking, transportation and leisure sectors.
Another factor that is driving the UAE’s services boom is its continuing economic growth, attracting increasing number of foreign investors and creating a lucrative business destination. “Businesses are under enormous pressure to be customer centric by using all means available to be cost effective and process efficient. The more efficient an organisation is in product and services delivery, the better chance it has for survival,” Massey adds.
“An IT services customer realises that in order to focus on the organisation’s core offerings, it should not have to worry about the daily hurdles of managing the company's technology infrastructure. That is why getting a third party to take onboard that burden is an [attractive] proposition.”
CNS attributes its success in the UAE’s services market to meeting customer demands. The integrator says it is crucial for managed service providers to understand customer demands and facilitate them accordingly. Corporations are not looking for ordinary service providers, they are on the lookout for a service provider that can develop solutions, carry out deployments and manage their requirements. “We have to bare in mind the only way customers move in that direction is when service providers invest heavily in their knowledge, competence and partnerships. Customers are not willing to jeopardise the integrity of their IT environment. For this reason [end users] will only work with entities that enjoy an impeccable market reputation,” enthuses Alam.
While major vendors are now making efforts to convince enterprises to trust them or their local partners with elements of their IT management, CIOs are starting to realise that by handing over responsibility for some of the day-to-day running and monitoring of their IT infrastructure to an experienced third party they can focus better on their core competencies. As the Abu Dhabi Islamic bank has found, that outsourcing has enabled it to lower the total cost of ownership (TCO) of their systems, allowing the bank to rest assured that its networks are maintained with the latest technologies.
“When we started investigating the possibilities of managed services back in 2003, we were not convinced by the prospects available at the time — we concluded the market was not mature enough at that time. There was only one vendor (Datafort) that was ready in the region at that time and we did not want to risk it. But two years on, managed services is providing the bank with a systematic approach to handling our IT requirements, and many other organisations are starting to understand the potential of this option. I believe this is a trend that will gain momentum,” says Adel Ahmed Al Zarouni, the senior vice president of IT at the bank.