In Like a Legacy, Out Like an E-business

Software Magazine, June, 2000 by Colleen Frye

Q: 1999 seemed to be the year that launched the application service provider market. Why is outsourcing suddenly so popular? And how does it differ from traditional outsourcing?

A: Outsourcing is enjoying renewed popularity because companies are refocusing on their core competencies. They are offloading "commodity"-type tasks to third parties with the expertise and economies of scale to do the job well, and at an acceptable cost. The still-evolving ASP model is a part of the larger outsourcing phenomenon. ASPs are really a new incarnation of the old-fashioned time-sharing vendor. They lease prepackaged application functionality at a competitive cost, and spare companies the overhead of installing, operating, and maintaining the package. If a company wants access to a specific application package, and doesn't need much customization, then an ASP is the way to go. In contrast, outsourcing isn't limited to application packages--it applies to virtually any aspect of IT. And outsourcing allows for a greater range of tailoring and customization.

Q: Are mergers and acquisitions among the IT services providers good news for IT customers?

A: The IT service provider market is highly fractured today, with a lot of players cash-rich from IPO's, making it ripe for M&A activity. With the IT skills shortage, growing organically is a less viable option. I think the M&A trend is good news for customers--the resulting firms will have a much broader and deeper skills base, making it easier to pick and stick with a full-services vendor. Given the nature of the services industry, no firm can ever grow powerful enough to have a monopoly, so buyers don't have to fear the rise of large firms.

Q: When evaluating IT services providers, how much importance should be given to their revenue growth, profits, and M&A activity?

A: It depends on the project. If you need five Web developers to help you design and launch a new Web site, then the revenue growth and profits of the services firm are largely irrelevant. On the other hand, if you are looking to build a long-term strategic partnership for an outsourcing or e-business venture, the financial strength of your partner becomes crucial. Further, if I were looking for a services partner to help develop my corporate strategy, then I would want a company that has a strong track record of success in running its own business.

Q: If you could give three pieces of advice to someone evaluating IT services providers, what would they be?

A: My advice focuses on the biggest issue A: in selecting a services partner--separating the reality from the hype. First, evaluate the wherewithal of the local group that will actually perform your work. Even national firms have strong regional differences, and you are not likely to get their high fliers from other regions. Is the local group strong enough to give you the resources and expertise you need, when you need them? Second, all firms claim a wide range of expertise. Do your homework and find out where their true strengths lie, and see if they match your project. If you need great legacy integration skills, don't look to a firm whose core skill is media and advertising. Third, check references! It's the best method for separating claims from reality. Many companies don't bother, but they could discover a lot by talking to other customers. Unsolicited references--at conferences, trade shows, etc.--are often the most revealing.