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November 16, 1998

Analyzing The Integrators

Systems integration and outsourcing is a $300 billion business, but are customers really getting their money's worth? Here's what IT managers really think about their hired guns.

Methodology

Fortune One's Outsourcing Challenge

For Some, Small Vendors Are Better

Merger Mania Vs. Merger Meltdown

Palmisano Extends IBM Relationships

CSC Chief Emphasizes Flexibility

Sprinkle Delivers For Deloitte

For Aris, Boutique Is Bountiful

Vendors Plan For Post-2000 Work

Behind The Numbers: Sizing Up The Integrators

Research Charts

By Bob Violino and Bruce Caldwell

electing an IT service provider could be THE most important decision a technology manager ever makes. The average company forks over close to one-fifth of its IT budget each year to these experts-for-hire, relying on them to fill huge skills gaps, cope with maddening technology complexity, and, ultimately, help drive new business.

So are these systems integrators and outsourcers delivering? In general, yes, according to an InformationWeek Research survey of 380 IT and project managers who use the services of 10 of the leading vendors. Customers rate them highest in responsiveness and global expertise, followed by business understanding, service levels, and talent. But there's still plenty of room for improvement. Customers say their biggest challenges are getting knowledge transferred from their service providers, getting consistent service over the life of a contract, resolving differences, and tracking changes. Keeping escalating integrator/outsourcer prices under control is also a top priority.

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IT organizations bear some of the blame for shortcomings in their relationships with service providers. Many organizations simply aren't prepared to choose a strategic partner, negotiate a flexible multiyear contract, and oversee the relationship. Consider that only 24% of IT organizations have a formal program to educate their key people on how to manage relationships with outsourcers and systems integrators. Despite the obvious high stakes, many IT organizations may be delegating the supervision of these strategic engagements to ill-prepared or overmatched managers.

Clearly, the success of these arrangements hinges on both sides' working harder to establish clear-cut goals. The stakes are high.

"There is a very high inherent risk in these agreements," notes Howard Rubin, chairman of the computer science program at New York's Hunter College and a Meta Group research fellow. "Companies are asking for outside help to meet business goals--cost cutting, improved performance, faster time to market--set by the highest levels of management. But those firms providing these services are doing it because they're in business to make money and expand market share. So you have two parties with potentially conflicting goals at the highest levels."

Most companies have no alternative but to seek outside help. Take Wisconsin Electric Power Co., a Milwaukee utility that hired Andersen Consulting to move it from a mainframe-based customer billing system to one based on Unix servers. While calling integrator prices "outrageous," Donald Ralfs, Wisconsin Electric's retiring manager of computer operations, says the utility didn't have the manpower or expertise to move 24 complex software programs from one hardware platform to another on its own.

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"It's expensive, and it's not always an easy sell to senior management, but the reason we're doing this is to enhance customer service, improve productivity, and save money in the long run," says Ralfs. "Those are good business reasons. Some corporate objectives are being achieved. But on the other side of the coin, we're eager to take over [from Andersen] at some point when our people have been trained to do the work."

Among the long-term dangers IT organizations face in using integrators and outsourcers to augment internal staff is the risk that their very best people will be poached, or employees may not develop the essential skills and know-how to manage and maintain new systems. That's why knowledge transfer--rated in the InformationWeek survey as the area service providers need to improve the most--is a big requirement for astute integrator customers.

Still, how can companies resist the appeal of partners that have assembled armies of experts in the latest emerging technologies and products, and that aren't bound by the budget and research and development constraints of most IS departments? "The skill sets they have are outside the realm of most IT organizations," Rubin says. "These companies are investing a lot of time and money to study and use the most advanced technology."

Escalating Demand
Of the IT managers surveyed by InformationWeek, more than two-thirds say the percentage of their companies' IT work performed by systems integrators and outsourcers will either increase or stay the same after Jan. 1, 2000. A number of factors are driving demand, including the omnipresent IT skills shortage, changes in IT spending patterns, the rise in enterprise applications projects, and the ever-expanding role of IT in strategic business initiatives.

Dataquest estimates that the worldwide IT services market will grow from $326.8 billion in 1997 to $630.4 billion in 2002, an average annual growth rate of 14%. Development and integration is the fastest-growing and largest segment of the market, totaling $97.3 billion in 1997 and pegged to grow 18% annually.

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The 10 systems integration and outsourcing companies analyzed by InformationWeek--all among the top 15 in sales--garnered nearly $64 billion in IT services revenue in their most recent fiscal year. The two biggest vendors, IBM Global Services and EDS, account for more than $40 billion. Rounding out the top 10 are Andersen Consulting, Compaq Computer/Digital, Computer Sciences, Deloitte Consulting, Ernst & Young, Hewlett-Packard, KPMG Peat Marwick, and PricewaterhouseCoopers.

Judging from both the survey of customers and numerous interviews with people who help oversee relationships with the service providers, IT managers are generally satisfied with the service they're getting.

InformationWeek asked managers to grade the service providers in a wide variety of areas on a scale of 1 to 10, with 10 representing "extremely satisfied." The composite average for the 10 companies is a respectable 7.1. Hewlett-Packard, which mainly provides services to its own product customers, was tops overall by a narrow margin over Compaq/Digital and PricewaterhouseCoopers.

IT managers scored the integrators highest in responsiveness and global expertise, earning average marks of 7.3. Next came overall performance, business understanding, service levels, and integrator talent. At the bottom of the list is knowledge transfer, the only category in which vendors were rated below 7.

Tops in the category of effectively transferring knowledge between consultants and IT staff were Compaq/Digital and Hewlett-Packard. HP also scored highest in overall ability to meet contracted service levels and budgets, responsiveness when project problems arise, and the overall quality and talent level of the IT professionals and project managers it assigns to accounts.

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HP and PricewaterhouseCoopers were tied for first place in their ability to meet deadlines and delivery dates. Andersen ranked highest for global expertise, reach, and capabilities. In the category of understanding the customer's business, there was a five-way tie among Deloitte, PricewaterhouseCoopers, Compaq/Digital, Ernst & Young, and IBM.

The Customer Experience
Perhaps even more telling than the survey results are the examples of successful client-integrator relationships described by IT and project managers.

When Albuquerque, N.M., grocery retailer Furr's Supermarkets Inc. earlier this year suddenly had to drop its wholesaler because of business and legal reasons and take over the distribution of products, it turned to EDS. The $5 million, business-critical project included the installation of Unix-based warehouse management, billing, invoicing, and purchasing systems from OMI International Inc.