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5/7/2004
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Brave New World

Outsourcers answer customers' demands for change by offering new service and pricing models, expanding geographically, and standardizing technology

Ralph Szygenda

"For good or bad, I'm enforcing standardization of the outsourcing industry," says GM's Szygenda.

Photo by Bob Stefko
At General Motors Corp.'s Detroit headquarters, staffers from outsourcing rivals Accenture, EDS, and IBM have been gathering for the past several weeks, looking for ways to standardize common IT processes such as network provisioning and configuration management. Usually archrivals, the vendors want to develop standards that could save customers big bucks. Those that don't come to the table risk missing out on a share of the $15 billion the automaker will spend on IT outsourcing over the next five years. "We're probably the only company in the world that can force that movement, but, for good or bad, I'm enforcing standardization of the outsourcing industry," GM CIO Ralph Szygenda says.

Few can match GM's clout, though many other companies are pushing IT-service vendors to change. Facing increasing demands for more accountability and lower prices, plus growing competition from offshore firms, vendors have little choice but to cooperate. They're experimenting with new service and pricing models, expanding geographically, and standardizing technology to improve efficiency. "We're seeing a lot more flexibility," says Cindy Shaw, an analyst for Schwab Soundview Capital Markets.

Szygenda complains that the services industry has failed to standardize many processes common to outsourcing engagements. That means customers pay big process-design, setup, and implementation fees time and again for what he believes should be routine activities. "Customers are getting tired of paying for this, and they're rebelling," GM's outspoken IT chief says. "IBM and Accenture should know how to work together when they come here from day one." Szygenda is asking the vendors to have common standards in place for about 30 processes within a year. He thinks other business customers will benefit along with GM. "The big belief is that they can take and use this elsewhere in the industry," he says.

IT vendors need to do what it takes to boost their services businesses because that's where the growth is. Worldwide sales of IT-outsourcing services will grow 9.9% this year to $152 billion, Schwab Soundview predicts. "There are a lot of industries that would love to have that kind of growth," says Shaw, who expects the pace to continue for several years.

Service companies are revamping operations to compete in the price-sensitive, tighter-margin outsourcing business. EDS executive VP Charles Feld sent a memo last week to employees explaining that the service provider intends to lower costs by significantly reducing the number of technology partners it works with. Unless customers insist otherwise, EDS will use servers from Sun Microsystems, storage equipment from EMC, networking hardware from Cisco Systems, and servers and desktop operating systems and application technology from Microsoft.

Accenture also is focusing more on deploying reusable technology for numerous customers--and avoiding the cost of custom work. Payless ShoeSource last week agreed to use Accenture's Interactive Retail Services to support a new Web storefront. It's based on off-the-shelf Microsoft Solution for Internet Business technology. "We're seeing more customers that are looking for us to deliver savings by applying knowledge and technology that we've gained elsewhere," says Fred Schneider, a partner at Accenture.

Computer Sciences Corp., the third-largest U.S. seller of outsourcing services, last week made a major pricing-model change by jumping into utility computing, where customers pay only for the computing power they consume. "The demand for this has already been created in the market," says Russ Owen, CSC's president of global infrastructure services. CSC will offer per-unit pricing on everything from processing power to storage consumption and network bandwidth. IBM and Hewlett-Packard already offer utility pricing.

Another sign of flexibility: outsourcing heavyweights teaming up with offshore providers to blend expertise and lower costs.

IBM and India's Wipro Technologies joined forces to capture an outsourcing deal with one of the world's largest companies. European petroleum company Royal Dutch/Shell Group, in a deal revealed last week, signed a far-reaching IT-services agreement with the vendors, as the company looks to reduce its 9,000-employee IT department by up to 30% by 2006. Shell officials declined to discuss details, but analysts speculate IBM will handle much of the high-end, on-site work, with Wipro providing low-cost application development and maintenance from India.

Others are joining forces to offer services around emerging technologies. Last week in New York, HP CEO Carly Fiorina and British Telecom CEO Ben Verwaayen unveiled a partnership to offer network and digital telephony support in an effort to cash in on the convergence of corporate voice and data networks and resulting technologies such as voice over IP. They will sell the services jointly to corporate and small-business markets in Europe. If it works, they'll consider expanding it to North America. "This isn't coming out of the strategy departments of our two companies," Verwaayen says. "It's a direct answer for customers who need to deal with ever-increasing demand for agility."

To capture more business and fend off competition, service providers are showing a good bit of agility themselves.

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