Those Nifty Little Niches | Article

Pillars outside of outsourcing buildingFor UnisysCorp., outsourcing is a business embedded in a product company. It currently accounts for about 25 percent of the $2.5 billion generated annually by the company’s Information Services Group. “We see it as an attractive component of our business, as opposed to an overwhelming part of our business,” says Larry Russell, senior vice president.

That component is expected to become even more attractive in 1999. Russell estimates growth rates of 19-20 percent in application management and over 30 percent in data center. Desktop, he says, “is shooting the lights out” with growth at over 40 percent, network is increasing at 35-40 percent, and Unisys sees even higher growth rates in selected areas of business processing outsourcing. Then there are what Russell calls “the nifty little niches we like† to deal in because we’re not faced with the EDS’s and IBMs.”

An example is payment systems. Work in the financial industry makes up about a third of the total Unisys business, according to Russell. The company is one of the largest — if not the largest — processor of checks in the U.K.

“I don’t think there’s anyone that comes close to us,” says Russell. “We may even be bigger than any single bank, given our business. So we have, in that particular niche, a scale advantage over anybody.”

The Economic Drivers

He says Unisys’ growth, and that of the outsourcing industry in general, will be driven by several economic trends. The increasing scarcity of technical skills will be the number one thing impacting both outsourcing and the systems integration business, according to Russell.

“Y2K is going to exacerbate that problem next year,” he says. “So people are being driven to outsource by virtue of having difficulty tracking and retaining sufficient technical skills to maintain and to build the next generation of functionality.”

Then there are corporate mergers and acquisitions, where two companies come together and find they have incompatible systems. “They don’t want to deal with it, so they turn over the totality of the operation and give us the opportunity to make those two operating environments come together flawlessly,” says Russell.

A similar situation that he sees occuring more frequently is where customers approach Unisys about taking over their proprietary operating environment, not necessarily a Unisys-based environment, and simultaneously helping the customer move to an NT environment. Such requests, says Russell, are driven by both the economics of NT and the scarcity of technical skills to accomplish the project.

The globalization of ‘virtually everything’ will, he believes, continue to be a driver for outsourcing. He points to Nike and Sara Lee as companies that have outsourced some or all of the manufacture of their consumer products and are focusing on brand marketing. “So increasingly, we find companies following the current strategic pundits and focusing their attention on what they do best,” says Russell.

He cites Y2K as having an impact that will become increasingly important in 1999, “as a fair number of companies begin to realize that they aren’t there and they can’t get there.”

Cut-Throat Competition

The ‘overarching’ economic trend affecting outsourcing, says Russell, is what he calls ‘extreme competition.’ “If you go back to WWII days, there was competition, there were global markets, but it wasn’t the same kind of competition,” he says. “Today, you have Internet disrupting supply chains; you have global competitors from all over Asia dumping product here, and you have global firms trying to squeeze out everybody in sight. The whole game of competing has become so intense that if you’re a supplier of almost anything and you can find a way to reduce costs and increase effectiveness, you’re going to do it — even though you may be outsourcing what, hitherto, had been considered a fundamental process.”

Strategic Relationships

As the marketplace shifts, relationships are also changing. Russell sees clients becoming more strategic, thinking through alternative business models and allowing their outsourcers to help in more substantive ways than being simply ‘a hired gun.’ In those situations, he says, there is less concern over the single performance metric of price and more concern over properly priced but properly delivered service.

“Customers are getting more sophisticated,” says Russell. As an example, he notes that over the last 15 years companies have relied on consultants and attorneys to draw up single source contracts that appear to favor the buyer. Now those companies are taking a new look at those contracts.

“They’re breaking up these big contracts into components,” says Russell, and latching up with the specialty and, in many cases, smaller outsourcing firms that have developed specialty niche capabilities.”

That bodes well for companies such as Unisys, which focuses on medium-sized deals in the vertical markets where they have unusual skills. For example, says Russell, Unisys has a vertical in transportation, where they focus on selling reservation systems. They also outsource freight weight bills for airlines. That enables the company to take on a project such as connecting an airline and a freight forwarder so the airline can offer crate service to a customer.

Network Management

One Unisys niche is network management, and Russell expects that area to continue to grow ‘explosively.’ “Literally every client that we have is moving aggressively to build or enhance their networks,” he says. “Virtually very major solution we have — and we’re primarily a solutions company — is web enabled.”

He is less enthusiastic about e-commerce. “There is a lot of talk about electronic business,” says Russell, “but there’s not a lot of beef, so to speak, in terms of outsourcing opportunity.”

A Cloud on the Horizon

One potential cloud Russell sees on the outsourcing horizon is commoditization. In some parts of the industry, he says, commoditization is seen as a way to try to force unreasonable pricing on vendors, and that will affect the willingness and capacity of providers on a global basis. The cost-driven focus, according to Russell, oftentimes is the result of advice from a consultant who is not looking at the benefits of a strategic relationship. His advice is for companies to do business with somebody who knows what they’re doing.

“There’s a story when John Glenn first went up into space, he was up on a crane about 270 feet above the ground,” says Russell. “Somehow a reporter got up there and thrust a microphone under his helmet and said, ‘Colonel, what are you thinking?’ Glenn was just about to step into the Apollo vehicle, and he looked down at that stainless steel and the smoke and said, ‘You know, I’m thinking that all this stuff was made by the lowest bidder.'”

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