ervices firms are more important to IT managers than ever. They provide help with strategy, new technologies, and other key issues. The good news is that the number of IT services firms is growing, and there's no shortage of choices.
That's also the bad news. The huge number of IT services vendors means evaluating, selecting, and managing outside help is becoming an overwhelming task, say technology managers. "We easily get 1,000 or more calls a year from companies wanting our IT services business," says Rob Sacco of Osram Sylvania Inc., a lighting company in Danvers, Mass. To manage all those inquiries, Sacco, manager of resource planning at the Siemens AG unit, has a secretary screen his calls, and he uses Caller ID.
The growth of services has been phenomenal. Computer and data-processing services is the country's third-fastest-growing industry, with employment expected to hit 1.6 million by 2005, up from nearly 960,000 in 1994, accor
ding to the Bureau of Labor Statistics. The number of computer maintenance and support vendors alone will grow to nearly 18,000 this year, up from 15,000 in 1994, predicts Coordinated Service Inc., a Groton, Mass., consulting company. And the number of services companies going public is also on the rise, with 22 professional services firms filing initial public offerings last year, compared with just six in 1995 and three in 1994, reports Broadview Associates LLC, an investment bank in Fort Lee, N.J.
Total revenue for all IT services companies will reach $413 billion worldwide in 2000, up from $262 billion last year (see chart: "
Services Boom
"), predicts Dataquest Inc., an IT research company in San Jose, Calif.
This growth is in response to the increased willingness of IT managers to seek outside help with complex, distributed computing and networks. Also driving the growth is a shortage of skilled IT workers. IT managers, instead of stretching their staffs e
ver thinner, rely nearly as much on services firms as they do on their own staffs.
Cigna Property and Casualty, for example, expects to spend fully half its IT budget on outside services companies in the next year, says Stephen Fugale, VP of application development at the unit of Philadelphia insurer Cigna Corp. Cigna P&C already spends about one-third of its IT budget on outside help. "Why keep the work on board when you can buy it when you need it?" Fugale asks.
Almost every IT shop gets some help from outside services firms. According to an InformationWeek survey of 100 CIOs and VP-level IS executives, 94% of respondents get services from software firms, and 89% get help from hardware manufacturers. Also, spending on these services will increase, say more than 40% of those surveyed. And more than one in four say the number of services vendors they use will increase over the next year.
New IT services entrants help bring balance to a market where demand for IT skills outstrips supply. But the
services boom also brings growing pains to some IS organizations. They're struggling to develop processes and skills to buy and then manage their increasing number of services contracts-from strategic IT consulting at the high end, to hardware maintenance at the low end. These users are also standardizing on procurement practices, developing teams of IS specialists, and forming support networks.
Vendors, too, are changing the game. Some have retrenched, focusing on selling more to existing clients rather than gaining new ones. Meanwhile, startup companies are springing up at every turn.
Randy Roth knows what it's like to be inundated with services vendors. Roth, assistant director of IT purchasing at the Principal Financial Group, a Des Moines, Iowa, insurance and financial services company with $60 billion in assets, has about 500 services contracts. A few years ago, Roth might have had 30 contracts waiting to be negotiated at any time. Today, it's closer to 50. "There are so many choices," Roth sa
ys. "Everyone from a former programmer who's gone out on his own to a major vendor making cold calls."
Yet there's still room for more IT services vendors. Dataquest says the the worldwide IT services market, now worth $295 billion, will experience a 12% cumulative annual growth rate through 2000. (See chart: "
What kinds of vendors provide you with services?
")
Stiff Competition
Competitors, which face the familiar services brands of Andersen Consulting, Computer Sciences, EDS, and IBM, include large services units at hardware, software, and networking vendors such as Amdahl, AT&T, Digital Equipment, Hewlett-Packard, MCI, Oracle, Sun Microsystems, and Unisys. Meanwhile, growing desktop-services units at Entex, Vanstar, and other PC resellers are getting into the game. Large corporations in other industries are also expanding their IT services capabilities. These include AMR's Sabre Group, General Electric's GE Information Services, and Lockheed Martin's I
ntegrated Business Solutions.
IS organizations buy from them all, according to InformationWeek's survey. In addition to services from hardware and software vendors,technology specialist firms are used by 75% of respondents, local firms by 74%, value-added resellers by 70%, and major systems integrators by 60%. More than half use industry specialists and Big Six firms.
"Everyone is hanging out the services flag," says Joe Tucci, chairman and CEO of Wang Laboratories Inc. in Billerica, Mass., which recently sold its software business to focus on network integration and maintenance services. "It's getting more confusing for everyone."
Still, the IT industry's convergence on services can help IS organizations. Michael Vargo, a VP and research director at Gartner Group Inc., an IT consulting firm in Stamford, Conn., says the growth offers managers more choice and creates more competition-not just among vendors, but also between vendors and IS organizations. It's not uncommon for IS groups to respond
to their own requests for proposals, competing with vendors on cost and quality, Vargo adds.
One key reason that the services market is heating up is the shortage of people with high-level IT skills. IS organizations are stressed out trying to attract and retain the skills they need. Year 2000 conversion work, for example, is "sucking up all the supply of skills needed for other projects," says Gary Sarkesian, VP of IS at ATC Leasing Co., the support unit of Active Transportation Co., a $350 million trucking firm in Louisville, Ky. The high wages available for year 2000 work, he adds, have a ripple effect, raising wages for programmers on other projects, such as system upgrades.
Sarkesian says he spends about one-quarter of his IS budget on services, and he expects this to increase because of ATC's year 2000 projects. In fact, the services component of Sarkesian's budget took a jump a few months ago when ATC's IS staff couldn't meet standards for timely PC maintenance and repair. "It was too expensi
ve and stressful on our staff to run around 31 terminals in North America," he says. "It was relatively easy to get a vendor."
While the IS skills shortage also affects services vendors, there's a difference: Because skills are directly related to profits at services vendors, the vendors offer better compensation packages and opportunities for advancement than IS organizations do to attract and retain skilled professionals.
IS organizations are trying to sharpen their skills at managing multiple services contracts by standardizing on procurement practices. They're also developing teams of IS specialists, contract lawyers, and purchasing managers. IS groups can mine a growing support network of consultants and lawyers experienced in services contracts. And they've formed peer support groups to swap experiences and exert collective clout within the services industry (see story: "
Strength In Numbers
").
National City Corp., a regional bank in Cleve
land with $51 billion in assets, realized it had too many services vendors and centralized IT procurement about 18 months ago, says Charles Gearheart, group manager of telecommunications. It also whittled down the number of programming services vendors from more than a dozen to about five.
Some IS organizations prefer to select a few key vendors for long-term relationships, sometimes with a prime contractor taking responsibility for managing the other vendors. These close relationships can improve vendors' understanding of the client's business objectives and culture, leading to more effective services (see story: "
Cozy Partners
"). According to Dataquest, a vendor's technical expertise and its understanding of clients' business goals are the most important factors in selecting services providers (see chart: "
The Deciding Factor
").
Another upside gained from long-term vendor relationships is fewer phone solicitations.
Take British Petroleum Co. Because the $77 billion energy giant in London favors five-year services deals, it gets fewer services sales calls than companies with shorter services relationships, says John Cross, head of IT. "We've closed the door on that by signing longer contracts," he adds.
While long-term contracts aren't foolproof, BP has seen them work in its favor. In 1995, BP awarded a contract to network integrator I-Net, which was acquired a year later by Wang. "The marriage gave me some concern at first because Wang was a product vendor," says Cross. But since then, Wang has sold off its software business, which pleases Cross because of the money Wang now has to help I-Net grow.
Still, some user companies can unknowingly invite a closer relationship than is good for them, cautions George Logemann, director of the outsourcing practice at the Yankee Group Inc., a research firm in Boston. "Many companies bring in vendors for education first, and they get presold on a single-source contract befo
re they even have a clear idea of what they want the vendor to do," he says. Instead, companies need a process to retain control of the services relationship, Logemann advises (see table, below).
Steps For Procuring Services
|
1. Document business objectives
2. Develop a project plan
3. Define a precise scope
4. Build a financial model
5. Define selection criteria
6. Identify qualified bidders
|
8. Visit vendor reference sites
9. Review vendors' proposals
10. Make a decision
11. Undergo a vendor inspection
12. Negotiate the contract
|
Some IS organizations look to services vendors that offer special technical expertise, resources, or industry knowledge. Osram Sylvania's Sacco, for ex
ample, relies on companies with proven technical expertise. In all, Osram Sylvania contracts with 125 consultants to help fill gaps in IT skills or to staff special projects. Still, Sacco says, the company is careful to mix outside help with existing staff. "After the consultants leave, we must be able to handle the technology," he says.
Services vendors aren't sitting still, of course. Some have pulled back on making competitive bids, citing the drain on their time and money. Instead, they've chosen to solidify and expand their positions with existing clients.
Among them is Computer Task Group, a Buffalo, N.Y., systems integrator. A little over a year ago, CTG had 900 clients; it has reduced that number to 500. "Even though we've walked away from a lot of revenue from our smaller accounts, we've been able to maintain revenue growth and profitability," says CEO Gale Fitzgerald. Part of that balance has been related to downsizing by CTG's biggest customer, IBM, which recently narrowed its list of serv
ices subcontractors to CTG and eight others-a big drop from the 100 it used in the past.
More Selective
Similarly, AT&T Solutions is rethinking the bidding process. Rick Roscitt, managing partner of AT&T Solutions' worldwide outsourcing practice, says preparing a competitive bid typically costs at least $500,000 and often reaches several million dollars. Facing costs like that, Roscitt has decided to be a lot more selective in the business he pursues. "I can probably only go up to 20 deals a year," he says.
At the same time, new companies are rushing in. Entrepreneurial-minded consultants and integrators are breaking away from older firms to take advantage of Wall Street's passion for IT stock and to make their own fortunes. Among them are 20 KPMG Peat Marwick partners who recently established AnswerThink Consulting Group in Miami with $20 million in venture capital. Other startups, such as the marketing and Web technology firm Align Solutions Corp. (see story: "
Services Get Creative
"), are pursuing emerging niche opportunities. Also, companies like DecisionOne and Ikon Office Solutions (see story: "
Ikon The Integrator
") are snapping up small specialized or regional firms to become multibillion-dollar services juggernauts.
The competitiveness of today's IT services environment is raising the standard for performance. One young systems integrator, Cambridge Technology Partners Inc. in Cambridge, Mass., has grown 20% a year since 1994-excluding acquisitions-with a fixed-time, fixed-price strategy. Revenue exceeds $235 million. That's forcing larger competitors to consider offering similar deals. Cambridge Technology recently raised the bar again by offering risk-reward deals, in which both losses and gains are shared between client and vendor.
Some services relationships are becoming more like joint ventures. HP, for example, is negotiating a contract with an automaker that would link the amount of money HP make
s with the number of cars coming out of the automaker's plant. "I sit down with clients and ask how we can make more money together," says Doug Chapin, general manager of HP's operations services division.
Risk-reward contracts seem likely to become more important in the future. Traditional time-and-materials pricing schemes are often abused by vendors who underbid to win contracts, then make up for the low bid by adding work and expanding the scope of the contract.
Still, risk-reward contracts are controversial. Harry Wallaesa, former CIO at Campbell Soup Co. and now president of align Inc., a Wayne, Pa., outsourcing consultancy, says risk-reward will remain the exception, not the rule. "They're extremely difficult to govern," he says. "How do you measure the impact a product or service has on a business result?"
Either way, it's clear that relationships between IT services buyers and sellers must be flexible. Creativity in structuring relationships can help fill the gaps. Armed with the righ
t experience, tools, and support teams, IS organizations can do better than hold their own against the onslaught of services vendors and the skills shortage. They can take care of business.
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ervices firms are more important to IT managers than ever. They provide help with strategy, new technologies, and other key issues. The good news is that the number of IT services firms is growing, and there's no shortage of choices.
