Beat the Odds

In good times or in bad, outsourcing is always a safe bet.

If you have any doubts about why some of the big IT consulting firms and integrators are flourishing despite the poor economy, the answer in a nutshell is outsourcing.

This shouldnt come as a surprise to anyone who has been involved in the technology business for any length of time. Typically, whenever the economy tanks, corporate America seeks to cut overhead by farming out its IT operations. Consequently, the major players in this market are reaping some hefty rewards. Earlier this year, as an example, EDS landed a $2.2 billion, 10-year outsourcing deal with Sabre. More recently, it announced new or extended outsourcing contracts worth about $220 million. Similarly, Cap Gemini Ernst & Young signed a $350 million deal with Continuum Health Partners, and IBM has secured a number of big outsourcing contracts, including a $450 million agreement with the largest cable operator in the United Kingdom, NTL Inc. Outsourcing accounted for 40 percent of IBMs $8.7 billion Q2 service revenues.

The major players have been the chief beneficiaries of the current outsourcing boom. For instance, at the time when so many other integrators were getting pounded, EDS Q2 earnings rose 18 percent, and its revenues rose 9 percent. The good news for smaller consultancies and solutions providers, however, is that these deals are often so complex, the big firms bring in numerous other service providers to help implement them. As an example, the $664 million project to outsource the county of San Diegos IT is being carried out by a Computer Sciences Corp.-led consortium called the Pennant Alliance.

Whats more, outsourcing growth isnt likely to slow down even if the economy stabilizes. One potential strong market: midsize and small companies that dont have the resources or the budget to run their own IT shops. Another: the public sector. The Yankee Group notes that with 50 percent of all federal IT employees retiring over the next five years, the government represents a hotbed of opportunity for outsourcers—at least those who choose the right model for delivery.

That can be tricky. The air went out of the ASP approach in tandem with the dot-com deflation, but some analysts see the ASP and MSP models regaining momentum once the economy settles down. Meanwhile, IBM is projecting that a scalable IT utility model will evolve into what Lou Gerstner calls e-sourcing. Frankly, Im not entirely sure what e-sourcing is. Gerstner describes it as the logical extension of outsourcing and projects it will become a $55 billion market by 2003.

Coming from anyone else, numbers like those might sound a tad exaggerated, but remember this is Lou Gerstner speaking. Whos to argue?