labels: cisco systems, infotech
New opportunities in managed services news
28 April 2005

As basic IP connectivity becomes a commodity, service providers who differentiate themselves with high-margin, IP-based managed services will gain a competitive advantage says Sudhir Narang*, senior vice president, SP & Government, Cisco System.

Sudhir NarangThe advent of globalisation has seen Indian enterprises and small and medium business (SMBs) increasingly leverage technology to drive productivity and higher economies of scale. As India moves towards the WTO regime the pace of ICT adoption will only increase. India''s total spending on ICT is expected to grow by 17.39 per cent to $26.39 billion this year, aided by higher spending in the consumer and manufacturing sectors, says a study by World Information Technology and Services Alliance.

The country''s ICT spending as a percentage of the GDP in 2004 is expected to be at 3.7 per cent, as per the study. This increasing adoption is giving birth to a new trend of managed services, where enterprises and SMBs are looking to out-task some / all of their networks / services. Enterprises are increasingly focusing on their core competencies and looking to out-task these.

This presents a tremendous business opportunity to service providers that already have a mega network in place and have the experience in managing networks. Indian service providers are investing in building next generation broadband networks that enable them to provide superior connectivity and value added services. Let''s take a closer look into what managed services offers to enterprises.

Today, many enterprises are adopting IP-based ICT solutions to drive down operating costs, increase functionality and improve quality. Further, outsourcing certain networking solutions allows them to reassign IT staff to higher-value work such as developing important new applications, rather than managing the network. Most service providers have already built out the network so it''s cheaper if many enterprises or SMBs share it rather than build their own. Every enterprise, depending on its need, can out-task either the whole or a part of its networking requirements. So what''s in it for service providers?

Opportunity for service providers
The managed services opportunity for service providers is projected to be substantial. In the US alone, Gartner estimates the total managed services market will be around $31.5 billion in 2006. Managed services provide service providers a great opportunity to move up the value chain and increase their revenue streams. It enables them to go beyond providing just the pipe and basic connectivity services. It allows them to manage the end point of the pipe — the customer premise equipment (CPE) — which creates more stickiness with the customer, reduces churn, and opens the door for more professional services and higher-margin services.

As profit margins on transport continue to plummet, managed services will play an ever more important role in service provider viability and profitability. According to a recent report from Gartner, going forward, transport bandwidth will only be as valuable as the enabling bundles of value-added services and applications that will increasingly require managed data services for efficient operation. Managed services will present Indian service providers the opportunity to drive higher revenues. Let''s take a look at some of the high growth services the service providers can look to offer.

High growth services
Though each is in a different phase of its life cycle, IP VPNs, IP Telephony and Security are promising areas in an enterprise for managed services for service providers.

IP VPNs: The enabler
Indian enterprises are increasingly leveraging IP VPN services. As per a recent IDC study, revenues from IP VPN services are likely to cross Rs1,100 crore by 2008 up from Rs230 crore in 2003. Some of the major accelerators are the small and medium enterprises (SMEs) that have started adopting IP-based VPN services. For many enterprises, managing VPNs requires a large capital outlay for equipment and ongoing commitment of human resources. From a total-cost-of-ownership (TCO) perspective, out-tasking is advantageous because many companies can share the costs of one infrastructure. Indian service providers have built next generation MPLS based networks, so it''s cheaper if many enterprises or SMBs share it rather than build their own.

Further, the idea of convergence is slowly gaining ground as companies see the economic and productivity advantages of running their voice, video, and data over one network. IP VPNs lay the groundwork for that convergence by providing a more robust WAN environment that is secure, cost-effective, and more flexible than leased lines or Frame Relay. The power of an IP VPN for service providers is that it acts as a foundation service for other advanced managed offerings, such as voice, security, storage etc.

IP telephony: The rise of the IP PBX
Once companies have IP VPNs, they can build multi-service VPNs and deliver other services including voice and video. An area that is showing great promise for managed services is IP PBX. Research from Allied Business Intelligence, Inc., shows that in 2003, the values of shipments of IP PBX equipment surpassed the revenues generated by legacy PBXs. In India, IDC expects the IP telephony market to grow at a CAGR of 119 per cent to touch Rs13,000 crore by 2005.

According to a Gartner report, IP telephony requires much more external assistance throughout the life cycle, including planning, deployment, and support services, than other technologies such as VPNs and WLANs. The complexity of call servers, unified messaging services, and collaboration tools outweighs the improved simplicity of plug-and-play moves, adds and changes when it comes to relying on external providers. This is a prime opportunity for services companies to deliver comprehensive IP telephony services to enterprises that are entering the planning and evaluation stages.

Managed Security: Strength in Numbers
Security is no longer an IT issue but has become a business issue. Point products aren''t enough. A recent Gartner study found that 97 per cent of the cyber attacks exploited known security flaws for which a patch already exists. So it''s not enough to invest in security products, manpower resources and have a security policy. Enterprises need to continuously monitor their networks and stay abreast of new threats, viruses, patches, etc, which they are ill-equipped to handle. Service providers, on the other hand, run networks for a living. From a market perspective, India is the second fastest-growing network security market in the Asia Pacific Region as per a Frost & Sullivan report. The market was $29.9 million in 2003 and is expected to be $1.42 billion by 2010.

To sum it up, as basic IP connectivity becomes a commodity, service providers that can successfully differentiate themselves with high-margin, IP-based managed services will gain a competitive advantage over others. This will have a positive impact on average revenue per user (ARPU''s) and increased customer loyalty. Indian enterprises depending on their need will look to out-task some/all of their networking to ''capable'' service providers. Service providers on their part need to take the initiative of driving these services to the enterprises.

*The author is senior vice president (SP & Government) Cisco System.

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New opportunities in managed services