Nonlinear Thinking

The Only Constant is Change: Addendum

When it rains, it pours, or so it seems.  On the heels of a recent Forrester report on the future of IT services which I wrote about here, management consultant A.T. Kearney weighs in with their own, very similar view on that future.  This recent op-ed in Businessweek by Arjun Sethi and Olivier Aries sees most of the same external drivers highlighted in the Forrester report  but offers a different and altogether more interesting futurescape for IT services.

“ In the next five years outsourcing as we know it will disappear.  The legion of Indian service providers will be sidelined or absorbed. U.S. and European companies that pioneered this corner of the high tech industry will suffer similar fates if they don't wake up.  Who will emerge as the new leaders?  Google and Amazon.com , brands that we associate with search and retail, will become better known for outsourcing."

Longtime readers of this blog will know that I have been harping on the threat that Amazon and Google, in particular, present to the old guard of IT service providers as I have written about it here, here and here. SaaS/cloud technologies, under any name, have been a game changing disruptive force for the past 10 years. When IBM acquired Corio five years ago, that should have, de facto, been some kind of canary in the coal mine.

In their commentary Sethi and Aries also conjure up a vision of what the new outsourcing model will look like.

“In the new model, outsourcers provide standard, off-the-shelf software on a "pay-per-drink" basis. For that, they will leverage so-called cloud technology, which lets users tap into computing power available via the Internet, rather than on a desktop or computer server housed locally. The appeal is scale, flexibility, and efficiency: Thousands of server computers can attack a task more quickly—and cheaply—or handle a patchwork quilt of different technologies that companies use to run their businesses. This approach will let businesses outsource entire tasks such as the tracking of inventory, paying only for the information accessed or used.”

The commentary also mentions who might be the losers in this new model (mid-tier Indian outsourcers), possible winners (SAP, Oracle, Microsoft, Salesforce), and a several major players that are not moving fast enough (Accenture, Xerox, Dell, HP).  

I am guessing that this commentary and the Forrester report will be far from the last discussions regarding the changing IT services landscape.  I would also imagine that we will see more and more discussion of the death of the internal IT department beyond the many books and reports already written.  Fasten your seatbelts.

The Only Constant is Change

"To improve is to change.  To be perfect is to change often." - Winston Churchill

Forrester has a new report out discussing the dynamic evolution that traditional IT services providers are going to experience over the next several years.  This analysis is very timely and it addresses a combination of external drivers that I have been writing and speaking about for the past several years.  The authors, John C. McCarthy and Pascal Matzke have done a masterful job in codifying the thinking around these externalities and their impact to the existing IT service provider business model. This excerpt from the executive summary delivers the high-level on the emerging metamorphosis.  

“The tech services market is about to undergo a massive transformation that will call traditional provider business models into question. Four factors will combine to dramatically change the dynamics, economics, and competitive landscape of IT services over the next three to four years: 1) the “restructuring economy”; 2) innovation moving to the edge of the enterprise; 3) the redefining of buying and governance dynamics in accounts; and 4) “as-a-service” becoming the norm.”

For those that have been engaged in surveying the technology market landscape over the past decade, the conclusions McCarthy/Matzke draw from their analysis is no surprise.  Unfortunately, few of those individuals appear to actually work for the major players in global tech services because those firms have made few, if any, alterations to the business model they have employed for the past 15 years.  As innovation in IT moved from the data center to the business units, on-demand/as-a-service and other cloud-based solutions gained traction, and social/mobile activity emerged as integral parts of the technology platform, Nero fiddled.

And the hits just keep coming.  The Forrester report offers a forecast of why and how the IT services model of today will cease to exist by 2020.  

• Forrester sees at least nine new services entering the market as cloud/SaaS redefine the services business.
• Selective sourcing and utility pricing models broaden their footprints.
• Digital natives and the advance of business (unit) buyers push traditional IT into the background.
• Standardization in cloud/SaaS solutions create pricing transparency and profound pricing pressure on traditional service models.
• Cloud/SaaS drive increasing standardization and process industrialization of services leading to delivery models based on solution partner ecosystems.

From my perspective, the most provocative item in the report is the following table that contrasts the top ten service providers in 2010 with a forecast of what the top 10 will look like in 2020.

 

Looks like a whole lotta growth, death and consolidation in the sector.  Ten years may seem like a lot of time for the current top ten to embrace and adapt to this new environment, but the truth is that this evolution has been ongoing for at least five years.  Too many of the incumbents lack the cultural and operational survival instincts to revolutionize their business models.  Some of the logos we have come to recognize in the global tech services space have already vanished.  It will be interesting to watch how this all plays out over the next decade.

Greenwashing, IT Services Style

Having worked there once upon a time, I have a lot of respect for the way Accenture adapts their services portfolio to take advantage of changing market drivers. They have been, however, a bit overzealous in the past with PDAs (public displays of affection) for market opportunities that they believe are ripe with potential. When I joined the firm, they had yet to grasp the magnitude of the discontinuity that was the Internet, though I had already been building business cases for the platform potential of the Web for four years. While Accenture was able to turn on a dime and seize the moment, I felt they were engaged in a bit of overkill with the amount of resource they dedicated without a clear direction.

So I do have a healthy level of skepticism on this recent announcement from the firm.

Accenture has introduced the Accenture Green Technology Suite, a comprehensive set of tools designed to help an organization assess its environmental standing, provide recommendations on how to address its carbon footprint by improvingthe way IT is managed, and support the entire organization’s green agenda.

These new tools have been designed to provide everything from detailed assessments of where the enterprise sits within a green “maturity spectrum,” to suggesting IT initiatives that can be undertaken to proactively address the company’s future carbon footprint. The tools also help calculate the impact of the specific initiatives in terms of workplace environmental efficiency and data center energy savings.

On the surface, it feels more than a little like greenwashing. While I have no doubt that services to assist enterprises in making their technology-related carbon footprint substantively lower will emerge in the market in due time, I want to see what the man behind the curtain really has for us before I give Accenture props for this move.

Has the Fat Lady Sung?

One has to wonder, after spending most of this decade trying to sort itself out, why BearingPoint can’t seem to find a way out of the fog.  After too many restructurings, redirections and restarts to count, now we get this.

Morningstar is placing its fair value estimate for BearingPoint under review and may rule out a successful turnaround for the company.

The investment research firm cites the McLean-based company's weak financials, its low stock price and the recent resignation of BearingPoint's chief financial officer in placing the company under review. Finance chief Eileen Kamerick resigned earlier this month after less than a month on the job. 

BearingPoint stock (NYSE: BE) was halted this week by the New York Stock Exchange after falling below $1.05 per share. It currently trades electronic exchanges, but will not resume trading on the New York Stock Exchange unless its share price rises above $1.10. 

For all its problems, the company still generated $3.4 billion in revenue over the past 12 months.  As of the close of business on Friday, the market valuation for BE was a lofty $185 million with a share price of $0.85.

Operating a consulting organization in the current environment is challenging but there are dozens of BearingPoint’s competitors that are not only surviving but, in many cases, thriving. I won't pretend to know all the problems that have plagued BearingPoint, but the things I have heard about suggest a complete inability to adapt to the exigencies of the evolving services marketplace.  

While the company’s exposure to the Federal market might complicate things, BE could end up becoming a nice front-end for one of the India pure-play providers looking for a larger footprint in the Americas.

Stay tuned.

IT Services Employment Continues to Grow

For those who, like me, have been pondering whether the traditional notion that IT services firms do well during an economic downturn still holds, here is some evidence that it does.  This is from Eric Chabrow at CIO Insight.

Why is employment at IT services firms at record levels when the overall economy is tanking? IT is so integral to business that the need to develop new and support existing systems don't disappear when the economy goes south. But in a weakened economy, businesses don't want to add to their payrolls, so they turn to IT services firms to provide the manpower on an as-needed basis.

And, IT continues to be a catalyst for productivity. Indeed, a brightspot in recent gloomy economic news is IT's role in the recent boost in personal productivity.

As overall nonfarm employers shed 49,000 jobs from their payrolls in May, IT services firms added a miniscule 200 jobs, according to the monthly employment report issued Friday by the federal Bureau of Labor Statistics. That report showed that national unemployment jumped a half a percentage point to 5.5 percent. A year earlier, national jobless stood at 4.5 percent.

IT services firms, tagged computer systems design and related services by the government, employed 1,402,000 people in May. That's 48,600 jobs, or 3.6 percent, higher than a year earlier. [Industry figures for April and May are preliminary.]

Roughly one of five employed IT pros in the United States works for an IT services firm, according to a CIO Insight analysis of government labor statistics.

U.S. Dollar, Sub-Prime Fallout and IT Spending

According to IDC, IT spending is experiencing a modest deceleration in demand in the U.S. and only in specific sectors, such as PCs. The direct impact of a stagnating economy on spending has been mitigated by the weakness of the U.S. dollar.

International demand continues to mitigate the impact of the U.S. slowdown to some degree, particularly in relation to favorable currency trends which have buoyed the reported earnings of U.S.-based vendors. Some tentative signs of weakening demand and indicators have emerged in Europe and Asia, however, and there remains an elevated risk of further downside patterns in the next three quarters. Worldwide IT spending is expected to increase by 5.7% this year on a constant currency basis, down from last year's 7.2%.

"In a downside scenario, we could be at the beginning of a classic IT spending slowdown," said Stephen Minton, vice president of Worldwide IT Markets at IDC. "In every previous IT recession, the first sign of weakness has shown up in a softening of PC shipments. This has then transmitted to other hardware sectors within one quarter, to software license sales within half a year, and to the IT services sector if the recession persists for more than three quarters. Until we deviate from that course, we must closely monitor all other sectors of the IT and telecom industries for indicators of a further round of spending cuts. While this downturn will not resemble 2001 in terms of scale, it could yet be similar in terms of timing."

If the U.S. dollar were to begin strengthening, a downturn in IT spending could accelerate as the broad-based impacts and implications of the housing and financial crisis will require an extended period to stabilize.

"The global economy is still faced with a variety of risk factors," said Anna Toncheva, economist at IDC. "Intensifying financial instability, inflation pressures, and global imbalances have lead to increased synchronization of the business cycles between the U.S. and the rest of the world over the first quarter of 2008. When business cycles are closely tied together, macroeconomic shocks tend to spread faster from one area to another. And though the current housing and financial crisis in the U.S. seems comparable only to the mildest cases in world history, the compression on global economic activity will probably linger over the course of the next 6-7 quarters and will inevitably discourage investment plans."

Let's Dance

With yesterday’s announcement of the H-P/EDS business combination, are we about to embark on a significant round of consolidation among the heavyweights in the IT/BPO services marketplace? I don’t really believe so for a number of reasons.

First, it has been pretty well known, or suspected, for several years that H-P was in the market for an acquisition that would align their business model more closely with IBM’s (hardware - software - services) model. While I don’t suspect that H-P/EDS is a match made in heaven (since cutting A.T Kearney free in 2006, EDS has lacked the high end business consulting capabilities that IBM and Accenture dominate), it does provide both scale and scope and a strong global services footprint. I don’t suspect that any other service provider feels the same urgency to combine as H-P, at least in North America. EMEA may be more ripe for service provider M & A based on the strong desire by the Indian pure plays to establish a strong presence there.

Second, structuring a business combination that makes sense culturally, geographically, politically and synergistically is pretty difficult. Right now, the number of potential suitors across the globe that could reasonably pursue a deal of this magnitude is small and pursuing acquisitions across borders is made difficult when so many service providers have strong books of business with their sovereign government.

Third, all of the large global service providers are challenged in the current environment to reorient their existing business models and service portfolios to embrace emerging technologies and emerging delivery models. Combining two “old school” service providers may inhibit the adoption of skills/capabilities/assets necessary to compete with an emerging vanguard of niche/boutique providers and more agile Indian pure plays.

And, finally, the track record for M & A globally over the past two decades is pretty dismal. Within the IT/BPO service provider sector, large combinations such as H-P/EDS have delivered moderate success (IBM/PriceWaterhouseCoopers) or unqualified failure (Capgemini/Ernst & Young).

Consolidation is continuing apace at the lower levels of the market as the large providers acquire niche/boutique players with specialized skills, particularly in the BPO space. I just don’t think there will be a mad push for consolidation among the dozen or so large global providers.