ICT services: A broth with too many chefs

A multitude of companies are offering commercial services, and even original equipment manufacturers (OEMs) are including them in their product packages. With most concentrating on the lower end of the services sub-sector, consolidation is definitely on its way.

Lucky Khumalo, COO of ICT services company Mthombo-IT, says too many companies are playing in the space and it is over-traded with low margins. Companies are offering little value-add and there are almost no asset management offerings.

"When you move up into the Wintel environment, the numbers and the market get smaller, and on the mission/business-critical side the numbers are even lower," observes Khumalo, also noting that the local market lacks business analysis skills.

Khumalo explains that the customer is now demanding a single point of contact, hence the move by the likes of Datacentrix and Mthombo-IT into both distribution and services. He adds that services companies have to develop from being simply technology partners to being business partners as well, while there is also a need for companies such as Mthombo-IT to move up the value chain.

"Basically, SA has a very bad services culture and there is a great need to change this because customer satisfaction at all levels is almost non-existent," says Khumalo.

According to him, natural progression will see bigger companies, able to play both the high and low ends of the services sector, gradually assimilate smaller ones operating only in the commercial services space.

"The ICT services sector is just like any other; it will eventually consolidate into four major players with a handful of small players," says Khumalo.

He believes there will always be players coming in on the commercial services side, but customers will drive the value side. Also, the next two years will see a lot of consolidation and the ICT black empowerment charter will contribute to the process.

AST spokesman Pieter Bouwer says a lot of companies that claim to play in the services space actually do not.

"There are very few companies able to support clients as a service provider, with process maturity and adequate tools. Few companies are able to reduce the number and cost of downtime incidents," he says.

Bouwer comments that it is also unusual that the local services sector is predominantly owned by local companies, with multinationals taking a backseat.

He adds that incumbent companies will have a great chance of retaining their business in the near future as they will be protected by the ICT empowerment charter. However, barriers to entry into the market are bound to go up due to higher investment demands. Proof that the sector might have over-traded areas is that, in some areas, services companies compete with their clients.

According to Meta Group, the business and IT services market began to rebound in 2003, driven by downstream operations and management opportunities, especially offshore, and selectively by compliance mandates. Business process outsourcing infused with transformational elements is a long-term growth engine, but this year will still prove to be a challenging one for most service providers.

Service offerings of major upstream IT consultancies (IT strategy through systems integration) and those of major downstream IT firms (managed services and outsourcing) are expected to blur throughout the year. Just as clients will increasingly view firms such as Accenture, Atos Origin and CGE&Y as viable managed services and outsourcing providers, they will also see firms such as EDS/AT Kearney, Perot Systems and CSC as viable systems integrators and business process developers.

Meta predicts that by 2006/07 the global end-to-end IT services majors will be Accenture, IBM BCS, EDS/AT Kearney, CGE&Y and CSC. Dark horses, requiring acquisition of downstream resources, are BearingPoint and Deloitte Consulting.

For business and IT services overall, supply still outstrips demand, systems integration is dying as a discrete market, and operating models are still too skewed toward integration and implementation versus operations and transformation. In addition, most providers struggle to exploit globalisation, address price deflation and acquire the requisite horizontal business process and vertical industry domain skills to take business process outsourcing (BPO), and ultimately business transformation outsourcing (BTO), mainstream, the research company says.

Services should be defined by what they provide to the user via a service interface, not by the technical details of how the task is achieved.

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The dramatic increase in regulatory compliance mandates, such as Sarbanes-Oxley, HIPAA and GLBA, has not been the boon for services consumption - with the exception of external audit services - that some anticipated.

Indeed, compliance mandates have complicated matters for both business and IT services providers from the standpoint of who can provide what services to which clients under which conditions, as well as regarding the ramifications for involvement in, or association with, clients` nefarious activities.

It will take another one to three years to adequately clarify and interpret the impact these various regulations will have on the business and IT services market. It is clear, however, that the regulatory net will widen to cover a broader range of business and IT services and service providers.

The sector where regulatory mandates will have the greatest impact is IT, especially for business process outsourcing. Clients and providers are tasked with both providing compliance for outsourced processes and demonstrating said compliance.

This is a potentially onerous and currently ill-defined task that will have a minimal negative impact on outsourcing in the near term (12-18 months), yet is likely to spur outsourcing for the longer term (24-plus months) as clients increasingly rely on external "experts" for compliance management.

Defining the "winning" next-generation business and IT service provider models is still a work in progress. Key elements will include:

o Truly global operation and service delivery models.

o Business results-driven value pricing models.

o Balanced service offering portfolios from both the upstream and downstream perspective, as well as for business and IT capabilities.

A necessary, if painful, melding of business and IT services markets - a three- to six-year process - will drive the growth of business process and industry service provider specialists, especially in the outsourcing space.

Coupled with market globalisation, this will create a larger, broader and more diverse marketplace. A handful of "mega players" - in the $25 billion to $50 billion-plus revenue arena - will still dominate the first tier service provider space, though they will often operate in a multi-provider prime/subcontractor model for BPO and BTO efforts.

Both organic growth and consolidation - especially among domestic and offshore providers - will drive revenue growth.

The "onshore versus offshore" debate - comprising elements of passion, fear, virulence and misinformation - rose to prominence in 2003, with offshore providers and advocates typically missing from the dialogue.

Although anti-offshore and protectionist sentiments (and occasional legislation) have grown this year, especially given election-year politics in the US, they will not significantly dampen services globalisation for the long-term, at least not in the private sector.

Yet business and IT services providers, regardless of the sentiments of the various constituents, still have much work to do to build global, rather than multinational models. It will take several years to evolve operating, resource management and service delivery models that are truly global. This is a key requirement, however, as providers attempt to offer more varied, comprehensive and business-critical services to their global clientele.

Users will continue to improve their capabilities to source and manage business and IT services. In the BPO space, it will often be the user organisation, not the provider, that has the most extensive best-practice knowledge, which will make life more challenging and difficult for service providers than in the boom years of 1995-2000.

Although increased operations and management activities via BPO and BTO will drive larger and more recurring revenue streams and cement client relationships, these activities will also introduce new elements and scales of risk. Most providers are just beginning to understand the need to address these market changes and the consequent requirement to adapt their operating and pricing models.

There are also several untapped areas relative to Global 2000 organisation demand versus provider supply. One area is post-implementation ERP "centres of excellence". Enabling clients` holistic support of enterprise applications (eg technical, user and business process) is a lucrative and so far largely ignored space.

Internationally, all manner of IT service providers have a shot at this space, though a combination of ERP systems and relevant industry expertise, along with strong outsourcer capabilities, will profile the most likely leaders in this area.

Related subsets of this model (eg for application management, remote application configuration and implementation, and business user support) present other growth areas for services across all major application types.

From a specific service provider perspective, a new world order began to emerge last year. Much work still needs to be done, however, as IT evolves from something that automates business processes into something used to define and enable new business processes and models - for example the adaptive organisation, on demand as a business and services delivery model.

"Many of the inquiries Meta currently receives from clients relate to the concept of reusable IT services," says Meta Group analyst Daniel Sholler. "Clients have invested large sums in technology, and they are searching for ways to maximise the return they get from those investments.

"To achieve this, they want to delegate tasks to shared services to maximise re-use and efficiency. These services include not only operational groups and processes, such as the IT help-desk for its problem resolution process, but also shared infrastructure hardware and software components."

IT operations is the domain where a services-based approach is best established, for example in providing central IT services, not unlike an outsourcer. Help-desk and desktop management groups are examples of shared operational services.

Business application services are capabilities that can be shared among multiple implementations to achieve similar purposes. These services can be large-grained, such as entire software packages like ERP and CRM, or key modules, where the customer is the business unit. However, a more composite application approach will increasingly define finer-grained software components (ie parts of applications) that can be integrated into different solutions to achieve a particular task (eg a credit card authorisation routine or pricing engine).

Although business application services have the least mature services-based approach, the most value can be gained from their increased re-use. The introduction of XML-based Web services technologies will enable significantly increased integration of software components and drive cultural change toward re-use and service-oriented architectures or designs in both business application components and hardware and software infrastructure.

Meta says, as delegated tasks, all three types of services - operations, infrastructure and applications - should be defined by what they provide to the user via a service interface, not by the technical details of how the task is achieved.

In many cases, mature shared services deployed will be higher-order aggregate services that combine technical, operational and/or business application services created by different IT groups. For example, EAI technical services (server and software) should be explicitly mapped to operational services required for EAI.

The shared services concept is hardly controversial. Many IT operational processes, application functions and infrastructure components can be shared by "customers" or used for different purposes to reduce costs and enhance performance.

The challenge is not conceptual, but practical: how to adapt the IT organisation to enforce and manage re-use of services across the three domains of operations, infrastructure and applications.

As leading IT organisations leverage Web services and instil best practices throughout their enterprises to maximise service sharing and re-use, the pressure on others to emulate this approach will increase. Consequently, Meta Group believes the trend toward a services-based approach to IT, still only in its early stages, will be one of the most important developments in the industry over the next decade.

Meta recommends that IT organisations inventory and define their catalogues of operational, technical and business application services. Each service definition should stipulate the appropriate users and use cases for the service, the service interface and the service level provided, as well as the value structure, charge-back and funding approach. These service catalogues should be documented and marketed to the intended users, both inside and outside the IT organisation.

CIOs should get their enterprise architecture teams - as well as the heads of their infrastructure, operations and application development groups, and their top executive lieutenants (eg IT transformation leader and IT controller) - to inventory the various types of reusable IT services in the organisation, optimise how different services are aggregated and consolidated, increase the level of reuse within the organisation, and measure the efficiencies obtained.

* Meta Group analysts Daniel Sholler, Bruce Robertson, Janelle Hill, Karen Rubenstrunk, Craig Roth and Hollis Bischoff contributed to this article.