Big guns muscle into services and consulting

It’s no secret that the giant box pushers are fast turning into solutions giants as well. Rahul Neel Mani describes the latest developments on this front, examines the strategies of the main players and analyses the probable impact on the industry

The biggest reason why the box pushers of yesteryear are turning themselves into total IT solutions giants is the size of the opportunity in IT solutions. According to IDC estimates, the global IT services market stood at $400 billion at the end of 2002. And the biggest of the box pushers—IBM, HP and Sun—are already providing tough competition to the likes of Accenture, EDS and Cap Gemini E&Y.

Sun Microsystems is lining up world-class systems talent, R&D resources and global network of partners to engineer out cost and complexity, says K P Unnikrishnan

Shift in focus

All these three major vendors have taken giant steps forward in terms of broadening their business scope to the area of IT services, management services, customer support and IT consulting services. Says Chun-Phung Lim, VP, head of Regional Sales & Marketing, HP Services APAC, "Customers want to get a high value proposition in terms of the vendor’s ability to fulfil end-to-end solutions—from product selling to maintenance—and if this can be done by just one vendor, who is also a partner, then it makes sense." That calls for analysing the demands of customers vis-à-vis the strategies of the vendors who capitalised on the business opportunity. When we compare the pre- and post-dotcom era IT market, there is a clear differentiator that comes out, and that is the current trend of low and optimisation-driven IT funds allocation. Also, earlier, protection of IT investments was never envisaged.

Also, in the post-dotcom era, fast IT growth stalled and the market grew at a snail’s pace. In the boom times the industry was growing at five to six times of most countries’ GDP on an average. But with the end of the boom, growth came down to twice that of GDP growth. That meant all the large box pushers were not able to drive any kind of sustainable growth from box sales alone. "It is not a surprise that all the big IT vendors want to get into the services area and one of the reasons is that the services segment provides tremendous growth opportunities, notwithstanding the boom or bust," says Lim. According to experts and market leaders, services will soon be bigger than the IT product industry as a whole.

The second reason for this shift in focus was the change in customers’ buying expectations. Most enterprises today have cost-reduction as their key goal in order to maximise return on IT investment. It is all about realising the maximum from the investments that have already gone into IT infrastructure. Services and consulting help enterprises plan better and plan smart, thus resulting in growth opportunities.

Lastly, research also shows that enterprises are looking less at technology itself and more at innovation built on top of conventional products.

Mega business

Q1 2003 saw more than half of IBM’s revenues being driven by IBM Global Services, the services arm of the company. "With the formation of IBM Business Consulting Services, IBM is now poised to offer end-to-end solutions capabilities to customers—ranging from strategic consultancy to IT implementation to strategic outsourcing to application management services to infrastructure support to business transformation outsourcing. No other IT services company in the world today can make this possible," claims Ashish Kumar, country executive, IBM-GS. And while others may challenge this claim, the confidence may not be misplaced, if one considers the deals IBM has bagged in the last six months on the services and consulting front.

Take a look at the adjoining tables to get a clear picture.

These numbers clearly prove that HP’s IT services operation shows both sequential and year-on-year growth in the second quarter ending April 2003, albeit with some help from the Compaq acquisition.

Sun Microsystems does not provide similar financial data, but the company is very bullish in its own domain of expertise. K P Unnikrishnan, head of marketing at the Indian arm of Sun Microsystems says, "At Sun Microsystems, we’re lining up our world-class systems talent, R&D resources and global network of partners to engineer out cost and complexity. We are not looking at busloads of people to address these issues and that is the fundamental difference in strategies [between Sun and IBM and HP]," he says. The ‘busloads’ of course refers to the numbers that IBM and HP have in India, and their big plans for recruiting even more.

Sun believes in a partner-driven strategy, rather than going it all alone, and this where Indian software vendors like TCS, Wipro and HCL will partner with Sun to deliver world-class services. Having said that, it must be mentioned that Sun still does not focus on services as a revenue generating engine, like IBM and HP do.

Gap is shrinking

If we look at some comparable figures from traditional consulting and services companies such as EDS and Accenture, we find that the gap between them and firms like IBM is shrinking, and in the not-so-distant future, they will trail firms like IBM in the services race. IBM Global Services has around 8 percent of the global IT services market, based on its yearly revenue (2002) of $36 billion. IBM-GS accounted for 51 percent of the group’s total revenue, 50 percent of pre-tax profits and 55 percent of total headcount. IBM Business Consulting Services employs nearly 60,000 people whereas Accenture has 75,000. And importantly, IBM (with the acquisition of PwC Consulting) is estimated to have combined consulting revenues of $15 billion as compared to $11.2 billion of Accenture for the fiscal ended August 2002. The PwC Consulting takeover and the resultant leap in the consulting arena has widened the gap between Big Blue and HP. But Lim of HP feels otherwise. "HP’s focus is not to be the biggest. Our primary focus is to be the No 1 in customer experience and satisfaction. Being the biggest will not take us anywhere in terms of meeting our end-objective," he says.

IBM is now poised to offer end-to-end solutions capabilities to customers ranging from strategic consultancy to business transformation outsourcing, says Ashish Kumar

Small firms may suffer

While competition in the services and consulting arena is definitely going to intensify as the battle between the biggies heats up, it’s also a certainty that this war will eat into the business of the smaller system integrators, who have so far been the partners of these big box pushers. In another scenario, the smaller guys could also get acquired, thanks to the aggressive M&A policies of the biggies. Take India, for instance. As the global market gets more and more price sensitive, IBM and its main rivals are trying to build low-cost resource centres in India. IBM already has over 4,700 professionals in the Global Services division but is continually ramping up to fight the home-grown, yet globally competitive Indian firms such as TCS, HCL and Wipro, all strong in their own domains.

But because of the outsourcing buzz and being strong product companies, the powerful box players will have a sure edge over pure service providers. The main reason for this is the demand from user companies for vendors who can provide everything under one roof, and the capabilities of the big box pushers to do the same, using their services and consulting arms.

Out of the box

Just as feature-rich, value-added communications devices replaced the plain old telephone system, standalone hardware boxes are no more in demand. Users demand value for money with a wide array of value-added services with the box, or don’t want the box. In many cases, they just need an outsourcing partner to manage everything for their companies. That’s where IBM’s On-Demand Computing, HP’s Adaptive Enterprise strategy and Sun’s N1 strategy come in. These are simply different names for utility computing from different vendors, and basically promote the concept of pay-as-you-use.

The utility model, in which IBM has invested nearly $10 billion, differentiates it from the likes of consulting and services giants such as Accenture, CSC and EDS, and it is this approach that’s enabling IBM to clinch deals, including a recent one from JP Morgan Chase worth $5 billion. IBM is doing well in the financial sector with its on-demand utility projects. Even in India it has customers like ING Vyasa, RBI and Bank of Baroda. "IBM’s e-business on-demand strategy is a platform that BCS will help shape and make real to clients. BCS gives IBM the experts and practices to address our clients’ challenges from a business perspective," says Kumar of IBM.

IBM has already started expanding its on-demand menu with the announcement of new products that are designed to help companies make efficient use of servers and storage equipment. SAN Volume Controller, SAN Integration Server and SAN File System are the first few virtualisation products from Big Blue. On the apps server side it announced the availability of software that will allow users to pool application servers and then balance the load between them as traffic volume changes. Another new product meant to make an administrator’s task easier is IBM’s Web Server Provisioning tool.

On the other hand, HP is running neck to neck with IBM on this front by introducing its Adaptive Enterprise strategy with the concept of Utility Data Centre, HP Adaptive Network Architecture Services and Adaptive Application Architecture Services, all aimed at tight enterprise integration. "We offer services across the lifecycle of IT, including design, building, integration, management and evolution," says Lim. The company also recently unveiled two additions to the OpenView management software platform. Virtual Server Environment offers real-time server utilisation, and HP has also introduced self-healing solutions. Apart from these the company has also introduced HP Agility Assessment Services.

HP’s strategy centres around a reference architecture called Darwin. It is designed to integrate business processes with virtually every enterprise product, service and standard that HP supports—everything from J2EE to .NET to software from PeopleSoft and SAP. As part of Darwin, HP has announced 15 new products and services supporting its adaptive enterprise push. HP has recently formed a strategic partnership with Opsware that will ensure that a company’s data centre automation software is combined with HP’s Utility Data Centre. HP’s services group thus becomes an authorised partner of Opsware. "This is clearly aimed at gaining an edge over IBM and Sun," says Lim.

Sun is gearing up with its Sun N1 Offerings, which more or less target the same kind of customers and in the same technology space. Says Unnikrishnan, "The systems support market has grown and matured. Now we’re seeing tremendous demand in professional services because as the rest of the IT market is maturing, it is becoming more complex."

N1 is Sun’s architecture for managing entire network computing systems, allowing customers to treat the data centre as a single system. With N1, businesses can improve their bottom line by increasing the utilisation and agility of the data centre, while driving down cost and complexity. Sun’s N1 offering includes software, hardware, storage, and services.

Sun is also buying application provisioning start-up CenterRun for a reported $66 million, helping fill out its N1 strategy. According to Sun, CenterRun would build on elements of N1 that provide a foundation for the strategy, by aggregating computing resources into a virtualised pool.

An array of partners have lined up to support the initiatives of HP and IBM (see tables below for details)

Future’s even better

IBM’s Global Services division is committing a lot of money and manpower to gear up the company around its utility and on-demand service delivery model. The biggest drivers would be grid computing and storage, one of the six core infrastructure services that IBM-GS currently offers as a utility. IBM’s utility model also incorporates three management services—apps and process management, infrastructure management and value-add services. With all these offerings, IBM is growing as a dominant force in the IT services and consulting market. Also, the acquisition of PwC Consulting will bring the company more wins in terms of services contracts.

On the other hand, HP’s services division can be divided into three main areas: customer support, consulting & integration and managed services/outsourcing. HP is keen to position itself on par with IBM-GS and recent deals have shown its impact on the services industry. HP’s customer support operation accounts for approximately half of its total services revenue and HP is one among the three largest providers of support services with IBM and Xerox, according to Computer Wire Research. The company is also pinning a lot of hope on the future of its consulting and system integration operations. HP has Deloitte and Accenture to rely upon to resolve business re-alignment issues today, but in future the company may look for more acquisitions. "The consulting division will grow strong and it may happen with some acquisitions, which will happen in due course of time," says Lim.

HP is keen on customers who are changing their total computing environment and want an IT services partner to take ownership of the change. Sources also reveal that HP may acquire a company in India as part of a three-year strategy in the country. This will be for some BPO activities and to save costs. The company is believed to be targeting $200 million as services revenue from India by 2005, according to Computer Wire Research.

Sun also has great plans for the future. With the Reference Architectures and the Sun Customer Ready systems programme, Sun aims to speed design and deployment times while reducing complexity and risk for its customers. "Sun Reference Architectures are designed, tested, sized, and documented end-to-end solutions for building complex systems that meet specific business needs. These documented architectures help reduce the complexity and risk associated with deploying new computing infrastructures," says Unnikrishnan. Sun Reference Architectures are built to the specifications of the SunTone Initiative to help deliver the highest quality of service to customers.

Sun officials say that they are all set to define TCO as ‘Taking Cost Out of an enterprise’. "For this, we will be attacking cost from all angles, including data centres, apart from working at increasing utilisation, simplicity and increased security for mobile devices. We propose to lower the total cost of operations. We propose to achieve this through our network of partners by offering integrated solutions that address the specific requirements of the end-users," says Unnikrishnan.

All this is a small part of a larger two-pronged strategy: One, to sell products through services and consulting and vice-versa, and second to make India a base to develop to deliver low-cost application deployment and maintenance.