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IMS: Why companies are running after this? - Views on News from Equitymaster
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IMS: Why companies are running after this?
Sep 19, 2007

For some time, let us shift from our focus on rupee appreciation, sub-prime crisis and a possible US slowdown etc. etc. Today, most Indian IT companies are looking for deals in the Infrastructure Management Services (IMS) space. In this article, we take a look at why IT companies are running after this and the technicalities behind IMS. We earlier gave a brief write-up on IMS. IT outsourcing can be broadly divided into 2 sub-segments.

Application maintenance services, as all of you know, are the bread and butter of Indian IT companies. Indian companies specialises in developing and maintaining applications. IMS on the other hand, can further be divided into 6 sub-segments as given below.

The services offered in data centre, server management, storage and desktop services are together called Enterprise computing and are very critical in the day-to-day operations of an enterprise. Companies can manage its operations without services desk or network support for a couple of days but managing operations without servers and storage is impossible. So enterprise computing becomes very critical for the success of the organisation.

Just like services, the clients of IT companies in the IMS space can also be segregated. They are divided into two categories.

The distributed computing clients take advantage of low cost associated with offshoring. They retain the infrastructure and investments on future infrastructure with them and just offshore day-to-day operations to the Indian services providers. The key advantage here for the client is reduction in costs of maintenance.

Coming to data centre clients, here the client takes advantage of large economies of scale by installing the client’s infrastructure in data centre facilities of large IT services provider like Wipro. In this, the benefit to the client apart from cost advantage also includes reduction in capital investment.

Why companies are running after this?
The main reason IT companies are chasing this is the enormous size of the IT Infrastructure industry, which is projected to reach US$ 234 bn by FY10. According to Gartner, the IMS revenues of Indian services providers grew by 72% in 2QCY08. Secondly, IMS is the entry point for gaining access into other large customer accounts.

To explain this in a simple way, suppose an IT company wants to service a large client. Its entry point to that company will be the IMS. If it serves the client well, then the client will allow it to move up the value chain and further outsource some of its other functions like the HR and F&A operations. Success here is likely to lead to still higher value added job of maintaining and developing applications and so on and so forth. The entire process might take at least 2 years to 3 years. But this is how IT companies gain access to larger accounts and a 5 million dollar client turns into a 50 million dollar client.

The Indian players are new entrants in this field. Currently, the leader in this space is HCL Tech, which derives 14% of its revenues from IMS. Wipro derives 11%, TCS 6% and Satyam 4%. The Indian companies are bound to face stiff competition from its global counterparts like EDS. Another concern in this arena is lack of entry barriers, which make the field even more competitive. On the positive side, the IMS market is growing at a very fast pace and Indian IT companies can certainly target a bigger pie in this.

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