This was the year of the global IT outsourcing supplier, observes Ned May, program manager for IDC, the Framingham, Massachusetts IT market research firm. “EDS, CSC and IBM all had a strong year last year,” the analyst points out.
It was a year when the innovative startups cratered. During the dotcom boom, the startups garnered most of the attention. But when the free flowing capital began drying up, prospective buyers flocked to the big guns because they were worried the newcomers wouldn’t be around by the end of the contract. This fear “sped up their demise” and benefited the uber suppliers, notes May.
In addition, the major players have a global presence. Last year European outsourcing experienced very strong double digit growth, according to the analyst. “Their global contracts helped them weather the U.S. downturn,” May says.
Another reason the big suppliers had a good year is because outsourcing has benefited from the downturn in the economy. Companies perceive outsourcing as an effective cost reduction tool. “Outsourcing helps enterprises remove expenses from their books and lowers head count while still getting the job done well,” he explains.
In the past, the analyst has seen corporations reluctant to hand over critical IT tasks to an outsourcing supplier. The slumping economy has “reduced that resistance,” he reports.
Reality Struck the ASPs
Also last year May says the application service provider (ASP) model “came back to earth after years of tremendous hype.” The promise of the ASP model is one to many. The new ASP suppliers priced their offerings based on the idea they would host an application and simply let a multitude of clients tap into it. They never anticipated any customization would be necessary. They also assumed they would have hundreds of customers on the roster almost overnight. The abundant flow of cheap capital allowed them to rely on this flawed business plan until “they priced themselves out of business,” says May.
However, “the reality is, everyone needs some customization.” The ASPs that have survived are now pricing their products accordingly. The analyst believes the ASP model will continue to thrive now that the prices more accurately reflect the outsourcing requirements.
May predicts we will see the ASP model increasingly applied in innovative ways during the coming year. For example, global enterprises will use the ASP model internally to centralize IT systems while still distributing costs on an equitable basis. “Multinational firms that are highly decentralized struggle to get their local operations to standardize on global applications. The ASP model allows headquarters to build and deploy these applications and then charge back on a per use basis once they have demonstrated their value.
Consolidation may be the defining trend in the outsourcing industry this year. As the larger companies grow stronger, the disparity between them and the smaller firms increases. This will make the smaller firms take over targets.
May believes ASPs and infrastructure on demand suppliers will both continue on their “aggressive growth paths” this year, a trend that will last at least through 2007. However, their share of the overall IT outsourcing market will remain small for several years.
Finally, this year May sees many IT consultants changing the way they approach business process outsourcing (BPO). Today these firms often deliver BPO services by designing and managing the underlying IT infrastructure in addition to the business processes they ultimately sell.
However, IT environments today are becoming ever more complex. May predicts these firms will need to become less involved in the IT portion of the process and instead concentrate on the business process side of BPO. “They will need to form a solid partnership with a strong IT partner,” he predicts. “Partnering with someone who can simplify and deliver the IT will let them deepen their expertise around the industry specific business issues that these offerings increasingly require. That will give the partnership a competitive advantage over most other firms that attempt to excel at both skill sets.”
Lessons from the Outsourcing Journal:
- The major IT suppliers had a banner year in 2001.
- ASPs began to price their offerings appropriately, after realizing every customer needs some customization.
- There will be a continued consolidation in the “computing on demand” market in 2002.
- On the BPO side, traditional consultants will increasingly rely on partnerships with IT providers as they concentrate on the strategic issues on the business process.