Sorting Through the Rubble | Article

rock slideNew vendors around every corner. Mega deals. Dead dotcoms. And even some fallout from Y2K. They littered the year 2000 battlegrounds in the outsourcing arena. Gartner Dataquest’s Bruce Caldwell, senior analyst-outsourcing, recently completed reports and forecasts from his company’s surveys of end user wants and needs in the world of IT. He says the turmoil in the IT services marketplace this past year was a factor in “a dip in the IT services revenue” that had been forecasted for 2000.

Companies admittedly shifted some dollars to other enterprise needs last year, making up for lost time in dollars spent on Y2K transition. But the dip, he says, is also due to “new kinds of services vendors that are not well understood, a lot of new kinds of delivery of IT services and new pricing mechanisms.”

The good news is that the market will bounce back in 2001, he predicts, and may surpass its former growth rate. “The new economy that we’ve been seeing emerge is becoming more and more a part of the old economy and is not so strange anymore,” Caldwell says. B2Bs and brick-and-clicks are sorting themselves out, and the stock market has humbled the dotcom marketplace with appraisals that are more realistic. “There is a better understanding of what to expect in the B2C and B2B spaces now.” He adds that outsourcing is more and more accepted as a good business practice.†

The New Piece

Outsourcing has often, in the past, involved the transfer of assets from the buyer to the supplier. “Companies acquired their human resources and equipment and then wanted to unload them to somebody who would make them more efficient.” What we are seeing in the marketplace today is something new and different, Caldwell believes. “IT infrastructure is being built externally and on its own, in advance of demand. It’s a matter of ‘here it is. If you want it, all you have to do is dial in to it and you’ve got it.’ So it’s an access market instead of an assets market.”

Because new applications have emerged and companies do not have time or skills to implement them internally, the phenomenal growth in outsourcing to ASPs is a beneficiary of this new access market. Organizations prefer now to “throw a switch and have it work for them and make a monthly payment.” Migration of legacy systems is also big business in the new market. Companies are increasingly willing to outsource their critical business processes, and “IT infrastructure is becoming externalized.” Where there is demand for great speed and scalability, companies now prefer to buy rather than build.

Caldwell draws a picture of the new marketplace: “The services market will be the conglomeration of partnerships where you have companies that can provide consulting, application development and systems integration expertise. They will partner with companies that have the IT and telecommunications infrastructure (the hosting facilities, Internet data centers, bandwidth, storage). So it will become a market of capacity on one hand and administration or management functions for the IT layer on top of that. The outsourcers won’t necessarily own the infrastructure, so it will be a more complicated supply chain for the delivery of outsourcing services than we have seen before.”

The Big Picture

Business models are changing radically and quickly. That, along with an enormous IT skills shortage, continues to drive outsourcing. Caldwell says another driver is an economic slowdown because of energy prices.

Because there are so many new vendors in the BPO and ASP area now, he believes a lot of sorting out will soon begin in the marketplace and that the result will be some consolidation. †

CRM and supply chain management are both growing rapidly because they are transaction-processing intensive and complex, making them ideal for outsourcing rather than internal implementation. Although the environment is standardizing ERP operations that will support smaller companies, Caldwell says we’ll see it going back to more customization in the next two to five years. “The new and old are pretty far apart right now, but they are going to merge again in the future.”

He cautions that the amount of change coming in 2001 should be kept in perspective. The access-versus-assets view of the market is very different and will bring a lot of change. Nevertheless, “as far as the overall market goes, it’s growing at a good pace (14% – 16%).” New service offerings, such as ASPs, are growing much faster, but they comprise only a small percentage of the total market. Consolidation, niche service offerings, more supplier alliances in order “to present one face to the customer,” will all be present in the marketplace in 2001. While the amount of change will be substantial again in 2001, he predicts that it won’t be as troubling as it was during 2000. “People are more accustomed now to new ways of delivering services.”

He also talks about the changing of organizational sizes. “It’s fairly standard to outsource your payroll to an ADP, for instance, but what we’re seeing now is the capability to support all of an organization’s financial, HR, procurement processes and customer relationship to third parties. So the core of an organization is becoming much smaller and more focused on what it does better than anyone else.” The value derived by doing that, after all, is what outsourcing is all about.

Lessons from the Outsourcing Primer:

  • The outsourcing market in 2001 is predicted to surpass its former growth rate, and there is a better understanding now of what to expect in the B2C and B2B spaces.
  • The core of buyer organizations is becoming much smaller because so many non-core processes are being outsourced.
  • The outsourcing market is changing from an assets perspective to one of access, with capacity on one hand and management functions for the IT layers on top of that.

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