Corporate Customers Jump on Services Bandwagon

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Corporate Customers Jump on Services Bandwagon

The worldwide outsourcing market is expected to grow from $40.5 billion in 1996 to $68.5 billion by 1999

By Ed McKenna, Contributing Writer

The market for information technology outsourcing continues to grow as savvy corporate customers expand their use of the services and integrate them into their larger infotech strategies.

Victor Millar

Outsourcing remains a staple and a growing part of most large integrators' businesses despite inroads by infotech management consulting into services traditionally associated with outsourcing. Projected to grow 19.2 percent through the end of the decade, the worldwide outsourcing market is expected to grow from $40.5 billion in 1996 to $68.5 billion by 1999, according to the market research firm Dataquest, Westborough, Mass.

As with the consulting services, these increases are being fueled by the growing complexity of technology and the lack of resources at many companies due to downsizing. Companies are also leveraging outsourcing services for financial and infrastructure gains.

The consulting and outsourcing businesses are not really competing, said Bob Olivier, marketing director for Integrated Business Systems at Computer Sciences Corp., Falls Church, Va. "It's more a question of companies buying from many sources," he said. CSC earned about $1.6 million from each of its outsourcing and consulting businesses in 1995.

Customers have become more sophisticated, he said. They understand the basic processes offered by infotech service providers, such as business re-engineering, and are increasingly "buying results as opposed to capability," he said. The federal government, however, continues to focus on capability, he added.

"They are consciously avoiding cookie-cutter solutions," he said, noting that CSC is focusing on tailoring its services to its customers' needs.

The main reasons companies seek outsourcing remain the same - "to save costs of technology and avoid future costs," said Olivier. However, over the last few years, companies are beginning to use capital savings gained from outsourcing to pay for the services.

For example, James River Corp., Richmond, Va., which contracts with CSC for outsourcing, systems development and consulting services, is using the capital savings gained from outsourcing to underwrite its consulting costs.

In another marketplace shift, companies are beginning to defy conventional wisdom and outsource their core businesses, said Victor Millar, president of AT&T Solutions, Florham Park, N.J. Specializing in network solutions, the AT&T unit has bagged major contracts with Textron Inc., Providence, R.I., and United HealthCare, Minneapolis. The latter, inked in late October 1996, calls for Solutions to build and operate the health-care company's enterprisewide networking platform.

AT&T Solutions has also managed to line up financial services companies, such as MasterCard International and Merrill Lynch, for its services. "For any brokerage house, the network is a core operation," he noted.

AT&T Solutions is also part of a high-powered team called the Pinnacle Alliance hired by J.P. Morgan, a global financial services company, to manage its infotech operations. Led by CSC, the alliance also includes Bell Atlantic, Philadelphia, and Andersen Consulting, Chicago.

Valued at $2 billion over seven years, the arrangement employs an unusual operating model, said Olivier, with cross-company teams addressing every facet of the effort, rather than assigning companies different areas of the task. As the lead contractor, CSC will receive about 40 percent of the contract value.

Olivier said he has not seen any indication that the Pinnacle Alliance model will become a market trend. J.P. Morgan is "a very sophisticated client and wanted the best of breed across the board," he said.

In another novel industry development, Hughes Space and Communications Co., Los Angeles, engaged Oracle Corp., Redwood Shores, Calif., in 1995 to manage its database, an operation usually handled by the systems manager. Under a five-year contract valued at $16 million, Hughes outsourced its technical data management, as well as application integration and application production support functions to Oracle.

"It is a different kind of outsourcing," said John Wheeler, vice president for U.S. operations for Oracle Government Services, Bethesda, Md. Instead of being an exchange of specific services for funds, Hughes can exploit Oracle's services in other areas of its operation as Oracle infuses into the system technology for all Hughes' data applications.

Essentially, Oracle "serves as the data broker to the suppliers of technology," Wheeler said. At HSC, Computer Sciences Corp. manages the network and Electronic Data Systems Corp., Plano, Texas, manages the desktop systems, he said. "Hughes' IT staff continues to do the systems engineering and hands off architecture requirements to us," said Wheeler.

To facilitate integration of HSC's different databases under the contract, Oracle is tasked to incorporate commercial, off-the-shelf programs into HSC's diverse databases. Oracle also built a tool set, called the Enterprise Data Management System, to splice together HSC's different databases. To integrate these systems "manually would take 20 hours, but with the tool set, integration can be done in two hours," he said.