Monday, January 21, 2002

Guest Commentary: IT services companies try their hands at playing 'Survivor'

By Jeffrey M. Kaplan

Perhaps nowhere in the IT industry has the downturn in the economy been felt more than in the professional services sector. A saturation of e-business/Web-oriented consulting companies led to a well-documented shakeout that decimated the sector over the past year.

Now corporate customers and venture capitalists alike are apprehensive about using or investing in these firms.

Yet the need for these services hasn't gone away. The economics of professional services companies is still attractive.

The professional services sector gained prominence in the 1980s with the emergence of the systems integration business aimed at helping companies pull together many different computing systems into a more cohesive corporate asset.

It was a time when proprietary systems were the norm and in-house IT staffs were hard-pressed to build computing systems that truly supported their companies' business needs. The Big Five accounting companies, IT divisions of aerospace companies and a variety of independent consultancies such as Keane and Cambridge Technology Partners found tremendous market opportunities in these complex computing environments.

The systems integration business gave way to the outsourcing phenomena at the end of the 1980s with the landmark Eastman Kodak agreement that saw IBM winning data center management responsibility, BusinessLand (remember them?) assuming responsibility for Kodak's desktops, and Digital Equipment Corp. handling Kodak's telecom network. (Don't ask.)

Although outsourcing has been a key element of the IT industry for more than a decade as a result of the Kodak deal, the real composition of the outsourcing market is far from how it is typically painted in the press and by industry analysts. Instead of looking for ways to entirely offload IT burdens, most companies turn to IT service providers to augment their in-house resources. And that is why the professional services business still has legs despite investor sentiment to the contrary.

Although the mega-outsourcing deals involving enterprise companies' entire IT operations won by the likes of IBM and EDS continue to grab the headlines, the more common contract agreements involve more specific "out-tasking" arrangements. These agreements focus on specific IT management functions or tasks that a company no longer wants to perform in-house.

If the demand for out-tasking is continuing to grow, why are so many IT services companies struggling and investors moving away from this sector?

First, consultants are always the first victims of spending cuts in a down economy because it's easy to cut back on those contracts.

Second, too many IT service companies, professional services firms and consultants were born of the Internet bubble. A shakeout was inevitable.

Finally, few of the remaining companies have developed a compelling value proposition and set of marketing messages to differentiate themselves.

The demise of local companies such as Viant and Breakaway Solutions has scared many away from the services side of the IT industry. Since few companies can aspire to become the next IBM or EDS, what are the lessons that can be learned?

Most industry prognosticators agree that the coming year will be a period in which IT users will attempt to reap greater rewards from their current IT investments. In this environment, the IT industry will no longer be about the latest hot technology but about solving business problems.

It's no longer about selling products but about providing services.

Few companies have the in-house skills and resources to achieve their IT objectives. The market opportunity for IT professional services is clear. The challenge for IT service providers is making their differentiating qualities and business benefits equally clear.

When the budgetary pressures of today's economy ease, it will be those companies that have compelling, solutions-oriented value propositions and marketing messages, and attractive service offerings who will win customers and investor support.

Jeffrey M. Kaplan is managing director of Thinkstrategies, a strategic consulting services firm. He can be reached at jkaplan@thinkstrategies.com.