InformationWeek
Defining The Business Value Of Technology
November 15, 1999
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IBM Global Services Takes On Application Outsourcing
InformationWeek: How is your traditional outsourcing changing in the E-business environment?
Huhn: We have seen the first deals that IBM did back in the late '80s for data- center management evolve into applications development, and then into management of server and midrange platforms five years ago. E-business is another step in the evolution of application-processing platforms to net-centric processing and Web-based applications. E-business is the future of our services business, and everyone is focused on how to migrate and morph into a company that is adept at handling these E-business issues. But we still do traditional outsourcing where IT operations are transferred to outside services providers like us.
Huhn: E-business requires changes in the way you negotiate and structure deals and write contracts, terms, and conditions. A large number of customers with traditional outsourcing arrangements are asking us to develop E-commerce applications and manage, develop, and implement the platforms on which they run. In addition, we see new customers who want us to do standalone independent Web hosting and E-business work. These latter arrangements require a new method of contracting where you don't have a 10-year full outsourcing agreement in which customers transfer assets and people to the company providing outsourcing services. Instead, you have shorter and more flexible deals that allow for newer technologies to be added.
InformationWeek: Does E-business outsourcing require better understanding of business processes and bottom-line benefits?
Huhn: We've just come through an era where enterprise resource planning platforms required tight integration with customers' business processes. For Web-based applications, we bring together those technical capabilities and our knowledge of industries.
InformationWeek: Research indicates that many E-businesses want to outsource everything from Web development to hosting. Do you see that trend?
Huhn: Yes. E-business companies don't want to be burdened with IT infrastructure and applications chores that aren't central to their core businesses. They don't have the ability to hire enough people and build enough infrastructure fast enough to maintain the time to market. So they hire all that capability by outsourcing. Customers with traditional outsourcing deals are keeping a hand in the design, development, and implementation of Web applications, but they are also willing to take on a partner sometimes to help them design, which we do. The level of outsourcing really depends on the company we are dealing with.
InformationWeek: Do these bigger companies that are moving into E-business want to keep the control in their hands?
Huhn: Control is a key word, and it is difficult for customers to know exactly whether they want conceptual and architectural control or actual operational and implementation control. It differs among companies, depending upon their need and focus.
InformationWeek: E-business specialty houses seem to be quicker on their feet and seem to have created the perception that they can deliver better and faster Web expertise compared with IBM Global Services or EDS. How do you respond to that?
Huhn: We need to be willing to adapt, be quick on our feet, and be flexible to compete in this business. But the criteria that will determine decision-making around E-business are going to be the same criteria that we have seen in the past: dependable and reliable service providers with deep technical skills and a good track record.
It required an enormous shift from being somewhat of a--I won't say arrogant--provider to becoming much more customer-oriented, flexible, and responsive with new solutions and pricing metrics than in the past. But we did it, and now we are at that time again when we need to look at selling into this Internet environment. We needed to restructure our offerings and retarget our capabilities. We are well on the way to doing that.
InformationWeek: Do you think that these smaller Internet-oriented outsourcing houses have the expertise and pose a certain amount of competition to IBM?
Huhn: They sure do. There are some very capable firms out there that are aimed at different aspects of this business. There is an enormous amount of business to be had. There is room in the marketplace for lots of competitors with different strategies and targeting different segments. Our particular strategy and approach is to be very broad-ranging in terms of our capabilities and offerings. That's not an option that is open to a number of boutique firms and niche-type providers.
InformationWeek: Do you see consolidation in this market, especially with scores of smaller companies becoming acquisition candidates?
Huhn: Consolidation is a term that you typically hear with an industry that has begun to hit maturity, and this segment of IT really hasn't even begun to get up that ramp. It's not even clear yet where the large revenue segments of this business are. But we will see consolidation in a few years.
InformationWeek: How does a company of 140,000 people--IBM Global Services--retrain its workers to provide service and support to new E-businesses?
Huhn: By making sure that people who have traditional skills and knowledge are skilled in all Internet technologies. That process is going on through internal retraining and hiring very skilled people from outside. Also, we have to change the way we offer services; we are focusing on developing terms and conditions around E-business offerings and E-business opportunities that significantly differentiate us from the way that we do business in traditional outsourcing. For example, if a customer for whom we provide Web hosting experiences a sudden burst of 10 to 20 times the usual traffic, we have to design a solution with sufficient available capacity to deliver that bandwidth. But you can't charge the customer 20 times more than he'd normally be paying.
Photo by Giorgio Palmisano
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BM Global Services, the computer giant's outsourcing arm, is testing the waters as an application service provider. It recently extended an agreement with SAP to offer electronic-procurement products. IBM offers solutions for several applications, including those from Great Plains Software Inc. "Applications services outsourcing is a very critical area of E-business for us," says Steve Huhn, VP of global business development at IBM Global Services. "But it is not clear yet how customers are going to want those contracts." As IBM Global Services inches forward as an ASP, it remains a major force in the traditional, yet evolving, IT outsourcing arena.
InformationWeek: How are contracts changing?
Go on to the next Q&A, "Outsourcing's Changing Landscape."
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