Shaw Pittman Potts & Trowbridge provides legal representation to customers in IT outsourcing transactions, primarily in the transportation, travel, retail, health care, financial institutions and manufacturing industries. At the end of 1998, the firm anticipated an increase in outsourcing in the international market during 1999 and opened an office in London in September 1998 to handle the potential work. Robert Zahler comments that the firm recently has had to lease additional space in London already, due to the enormous amount of international business. “I expect that trend clearly to continue strong in 2000,” Zahler says. “Companies are doing global transactions, and they are looking for sourcing vendors who can handle their work on a global basis.”
While there continue to be “mega deals” ($1 billion plus), Zahler notes that they are fewer in number than in past years. He believes deals will be smaller and not more than a dozen mega deals will occur in 2000. Most of the transactions during the year, he believes, will center on the Internet.
A Time to Watch
Shaw Pittman is seeing a significant increase in the amount of outsourcing-related activity go to companies like Exodus Communications (web hosting) and to Sapient (software development tools). “It’s clear,” Zahler says, that many of the .com companies feel a need to get to market so quickly that the only way they can create the infrastructure and content fast enough is to enter outsourcing transactions.”
His stellar prediction for 2000 is that a large, established company (such as Morgan Stanley, Merrill Lynch, or J. P. Morgan) will outsource all or a significant portion of its Internet activities. “The interesting question,” he says, “is when that will happen. There are vendors out there, like IBM, EDS, and some smaller start-up companies, that are aggressively going after that business.”
He believes there will be large-scale reliance on the Application Service Providers (ASPs), beginning after the first quarter, but that a more interesting development will be movement of large companies toward use of ASPs. “I think that may be a year?or possibly two?away,” he says, “but it will happen. The reason for the delay is that the ASPs are now creating the infrastructure to support mid-size companies, which is different from the infrastructure necessary to support large companies.”
There is an interesting battle about to be played out this year, he says. “I don’t know how it will happen, but EDS clearly has to win back from IBM the market perception that it is the leader,” Zahler explains. “Historically, if there were new transactions and new things, EDS was doing it. They’ve sort of lost that, and they have to get it back in 2000. The heat has been turned up for EDS.”
Zahler states that there are a number of very large BPO transactions that are likely to be announced in the next few months. Those will have the effect, he says, of providing impetus for executives to again start looking at which of their organizations’ functions are non-core, IT-enabled functions. He says that the outsourcing model is generally accepted within the business world today as an appropriate way to meet needs that are otherwise difficult to satisfy, and that BPO will cause it to grow.
Finally, the telecommunications field is one to watch. Zahler says a “whole lot of froth is going on about how those services are provided, and it will continue to evolve at a very fast pace throughout 2000.”
A Time to Talk
The year 2000 will also see the end of contractual terms for many outsourcing relationships that were established in the early 1990s, causing an increase in the number of renegotiated transactions taking place during the year. “Whenever these deals get renegotiated,” he explains, “the number one issue is how to improve the relationship between the buyer and supplier. The reality is that, even in relationships that are viewed as successful, the area where people are at the end of their ropes is the relationship issue.” Zahler says it remains to be seen whether strategic partnering is simply marketing hype or whether relationships can actually change.
Another area of discussion throughout the year is likely to be Y2k compliance issues. He predicts only hiccups rather than monumental disasters from Y2k problems. Although he believes there will be very little outright litigation, he says costs will be incurred in relation to establishing whether the buyer or the supplier has the responsibility to fix the hiccups.
A Time to Spend
An enormous amount of resources?in the trillions of dollars?was diverted in 1999 to fixing Y2k problems. Zahler believes money will not be freed up until after the first quarter, at which time the pent-up demand for new products and systems will be very large.
The one area where the economy is booming, he adds, is the IT area. It is quite a different scenario from outsourcing’s origins in the bad economic times of the late 1980s and early 1990s. “All these .com companies are going to generate enormous demand for IT services. But I think we are going to see an acceleration of the shortage of trained IT people,” he says. “Outsourcing will be the solution on how to meet that demand.”