ACCELERATING DEMAND: e-services stretches supply

With the intense demands on their time and resources, IT managers are choosing to delegate some of their headachesThe rapid growth in demand on IT departments in recent years has forced many users to turn to external providers to deliver services such as support, consulting, technical skills and project management. Indeed, many of Australia's biggest users have chosen to outsource their entire IT function to the likes of services giants EDS, CSC and IBM GSA in deals worth hundreds of millions of dollars.

However, many see this as just the tip of the iceberg. As businesses look to rapidly deploy incredibly complex mission-critical e-business applications, many believe the IT services industry will scale new heights as users reach out in search of a helping hand.

"We are at the brink of a new era in the services industry," said IDC analyst Merv Langby. "Full-blown, fully-integrated e-business applications are going to usher in a host of new IT service opportunities."

The reasons for the strong growth in the IT services industry (which Gartner estimates is growing at 20 per cent annually in Australia, and in 1999 was worth about $11.5 billion), have been well documented.

Firstly, businesses in general have increasingly opted to focus on their core competencies, while noncore functions are outsourced. With the pace of change in IT accelerating unabated, complex technology implementations are being left to the specialists, improving time-to-market and increasing a company's competitive edge. (Or at least that's how the theory goes.)The critical shortage in IT skills has also driven CIOs and IT managers to partner with external companies. By outsourcing or out-tasking, it's the service provider that has the headache of hiring and firing. Somewhat ironically, the trend towards external services has made it even harder for those companies that buck the outsourcing trend to recruit and keep talented staff.

"The good people tend to be attracted to service providers," Rolf Jester, Gartner's regional director for the IT services market, said. "Service providers generally pay more and they tend to provide more interesting and challenging careers too."

The comfort of negotiating a service-level agreement, guaranteeing certain levels of performance, also makes outsourcing or out-tasking attractive.

It's not surprising that Australian businesses have taken so readily to outsourcing and out-tasking.

"Australia really is advanced in terms of the maturity of our services industry, certainly much more so than other countries in our region," Jester said. "We're well up there, even on a world level."

One mark of our maturity is that product-related support services, the most elementary of IT services, now represents only 20 per cent of the total market, Jester said. The largest services sector, according to Gartner, is now IT management services, which includes operations management or out-sourcing. It accounts for 27 per cent of the total services pie. Fast growing areas include systems, network and application integration and, in particular, professional consulting services.

It's worth noting too that even the slower growing offerings, like product-related support services, are growing at eight per cent annually, which is hardly tortoise pace. It's just that the rest of the industry is growing so quickly that it pales in comparison.

Most agree, however, that the really hot services will be those associated with users' e-business initiatives.

All the reasons already given about why a company might outsource become even more relevant as users scramble to implement ambitious e-business strategies.

"The real drivers behind IT services are the increasing levels of technical complexity and the rapid rate of change," IDC's Langby said.

"Users want to get to market quicker so they turn to people who have done it all before and as a result have the expertise in the relevant technologies, solutions and processes."

Paul Kenny, IBM GSA's director for e-business, agreed this was a primary motive for many of its customers.

"For many of our clients, these e-business projects are a first-of-a-kind for them, so they don't have the expertise."

"What's more, because these projects are so visible to the outside world, they can't afford to make a mistake learning how to do it, so they're happy to bring in people who have the skills," he said.

Arno Franz, vice president of consulting for CSC, said that most IT departments already have enough on their plates with everyday maintenance and ongoing operations as well as dealing with issues like GST.

"Businesses are going to need to move fast to stay relevant and not everyone is geared up to move as quickly as is needed; as a result they will suffer," he said.

"The IS function isn't always built to move with speed, it often suffers from the inertia of bureaucracy and so it's easier to bring in someone from outside."

Franz said CIOs and IT managers were refocusing on ensuring IT was absolutely aligned with their company's business strategy, a change necessary now that so many e-business initiatives receive sponsorship from the highest levels of management.

As a result the relationship between the user and its external service provider is changing, Kenny said.

"In the past, certainly some outsourcing arrangements have been very bottom-line focused, but I think what we are now seeing are more partnership-type relationships.

"Any outsourcing relationship really needs to be viewed in terms of how quickly it enables you to respond to changes. If it's reduced to commodity status, then everybody loses," he said.

Service providers assert they are responding to users' needs by delivering new services aimed at helping companies e-enabling their business, as well as ramping up existing offerings they expect to be in strong demand as a result of e-business initiatives.

"Now that we're over Y2K, CIOs are going to be facing a lot of pressure to either drive costs out of their business or to grow revenue using e-business," CSC's Franz said.

"They're the two broad areas of e-business. The business-to-business (B2B) initiatives that reduce costs and the business-to-consumer strategies that aim to grow revenue."

Paul O'Rourke, EDS sales executive, said that on the B2B or e-procurement side of the equation, service providers will be looking to help users implement software from leading vendors in this market place such as Ariba, Commerce One, Oracle and SAP.

He said users should be looking to cut their cost of doing business by exploring ways of both e-enabling their internal procurement process, but also by becoming involved with vertical "mega" B2B marketplaces.

On the consumer side of the coin, IBM GSA's Kenny said that Australian companies were beginning to follow the lead of US businesses in recognising that the supply chain was now consumer driven.

"We're really seeing the breakdown of traditional relationship between manufacturer and retailer where they would collaborate to decide on things like price, fulfilment cycles, and so on. It's now the consumer who is deciding at what price, when they want to buy it and how they want to receive the product. It's a consumer-driven supply chain," Kenny said.

A consumer sitting in an airport decides he wants to buy a book, so orders one from the lounge using his Palm unit and expects it to be delivered to his hotel room in another city by the time he gets there. That's the kind of consumer-driven supply chain that Kenny is talking about.

"There are enormous ramifications created by a business operating in such a way all the way down the line. You need to look at your demand cycle, fulfilment cycle, invoicing, and so on."

Service providers are seeking to hawk their expertise in helping users, not just to implement technical solutions, but also to help companies redefine their business processes, Kenny said.

The two most complementary areas where service providers see they can aid users in implementing e-business strategies are in customer relationship management and knowledge management.

"Customer relationship management is already a very big business for us and it's not going away," EDS' O'Rourke said. Primarily a market for tier-one blue-chip companies at the moment, O'Rourke believes it will be made more accessible as it moves to a usage-based model delivered by an application service provider (see ASP story p20).

"The other big area of business is going to be knowledge management," CSC's Franz said. This typically involves technologies like business intelligence, data warehousing, groupware and so forth and often involves integration with CRM and ERP systems.

"Businesses have long grappled with how to capture and reuse the knowledge contained in your organisation," he said. "Having mastered that you might start asking how you can use that knowledge for best practice and balance scorecarding and so forth."

However, he said the next step is how to use that knowledge on a competitive basis. "How do you get information on your competitors and incorporate that into your knowledge management systems?" he asked.

Perhaps, the most difficult part of any such e-business initiative, though, is tying together a company's existing legacy systems to the latest whiz-bang solutions.

"There is a lot of hype around these new software solutions, like Siebel and Commerce One, as universal panaceas, but it's not until you unleash the power of your legacy systems that you are really going to see the true benefits," Franz said.

In fact, Franz is predicting disaster for companies that think they can just bolt on one of these solutions without the accompanying integration work involved with tying them to legacy systems.

"I think we're going to see a lot of very spectacular failures," he said. "It's going to be a return to the ERP phenomenon where you have systems that are still being implemented, because the greater issues like re-engineering the business process weren't tackled first."

Integration certainly seems to be one of the hottest services that external providers can offer customers.

According to Com Tech's Darron Lonstein, director of enterprise systems, there is strong demand from customers wanting service providers to come in and tie together systems that before existed separately.

"We're certainly seeing that customers want a single integrated solution rather than all these individual silos," he said.

"If you take customer relationship management, you may have had your Internet camp and your call centre camp, but now there is a definite move to bring those areas together as part of a fully integrated single solution," Lonstein said.

Integration has always been a strength of external providers. With their breadth of knowledge and expertise, it lets them piece together a single solution from disparate components, far more quickly than a user could themselves, argues IBM GSA's Kenny.

"We're seeing a lot of customers expressing frustration when trying to glue together a lot of different systems, people and contractors on such a compressed time frame."

"We are able to act as a single point of accountability in delivering the business outcomes our customers are after," Kenny said.

It's no surprise then that, according to Gartner's figures, the integration market is growing strongly. To some degree that has been at the expense of pure application development.

"Application development is not keeping up with other services," Jester said. "It's clear that people are today more inclined to spend money on buying and integrating applications, rather than building them from scratch."

IBM GSA's Kenny argues that once users have an integrated solution they really need to think about how they can get the most benefit out of it and perhaps bring in an external company to guide their thinking.

"A lot of people have done the work of integrating together their Web site and call centre, but now really need to think about how they can bring it all together at an action point," he said.

"That's looking at areas like permissive marketing where you track your interaction with your customers and link it all together so that you can respond with a unique offer targeted at individuals."

IDC's Merv Langby identifies this new breed of consulting services as another future services hot spot.

"The e-business executive is a new breed of manager because he/she doesn't belong to any single business unit. Service providers will be looking to target this individual with an unusual mix of technology enablement, creative marketing and media solutions and consulting services.

Another example, put forward by Kenny is in the area of content and knowledge management. Service providers might break bulk on subject knowledge to enhance a customers call centre and Web site. "For example, a service company might build up a level of expertise on mothercraft. If you're Nestle and you're selling infant's milk, you have a need for that information and that knowledge base might drive your call centre," Kenny said.

Another emerging pure e-business service is helping customers extend their brand online.

"How do I extend my brand to the Internet world," Kenny said. "There are many examples of customers who have advertising campaigns that work well in a magazine or newspaper format, but have been somewhat challenged when it comes to taking that to the Internet. It's a whole new kind of thinking."

Most developers of internal applications give only a passing thought to the user interface design, however when you are developing an outward facing application the ease and usability of your interface design is critical and can undo all the good work that has been done elsewhere, Kenny said. Users might therefore turn to IBM GSA to ensure their user interface is as good as it can be.

While, there are a host of new services being offered in the market now, a number of traditional services are growing strongly as they piggyback on the e-business boom. In particular network integration, security and management services are critical foundations of a successful e-business strategy.

"We're seeing strong demand for people looking to build the platforms for their e-business enablement," said Com Tech's Lonstein.

"There is a definite focus on building robust, scalable platforms, full-featured environments that incorporate security, caching, load balancing and disaster recovery."

In particular, security services were in strong demand.

"Security can't be an afterthought," said Kenny. "Sometimes, you can be so focused on the business outcomes you forget to address issues like security that have to be part of the overall design."

"We're finding PKI (private key infrastructure) services are particularly in demand," EDS' O'Rourke said, adding that the service was dovetailing into demand for smart-card services.

Gartner's Jester highlighted disaster recovery, or put more politely business continuity, as being a huge growth market for services companies; the sector is predicted to grow at 40 per cent annually.

"Business continuity has been around for a long time, but it's really only now that services firms are being successful in convincing customers of the value of such a service," Jester said.

"Businesses are now starting to understand that they can't do without their IT systems."

Integrating new emerging network technologies like wireless and WAP, as well as broadband would also be a hot area, IDC's Langby said, as would management services. Lonstein pointed to storage management in particular as being a fast emerging market.

Whether it be new services or traditional services getting another leg up, one thing seems clear. E-business is driving a golden age of service provision and in the process forging closer relationships between a user and their external service providers.

ASP: the sting in the tale

Almost everyone expects the application service provider (ASP) market to explode in coming years. Gartner, for example, estimates it will grow at in excess of 100 per cent annually.

Rather than host your own applications, ASPs host the applications at their data centre and deliver it to the customer over a network or Internet on a usage or subscription basis. The improved cost efficiencies lead to lower charges making high-end applications much more accessible to smaller users.

A new breed of ASP start-ups have hit the market place, with the likes of Alta, Tequinox and ManageIT, but expect the big services companies to also play heavily in this market.

"We've always operated these large data centres so it's a natural extension of our business. It's also a very big advantage for us over the big five consulting firms, which don't have that capability," EDS' O'Rourke said.

The bundling of application delivery and business services and consulting is likely to lead to increased enthusiasm for business process outsourcing, another area that Gartner is tipping to grow strongly.

Both Gartner's Rolf Jester and IDC's Merv Langby agreed that ASPs would continually push the envelope in terms of the value-add they offer customers including a raft of managed services, consulting and BPO offerings.

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