Outsourcing
Financial Times, 7/3/02: Moving towards computing as a commodity
As internet technologies develop, the IT services industry is being driven by an unstoppable push towards 'connectedness', reports Tom Foremski
Information technology services have become a key focus for computer vendors as computer hardware becomes more commodity-like and as corporations search for complete solutions.
But this sector is no longer as vibrant as it used to be because of the global downturn in IT spending and changes in IT strategy.
International Business Machines, the world's largest computer company, is by far the largest in IT services, generating about 40 per cent of its total revenues. Its success in this area has offered a business model for others, such as Hewlett-Packard and Sun Microsystems, to emulate. But even IBM is struggling - its Global Services business declined 3 per cent in its most recent quarter. Big Blue has been forced to make staff cuts as demand for consulting and integration services has fallen significantly.
Overall, the IT services market is set for relatively anaemic growth this year. It is forecast to grow just 3 per cent in 2002 to Dollars 557bn, according to Gartner Dataquest, the leading US IT research company.
Next year should be slightly better with a forecast of 7 per cent growth. But a return to the double-digit growth, achieved in 1999 and 2000, is unlikely.
Gartner also says IT services providers will have to work harder for the available business with a focus on integration services, where companies tie together disparate IT systems and use internet-based technologies.
"The underlying driver of growth in the IT services industry over the medium term will be the continuing and unstoppable push towards 'connectedness.' The market has only witnessed the early stages that the internet and its subsequent derivations will create," says Ben Pring, chief analyst at Gartner's IT services group.
Corporations have been shelving large IT projects because of the weak global economy and they are waiting for sustained revenue growth. Spending on IT systems typically lags economic recovery by about six months.
In the meantime, corporations are focusing on smaller projects and ones where there is a quick return on investment (ROI). Increasingly, the chief financial officer is involved in final purchase decisions, and this also lengthens the sales cycle.
Some IT services companies are trying to guarantee a specific ROI, but this can be a risky strategy since there are always unseen difficulties, especially when integrating older, legacy systems. One area of IT services that is doing well is outsourcing IT departments.
IBM and Electronic Data Systems are reporting record contract signings. "Companies save money in a down economy by outsourcing," says Dick Brown, chief executive of EDS.
But large IT outsourcing deals are increasingly hard to find, and increased competition is putting pressure on margins to some extent. Also customers are driving hard bargains, which sometimes makes it difficult for IT services companies to make much money.
"Some of the deals currently being signed are clearly unprofitable for the services provider," says Mr Pring.
"Buyers need to understand that deals of this type ultimately impact them negatively as well. Unprofitable deals lead to reduced service quality, reduced innovation, and inevitably a breakdown of the corporate relationship. Reducing cost is a laudable objective but quality has a price worth paying."
However, when corporations have been laying off thousands of workers, there is a knock-on effect on outsourcing contracts. "If a large multi-national organisation removes 10,000 employees at a stroke, as has been happening recently, what happens to the PCs, network connections, servers and applications that they used?" asks Neil Barton, head of the IT practice at Compass Management Consulting. "No one wins." He advises that company and outsourcer set up contracts that provide adequate protection for both parties.
HP is beefing up its IT services business, which is dominated by repair and maintenance services. Although this part of the sector has had relatively low margins compared with consultancy and integration services, in today's tough times it is a solid and profitable area. Also, the business provides dependable revenue streams and generates cash for other services ventures.
HP is hoping to undercut IBM Global Services by focusing on areas of expertise where it can quickly and effectively provide IT services targeted at specific vertical industries such as airlines, providing total solutions. However, HP, Sun and others are somewhat hampered by their identity as proprietary computer vendors.
Big Blue has made it clear that its Global Services group is agnostic when it comes to hardware and software, and it is one of the largest resellers of HP and Sun equipment. This vendor independence has enabled it to win business, and also support and integrate a wide variety of computer platforms.
But IT services are a very people intensive business. And it requires processes and effective management to run a successful operation. To some extent, IBM is leading the way to automate many types of manual IT procedures, saving on the costs of employing expensive IT experts. This is partly in its self interest, because it can use IT system management technologies within its own Global Services business to cut operational costs, and sell those tools to corporations to help them reduce their IT staff costs. These typically account for about 75 per cent of IT budgets.
HP, Computer Associates and others are also offering and developing improved IT system management tools that could potentially slash the costs of running large computer data centres significantly .
The emerging concept of web services will also help alleviate the need for IT services in integration projects. This is because the web services approach is based on several accepted standard internet technologies, such as XML (extensible mark-up language). This means that computer systems can be more easily connected with each other because they have common data formats.
Web services also cuts application development costs within corporations. And as companies extend their IT systems beyond their walls to include suppliers and customers, standards-based web services will enable IT applications to be more easily leveraged across a large group of users.
However, there will still be a need for consulting work to ensure that the right IT architecture is in place. And even though the current market for IT services is weaker than it has been, analysts agree that it will not go away.
Over the long term, some IT services will become a utility. IBM, HP, and Sun, for example, are promoting the concept of grid computing in which computing resources become a utility. In a similar way that electric power is delivered to a business, companies can buy "computing cycles" and thus buy more computing power as they need it, instead of having to provision expensive extra IT capacity for peak usage times.
However, computing as a utility is very much in its early stages and will require a substantial cultural shift. Many companies still want their own computers, and these are sometimes referred to as "server huggers." But in the long term, computing as a utility is inevitable.
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Financial Times, 7/3/02: Service vendors in rush to target a hot market area: BUSINESS PROCESS OUTSOURCING
Would-be clients are warned that sales prowess may outstrip delivery capability
By ROD NEWING
Business process out-sourcing is very different from outsourcing code development or managing information technology, but is often confused with both. Code development involves a third party, often in another country, writing software code that is then run on the organisation's own computers in its own premises. IT outsourcing involves a third party taking over and managing the organisation's existing hardware, software and their associated support staff.
Business process outsourcing (BPO) takes this a major step further, with the third party taking over parts of the user organisation and its staff. It delivers an entire business process that was previously carried out by internal staff. Areas that have been outsourced so far are transaction-intensive, such as accounting, payroll, personnel administration, call centres, electronic mail response, logistics, billing and other clerically-intensive back office activities.
"One of my biggest worries is that because it is such a 'hot' part of the market there are vendors who are trying to affiliate themselves in some way with BPO as a marketing exercise," says Robert Brown, senior industry analyst at Gartner.
"One of our mantras is 'do your homework,' because BPO is not software development or IT outsourcing. It is fundamentally different and about the management of full business processes."
He warns clients to beware of the increasing number of vendors that are using BPO as a re-labelling exercise, which it certainly is not. "There are very few experienced BPO vendors in the world," he warns, "and sometimes sales prowess may outstrip delivery capability."
Gartner recognises four separate groups of BPO service providers, starting with two "old hands". These are the big management consultancies, particularly Accenture, PwC and Cap Gemini Ernst & Young, and the traditional IT outsourcing players, such as EDS, CSC, Capita and Atos-Origin.
The third group are specialists that focus on one very specific niche process, such as Automatic Data Processing for payroll, Rebus for personnel administration and Hayes and Ryder for logistics.
The fourth category covers the new "pure play" BPO vendors, such as Exchanging, Exult and Vertex which are dedicated exclusively to the BPO model. "They have come from nowhere and won very significant contracts with some of the biggest companies around the world," says Mr Brown.
Unlike software development and IT outsourcing, where the main objective is to save costs, the objective of BPO is to increase efficiency as part of a programme of corporate transformation. It is therefore vital for the service provider to have a deep understanding of the business that is to be supported.
This is clearly a problem for the offshore software development companies, who grew up by exploiting their lower wage costs and higher skills bases, with India being most successful. They have been able to capitalise their success by winning some major BPO contracts.
However, this brings problems. Success brings inevitably rises in wage rates, so the cost differential erodes. Some Indian companies are already sub-contracting work to lower cost countries. Then there is also the problem of political risk.
"More time and resources are spent at a senior level managing an offshore project," warns Andy McCallum, managing director of CMG Managed Services, "including the costs of long-haul flights. This can quickly reduce the original cost savings."
The solution is for organisations to contract with a global service provider, rather than indigenous company. The service provider can then worry about risk and wage rates through a "global resourcing" policy that spreads the work over different regions and minimises cost.
"Customers should not care where the work is being done, because the risks should lie with the vendor," says Ismail Amla, vice-president for business process outsourcing at CSC, "as long as their vendor is committing a price, service and quality level."
The whole point of BPO is not for existing processes to be managed more cheaply by a third party, but for the service provider to transform the operation. This requires a major effort in consultancy, creating a new culture, developing a new simplified management structure and procedures and providing more technology support, if it is required.
"Being able to strip a process to its essential components and apply a very transformational model of process delivery to an existing organisation is effectively how service providers make their money," says Mr Brown. "They are very selective about the companies they engage with. If the customer is unwilling to undergo the process transformation required to fit their model for process delivery, it blows apart their profitability."
David Locke, managing consultant at Compass Management Consulting, explains that BPO can be expensive in the short term, because of the amount of research it takes for the service provider to analyse the existing processes and technology of prospective clients. Some even charge for the investigative project.
According to Mr Brown, the "old hand" service providers have an edge because of their experience in managing multi-year client relationships and contracts.
"We have learned some key outsourcing science in the last few years, which plays a big part in success," says Mr Amla. "Winning a major outsourcing engagement depends on understanding long term relationships, relationship management, flexible contractual agreements and financial reengineering."
The next step in BPO is electronic delivery of processes over the internet by a business service provider (BSP). This will take the "software as a service" vision of application service providers (ASPs) to the next logical stage.
Tim Catling, a member of the management group at PA Consulting, points out that BPO has been around for 10 years. "It is not new," he says. "The advances in technology, in confidence and the increased business pressure on everybody make it more likely to be considered in future."
Mr Amla points out that we are now at an intersection of imperatives and enablers. The imperatives are to save money, improve service, be flexible and react quickly to the market. The enablers are the ability to remotely access a process and the availability of suitable service providers.
"It is not an outsourcing debate," he concludes. "It is about organisations fundamentally restructuring themselves with flexibility as the paramount objective. It isn't a question of outsourcing non-core activities or getting a service more cheaply elsewhere, but a question of getting the best process, which is a key differentiator from the old model of outsourcing."
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IT Management
Computerworld, 7/1/02: Rules of Engagement
By KATHLEEN MELYMUKA
Before the economy tanked, when hot skills were at a premium, a Houston oil company's IT department brought in quite a few high-priced contractors to get some key projects done. Talent was hard to come by, and IT couldn't be too choosy. Some of the contractors lacked social skills, and resentment began to build between them and the permanent staff. Before long, permanent employees began to leave. Frantic, the IT manager filled the gaps with more contractors, which encouraged more walkouts. Soon, contractors made up half the workforce, the IT culture was lost, and morale was shot. At last report, the company was still trying to figure out what went wrong.
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EDS
Infoworld, 7/2/02: EDS cuts 2,000 jobs, blames spending slowdown
By Juan Carlos Perez
ELECTRONIC DATA SYSTEMS (EDS) will cut 2,000 jobs, or about 1.4 percent of its workforce, a move due to a spending slowdown and unrelated to the IT services provider's relationship with WorldCom Inc., EDS executives said Tuesday during a conference call.
"It's related to contracts, and some of our clients have pulled back spending -- you all know that -- and we have to adjust our (work)force to workloads and that's what this is about," said Dick Brown, the company's chairman and chief executive officer, during the call with financial analysts, which was broadcast over the Web.
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Microsoft
Reuters, 7/202: Microsoft Unwraps New Initiative, Code Names
SEATTLE (Reuters) - Microsoft Corp. (MSFT.O) over the past week has quietly unveiled details about a key new security initiative code-named Palladium, giving the first glimpse into its plan to deliver on its promise of ``Trustworthy Computing.''
Named after a protective statue of the Greek goddess of wisdom, ``Palladium'' is being used to describe a broad-based security system for the Windows operating system that will involve both hardware and software.
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PC Industry
San Jose Mercury News, 7/2/02: IBM retools PC business for a changed market
By Jon Fortt
NEW YORK - IBM is trying to reinvent its PC business at a time when few companies can figure out how to sell them and still make a profit.
In an effort to keep PCs from dragging down increasingly elusive profits, International Business Machines has engaged in a slash-and-burn campaign over the past three years.
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