Services firms grow by carrying out processes for others, but can they truly transform the model?
The major IT services firms know a hot market when they see it. In the 1990s, the golden opportunity was implementing enterprise software packages. More recently, the growth area for consulting services has been in business process outsourcing, or BPO.
Rather than just helping companies install systems or giving advice on how to reengineer processes, BPO is the outsourcing of a business function to a services firm. BPO has been good for outfits ranging from smaller entities like Wipro, to IBM, Hewlett-Packard, and other established IT services firms.
Take IBM—No. 1 on the 2005 Global 100 list. It has won BPO relationships with some of the world's biggest manufacturers, including a recent 10-year deal with Toledo, Ohio-based automotive supplier Dana Corp. to run a broad range of human resources (HR) functions.
But outsourcing is just one part of the consulting services market, and at that, BPO could become commoditized. The future for consulting firms—say at least some observers—lies in services that transform the outsourced business process, as well as in more traditional lines of consulting around applications, like price optimization.
"Essentially, we are seeing big pieces of the market turning to partners to deliver business results," says Eric Pelander, Global and Americas leader, Strategic Change Solutions, with IBM's Business Consulting Services unit. "You can say, 'That's been done before,' but in the past, it's been turning to vendors to implement technology, whether to put in a package, do custom coding, or manage IT outsourcing. The big shift is clients are turning to partners to deliver a step change in business results."
IBM refers to this concept of revamping a business process, not just shedding it, as Business Performance Transformation Services (BPTS). Pelander says BPTS differs sharply from offshoring, which draws criticism when it takes well-paid internal jobs and moves them to low-wage workers with offshore partners. Says Pelander, "You can't win just by picking up what the client is doing with a business process, and doing that in a different company. Our experience is that it's very difficult to get the kind of improvements in our clients' results—as well as in the economics—without actually transforming the process."
Where's the value?
IBM, says Pelander, positions BPTS in five areas: HR, procurement, finance & accounting, customer service & support, and after-sales service. In each engagement, he says, the goal is to apply IBM's know-how around a process to improve the business results.
For example, says Pelander, IBM has a BPTS engagement with Philips Consumer Electronics
, in which IBM is running after-sales service processes for the Dutch electronics company's North American consumer products business. In this role, he says, IBM draws on knowledge gained from running its own after-sales service and reverse-logistics processes.
Similarly, with customer-support functions, IBM is applying knowledge gained from its own customer-support processes, including years spent on self-help features of IBM.com. Improvements might include using better scripts for call-center personnel, or self-help Web-based forms, says Pelander.
BPO is seen as a high-growth area within the professional services market. Cambridge, Mass.-based analyst firm Forrester Research estimates the IT services and IT outsourcing market will grow at a compound annual growth rate (CAGR) of 6 percent through 2008. For IT services alone, Forrester pegs CAGR at 5 percent through 2008.
Yet BPO encompasses more than just IT outsourcing. A forecast of the North American BPO market, put together by Stamford, Conn.-based Gartner Dataquest, calls for growth from $65.7 billion in 2003 to $101.6 billion in 2008, or a five-year CAGR of 9.1 percent.
William Martorelli, a Forrester analyst, notes that when it comes to IT outsourcing, there has been some backlash, with a few companies actually backing out of arrangements to have others run key IT functions. "There probably aren't that many companies that see IT as a steady-state service you can outsource with impunity," he says.
Apps still matter
When it comes to overall IT spending, a Forrester survey shows that for 2005, the deployment or upgrade of major packaged applications is the No. 1 priority, replacing security upgrades as the top priority from the year previous, and easily outdistancing the evaluation of IT outsourcing options. In other words, says
Martorelli, applications-related consulting matters.
"We know that the implementation practices around the major packaged application vendors aren't what they once were, but that doesn't mean there isn't action in and around applications," Martorelli says. "The applications-related services are just switching to other forms. The grand era of implementation practices may have passed us by, but there are projects and enhancements."
Kevin Gromley, global manufacturing consulting practice leader with New York-based Deloitte Consulting, agrees that implementations practices aren't the hyper-growth market they were in the 1990s, but he sees these areas as ripe for projects:
Deployment of complex functions in pricing and revenue management Advanced supply and demand planningCollaborative product development practices
These focuses are natural progressions, says Gromley, now that many companies have deployed basic ERP. "The logic for the clients is that because ERP is commonplace—not so much a differentiator as a core part of the infrastructure needed to run a company—the attention needs to turn to areas like product innovation or managing your global supply chain more effectively," he says.
IBM's Pelander also points to price optimization as a choice functionality. In such projects, he says, IBM can bring to bear algorithm development expertise from IBM Research, its $5-billion research arm.
The bottom line for the consulting market is that despite its own wave of consolidation, it enjoys multiple revenue streams. Applications-related work still continues, and BPO promises to help enterprises concentrate on what they do best.
"There is more equilibrium in the market today," concludes Martorelli. "It's not going to be like the 1990s, when growth was driven by the implementation practices. It will be more measured, balanced growth."
Top-ranking services providers Rank CompanyTotal revenue (in millions of dollars)1 IBM96,293At $46.2 billion, services are biggest slice of pie; expands idea of services with on-demand solutions that could include total responsibility for key business processes2 Hewlett-Packard Co.79,905Strengths in platforms & services, including for ERP, supply chain, and RFID projects; new CEO is about operations, not image 3 EDS 20,669Looks to recoup from bad contracts by selling non-core assets; estimated $2.4 billion 2003 manufacturing-related revenues*4 Computer Sciences Corp.15,150Vertical services groups include aerospace & defense, energy, and chemicals; estimated $1.4 billion 2003 manufacturing-related revenues*5 Accenture14,140New partnership with Opsware for data center automation; estimated $1.3 billion 2003 manufacturing-related revenues*6 Deloitte16,400Multiple member firms, including manufacturing/supply chain consulting practices; estimated $473.4 million 2003 manufacturing-related revenues* 7 Capgemini Group7,825Global consulting services company expands outsourcing; estimated $470 million 2003 manufacturing-related revenues*8 Unisys Corp.5,820Consulting, systems integration, outsourcing, infrastructure, and server technology; estimated $280 million 2003 manufacturing-related revenues*9 BearingPoint3,450Systems integration and IT and business consulting services; facing informal inquiry by Securities and Exchange Commission; estimated $265 million 2003 manufacturing-related revenues*
A senior contributing editor, Michel has been writing about enterprise software and IT services issues since 1996.