The widening gap between IT services: suppliers need to move carefully

Computer Industry Report, Nov 26, 1993

The distinction between solving strategic IT problems and the outsourcing of value-chain processes is growing, and IT services suppliers are in the middle. The problem solving inherent in the former entails addressing primary bottom-line concerns of the executive suite. It encroaches on the turf of management consultancies. The latter encompasses the actualization and implementation of that primary decision making. How services suppliers confront this divergence of services will shape their fortunes for the rest of the decade.

The two markets at either end of the services spectrum are maturing concurrently, but for different reasons. Strategy-oriented services are typified by business process reengineering. Companies using BPR services address very fundamental questions about their firm and its strategy. Can the business be restructured around value-adding activities? Can IT be used to assist in the changes? At the heart of such activities are elemental questions about how the company adds and delivers value to its customers.

The outsourcing of IT functions is dovetailing into a broader trend: the outsourcing of entire business processes. In the early years of the IT services industry, companies like ADP created new businesses by assuming discrete tasks, e.g., payroll. For the most part, corporate users did not seek to offload other functions because they were not yet automated, and organizations still held to the credo that mission-critical functions needed to be done internally.

Managers of "virtual" companies are reevaluating every aspect of their business. Should a process be automated or eliminated? Can it be more cheaply and/or efficiently done offshore? A company can focus on its core products and services while farming out ancillary functions. Business process outsourcing is a growth segment with no discernible limitation. As long as providers can produce efficiencies and reduce cost structures, there is in theory no end to what corporations will outsource.

The divergence of services markets leaves traditional IT suppliers in a potentially perilous position. What makes IT companies and integrators think that they can provide both strategic business consulting and business process services? These are two very different activities requiring different skill sets, cost structures, and customer relationships. In some limited cases their experiences are directly relevant to one or both businesses they seek to enter. Mostly, though, they are not so much leveraging existing strengths as they are attempting to build new ones.

The popular focus on BPR and "virtual mania," combined with the abundance of technological choices now available in the marketplace, provide a great opportunity for services suppliers. However, bureaucracies die slowly, if ever. Most large organizations have focused on the data center for so long that they are ill prepared to evaluate and implement radically new ideas and systems.

CIOs expect business unit managers to perform this function, but they are typically busy just keeping things running. Hiring outsiders to provide the assessment and planning aspect as well as the implementation is often cheaper and more effective. With the help of consultants, management is determining what processes within an organization could be better managed or delivered by an outside supplier, and then outsourced. Both strategy and process services will grow quickly through the 1990s.

But IT suppliers must address these markets very thoughtfully. Companies that can turn specific vertical expertise into a launching pad will succeed. Digital's traditional strengths in manufacturing may predispose it toward entering manufacturing consulting and/or managing manufacturing processes for others. IBM's experience managing worldwide networks and its traditional strengths in commercial processing give it many leverageable skills. Such expertise positions a company well for entry into these new services opportunities.

Conversely, companies that have a broad strategy for competing in both kinds of services markets will be less successful. The golden opportunity for IT services firms is where IT consulting and integration, merged with strategic planning, lead to lucrative outsourcing contracts. But they are few and far between. And companies that attempt to do both, without focus, will end up straddling the widening gap.