The collision of cloud, big data, mobile, and social has the potential to drive faster growth in the IT services business than we have seen in years. These are disruptive, technology-based trends that force businesses to re-make their technology and business strategies – perfect fodder for well-positioned consultancies. The window is open now because we are at just the beginning of this era, with standards, best practices, and market leaders not yet established. The question is, can established services firms adjust fast enough to take advantage of these opportunities, or will a new ecosystem of service providers step in and take the prize.
Like It’s 1999
Times of great change drive the services business. The previous peak for IT consulting was probably 1999, when the last of the big Y2K projects were launched and the industry held its breath waiting for the crash to happen on December 31. We haven’t seen that kind of concentrated spending on IT consulting since. The closest was in the early 2000s when Sarbanes-Oxley drove corporations to spend on IT software and services in order to get compliant with the new regulations.
Looking at the large established service providers today, we find companies trying to shift with the times, some more effectively than others. HP blamed its recent mediocre results on failures in its $40B services business, removed some managers, and is now seeking a new services leader. Meanwhile, IBM has seen a rebound in its outsourcing business and reported a backlog (contracts to be fulfilled) last quarter of $142B. Accenture, Deloitte, CSC, and others are strengthening partnerships with key tech firms in their bids to stay relevant. They’ve been highly visible at vendor tech conferences such as EMC World and SAP Sapphire this year.
This new era shows both differences and similarities to previous ones:
What’s Different This Time
Tech whales as consultants. Several large technology vendors are well-positioned to capture this business. HP and Dell have made major services acquisitions in preparation for the sea-change we are now experiencing. EMC has gradually built up a large consulting organization through hiring and M&A. Customers today put less value on the ivory-tower, tech-agnostic view that big consultants sold in the past—they want the full pitch, product bias included, on what’s best for them.
As Accenture partner Rockwell Bonecutter noted at EMC World last month, “Sometimes we get paid to have a point of view, because [in the end] the customer wants to buy something.” Whereas services-weak EMC felt the need to create a joint venture with Accenture in the early 2000s, today the stand-alone consultants and SIs like Deloitte, CSC, and Accenture need the tech firms as much as the tech firms need them. IBM, of course, is the elephant in the corner, with cloud experience, analytics (Netezza), its own huge services business, and technology.
Consulting to service providers. One less-explored part of this market shift is the consulting and integration that telecom firms – AT&T, Verizon, CenturyLink, and others – will need to transform themselves into cloud service providers. We think their needs have been underestimated, considering their central role in delivering public cloud services. Having journeyed to the xSP cloud with the telcos 10 years ago and seeing the pitfalls along the way, savvy companies like EMC have hedged their bets on telecom-delivered public clouds taking off soon. To cross the chasm this time, the telcos are going to need consulting, integration and support services, as EMC for one addressed at EMC World.
Pre-integrated infrastructure changes the game. Products like VCE’s Vblock are designed to reduce the need for classically long, expensive integration projects. Vblock and competing products are the first wave of pre-integrated technology that will replace the component parts that needed hands-on integration before.
IT-as-a-service can lead to more strategic consulting. Consultants over the years have built small industries around installing complex products like SAP and Oracle. But part of the attraction of cloud services like Salesforce.com is speed-to-implementation and cutting out the consultants. We think the cloud can also free up consultants to have more strategic conversations with clients. Consultants now can focus more on the piece of the CIO’s budget that goes to innovation instead of just helping to keep the lights on.
What’s the Same This Time
Another big shift. As Joe Tucci noted at EMC World, the infrastructure layer, application layer and end-user layer are all changing at once. Tectonic shifts drive customers’ services needs.
Consulting leads to additional services work and tighter customer relationships. Consulting has always been a potential entry-point into large corporate accounts, and this hasn’t changed. EMC and Dell can now legitimately offer consulting services and then pick up implementation, integration, and on-going customer support services, on top of the technology sale. Vertical market clouds also are beginning to come into play, and stand-alone services firms like Accenture and CSC as well as technology vendors are tackling the vertical angle.
Outsourcers can apply their experience. Cloud computing is not traditional strategic outsourcing, but some of the same decision-making will apply when customers look at moving workloads to clouds operated by service providers. Outsourcing firms have worked with customers on sourcing strategies for years and can bring that experience to the cloud conversation.
Large shops are buying IP that they don’t have in-house. Large services firms have always acquired small niche consultancies and software firms to obtain needed IP when an area gets hot, and this is happening again: Deloitte recently acquired SaaS analytics company Oco, while Accenture bought SaaS analytics vendor CadenceQuest in 2010. Meanwhile more cloud-focused consultancies have entered the picture.
Services companies can lead as well as follow. Some of the big SAP services partners at SAP Sapphire last month were farther along in their thinking and investing in new-era technologies than was SAP itself. But the question is whether the established service providers can turn the ship fast enough, or end up ceding significant market share to smaller, hungrier start-up consultancies, re-constituted telecom firms, and niche servicers.
Action Item: 1) Customers should find a service provider who understands their business goals first and works backwards from there. Be open-minded about who really has the intellectual capital – it may not be the big guys, who are often also more expensive.
2) If you’re moving to cloud or attacking Big Data within your organization, find out what technology vendors offer for advisory services. Don’t write them off if they have partnered with a services firm for these skills. As always, be clear about what services are included in the technology sale.
3) Spending on consulting for a move to cloud may seem contradictory, but particularly if you’re looking at moving critical applications to the cloud, you may need advice.
4) When it makes sense, look for risk/reward engagements where the services firm’s compensation is based partly on your post-project revenue growth, profitability, or other metrics.