Consultants Beating the Slump

Companies involved in technology outsourcing are weathering the economic storm better than most - and in some cases, they're even thriving in the downturn.

Companies involved in technology outsourcing are weathering the economic storm better than most - and in some cases, theyre even thriving in the downturn.

Corporations such as Electronic Data Systems, IBM and Keane that have large outsourcing and consulting organizations were able to perform much better than the overall technology sector in the last quarter, because of the strength of their outsourcing arms.

EDS was able to boost its revenue to $5.56 billion, an increase of 16 percent, in the latest quarter. More important, the company signed $6.8 billion in new contracts, up $600 million from the same quarter a year ago. IBM beat analysts expectations, thanks in part to $10 billion in new outsourcing contracts. And Keane, which develops applications and then manages them on an outsourced basis, saw a 25 percent jump in new bookings, to $310 million, in the third quarter.

"Were pretty bullish, even though this is the worst tech economy weve seen in a decade," said Larry Vale, a vice president of Keane in Boston. "Our outsourcing business has been growing for some time, but certainly [the recent jump in contracts] is related to the focus companies are placing on their core businesses and a desire to have fixed costs."

Keanes wins in the last quarter include a $127 million deal with the U.S. Air Force, and since then the company has signed a $500 million outsourcing contract with an undisclosed client.

I-managers and analysts said the move toward outsourcing illustrates economic forces and changes brought by the Internet.

"Outsourcing traditionally does better during an economic slump," said Bruce Caldwell, a senior analyst at Gartner. "Its always been a way for corporations to reduce costs, and to remove some financial assets from their portfolios. Beyond that, fundamental changes have been taking place over time."

Financial Benefits

The Internet makes it possible for corporations to shift responsibility for the management of applications from their own IT departments to software vendors, or to third parties such as application service providers (ASPs). In so doing, they can take advantage of the financial benefits of sharing skills and infrastructure resources.

Gartner is in the midst of revising its outsourcing forecasts, but earlier this year the firm pegged the North American market at $47.5 billion, a 13.6 percent increase over 2000. Perhaps the biggest change taking place is related to the decision-making process. In the age of electronic commerce, much of the responsibility for implementing Internet initiatives has shifted to business units. And those units are more open to outsourcing.

"Our IT people are very good, but theyre good at what they do," said Kevin Delahunt, Sargento Foods senior vice president of e-commerce. Sargento, a $425 million food processing company in Plymouth, Wis., recently embarked on an e-commerce project to sell its products directly to consumers and corporations over the Web. Delahunt said he initially looked at doing the project internally, partly because he wanted to make sure the e-commerce operation would be integrated with the companys internal applications. But after analyzing the costs and benefits, Sargento decided to outsource the entire e-commerce initiative to Digital River, a Minneapolis outsourcing company.

"We wanted to have an e-commerce engine up and running in a very short period of time," Delahunt said. "We looked at the options available to us, and we realized there were a lot of benefits to hooking up with a company thats already doing it."

Sargento is far from alone. In an earnings season full of disappointments, Digital River beat analysts expectations and made the all-important step of turning a profit before acquisition-related expenses in its third quarter. The companys revenue of $14 million represented an 84 percent increase over the third quarter a year ago.

Strength in the sector is not going unnoticed, and a number of companies are changing their business models to capitalize on the trend.

Divine, a former business incubator in Chicago, has been snapping up companies that will enable it to become a managed application outsourcer. During the past six months, the companys acquisitions have included ASP Intira; Web hosting firm HostOne; and a string of e-commerce firms, most notably eShare Communications, Open Market and RoweCom.

ISuppli, an El Segundo, Calif., company that provides supply chain services to electronic components suppliers and manufacturers, has outsourced the hosting of its Web-based application to Divine.

"We cant afford to have system downtime, and it would have been costly to build out the required level of infrastructure to do that ourselves," said Steve King, iSupplis vice president of supply chain solutions. "This way, we take advantage of shared resources."