Services as Commodity
The big theme for outsourcing and services in 2004? Without question, it was the rise of commodity outsourcing.
The cautious rebound in IT spending has meant that IT budgets have had to run a gauntlet of skepticism at many companies. Gone are the days when the mere mention of IT was greeted with an open checkbook. The memory of too many large, expensive and highly customized exercises in systems integration for things such as ERP deployments has been too fresh in the minds of corporate finance officers. However, companies were willing to sign smaller, more manageable deals with demonstrable savings.
The big deals have not worked out that well for service providers, either. No company has felt the sting of megadeals gone bad as sharply as Electronic Data Systems. Big, money-losing contracts such as the Navy Marine Corps Intranet project led to a shake-up at the venerable integrator, including the arrival of turnaround specialist Michael Jordan. In place of large, highly customized projects, EDS will offer far more standardized and repeatable services, in league with leading vendors such as Cisco and Microsoft. This is EDS Agile Enterprise strategy, and its geared to lowering EDS cost structure andas far as is possibleguaranteeing a profit to EDS on each deal.
Well before EDS saw the light, Dell began touting commoditized services when it entered the services business a couple of years ago. Dells offerings are closer to product support than systems integration, and they mirror the companys low-cost, industry-standard approach to manufacturing computers.
The move to smaller, componentlike deals also appears in the trend of multisourcing, or parceling out your data center, business process, network and other IT infrastructure pieces to different providers. Procter & Gamble, for example, signed up Hewlett-Packard for a big IT infrastructure deal in 2003 and followed that up by handing its HR processes to IBM. In March, P&G gave the nod to HP for its accounts payable operations.
General Motors announced in the pages of eWEEK that it would embark on an ambitious multisourcing strategy a year and a half ago, seeking to break large chunks of its IT work into smaller pieces and then benefit from market forces as different outsourcers competed for the pieces. GM is not ready to offer a detailed progress report of how this strategy is working, and I have not heard other companies expressing their outsourcing strategies in quite the same way.
The motivations behind multisourcing are clear. When an outsourcer is, in effect, the monopoly provider of IT services to a customer, there is no motivation to lower costs and increase performance. The perfect example of this was GMs acquisition of EDS, which became a captive IT provider to the automaker. By all accounts, it did not work and motivated GM to try multisourcing instead. At the same time, its too soon to take stock of all the benefits of multisourcing. P&Gs efforts are still in progress, and many industry observers remain skeptical that GM will succeed in getting service providers to cooperate as well as compete.
Its no secret why vendors are eager to get services deals: The profits are there. As Ann Livermore, HP executive vice president of the Technology Solutions Group, told an analysts briefing in Boston recently, HPs profit margins improve dramatically when services and software are sold along with servers. IBM has known this for some years, as it has been shifting its emphasis from hardware to services and software, finally selling off its PC manufacturing to Lenovo Group.
The trend toward commodity outsourcing is going to put pressure on service providers profit margins. Thus, service providers will send work to the low-cost sources wherever they may be in the world. So, although your outsourcer may appear to have an American face, the work may well be done elsewhere.
The commoditization of the PC has made being a PC maker a perilous business for all but the most efficient, such as Dell. As services commoditize, look for a similar Darwinian winnowing of the fittest from the fattest.
Stan Gibson can be reached at email@example.com.