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IT Trends In and Out of Downturn
An anonymous reader writes "Washington Post has an interesting article talking about how IT industry is changing its business models to survive (IBM: "Pay As You Save"; HP: universal printer driver; Consulting weak; Oursourcing booming), as well as how outsiders view the downturn (Merrill Lynch: it's just another bust after PC and mainframe, but the good thing is, "each 'wave' has so far represented a tenfold increase in the number of technology users."). I'm particularly interested in the outsourcing story. It might explain why IBM will benefit and other vendors like Sun Microsystem which don't have a strong service arm will suffer."
The problem with outsourcing arrangements is that companies only see savings at the beginning of the arrangement. Sure, they get to fire their expensive permanent employees. But guess what happens when something breaks? You end up with people who don't know how that particular company does business. I've seen this happen in three places. Average problem resolution goes from hours to days as users and staff try to figure out which call center halfway across the country to address their problem to.
There's the oxymoron of the day: "Save as you spend". Wow.
1. You get what you pay for, and good help is hard to find. Getting good constant support coverage is expensive.
2. Scale can help. Like insurance spreading the cost can help manage bumps, and smooth out the actual required resources.
By outsourcing you could save money by not buying more service then you need, and even lower your support if all you need is someone 'on call' incase "something happens".
But like any pooled asset, there will be times it isn't available, and it isn't like having a dedicated team to take care of stuff
"I don't think the computer industry will truly mature until 2015, 2020," he said. I don't understand where this comment fit into that article. BUT - I do not believe this at all. The technology industry changes each and every day, I don't believe that it will "mature" at any time, if at all.
I'm in a services organization and business is poor right now.
Yes, service orgs make lots of PR for each signed deal, but they are over many years and sometimes they get cancelled in advance of completion.
Also, services have more costs associated with them than do software or hardware sales.
To some extent, accounting of service contracts can be misleading by both front-ending the benefits and by buying other service orgs to obtain their profits but spreading out the acquisition costs.
It's not a comfortable business to be in right now.
this is not a sig
The computer techs shouldn't need to know the business.
The business or 'customer' should clearly specify their requirements. The techs should build it.
If they just guess at your requirements they need to know the business to get a good guess, project takes too long, everything's a mess and the end solution sucks.
Yes I work in design, yes I know nobody does it this way, but they should.
Companies outsource because they don't have the political will to control costs themselves. So they pass it off to another company like IBM.
The result is usually the reduced cost you were looking for and severely reduced service levels.
I once consulted for a very large Insurance company, which decided to outsource it's legacy IT staff, approximatly 300 people.
About a third of them left and they were the most knowledgable, each averaging 20 years experience on the systems they maintained.
A small modification that might take any of them a day to build, test and install would take me three weeks. (it's hard to compete with 20 years of domain knowledge).
Skilled IT workers are not assembly line workers. Outsourcing should be for easily replaced resources.
Generalizing somewhat, there are FOUR options for a company currently in "high tech".
One - Sell hardware. Generally billed once, though often financed and perhaps with a "support package" attached
Two - Sell "software". Usually licensed with an annual "maintance" agreement in addition (speaking of enterprise software - in consumer terms this is the annual or bi-annual upgrades/updates that you have to pay for)
Three - Sell a "service" (think ASP's, telcos, ISPs - generally billed on a periodic basis - often monthly, but also quarterly or yearly plans exist).
Four - sell "consulting" or services. This is further subdivided into "project work" or "outsourcing". Projects are generally of a limited duration and for a specific purpose, outsourcing usually involves the takeing over a company's IT staff, equipment, and processes - and is generally of a very long term duration.
There are, of course, variations to all of the above - but these are a basic choices that a company today faces - and all of these are driven in tandem by corporate needs.
New software usually meant new hardware, plenty of services needs, and lots of projects and outsource contracts to go around.
However, we are still suffering from the combination of Y2K, the "dotcom bust", and diminishing returns on technology investment (or at least the PERCEPTION of diminishing returns).
Y2K caused many large corporations to move up spending - which they had planned to do in the past two-three years, to 1999 so as to put new software and systems in place in advance of Y2K. In the course of doing this major corporations also steamlined and simplified their internal systems - often reducing by 50% or more the number of applications they supported internally.
Further, many corporations standardized on fewer platforms - and reduced variation within their corporations.
In 2000 it appeared that perhaps the "Internet boom" would be the driver of future investment in a post-y2k world - and indeed many corporations spent a lot of money on Internet/e-commerce projects - however though a lot of money was spent on these projects, and some companies did see big gains - far less money was spent on Internet projects than had been spent on ERP or other similar enterprise wide projects.
Further, as a new field - most of this money was spent on consultants and projects. Some was spent on services (hosting packages, additional T1s etc) - but less spent on software packages or additional hardware.
Software companies and hardware companies alike have not, in general, offered compelling new systems that provide powerful reasons for additional investment - corporations look at the desktops and servers that they have, note that most of their systems are underutilized, and see little reason to return to regular upgrade cycles - rather they see little to be gained from expensive upgrades - and much to be said for focusing their resources on using what they already own.
So, this in turn, means that corporate internal resources are increasingly available for internal projects - reducing still further the need for outside consultants on a project basis.
What then is the solution?
First - technology is driven by providing VALUE - i.e. providing systems that help people make money (by saving them money or making people more productive). Software vendors should focus on what their tools "really" need to do - and make compelling enhancements in those areas.
Second - We may be seeing a transition from a mostly growth industry to one that will be more stable - there is still money to be made, but annual growth rates of 30+% are probably a thing of the past.
Third - companies should focus on building long term value added relationships with their customers - if you make your client money on an ongoing basis, that is generally a recipe for continued and mutually profitable business - in the "internet boom" many service/consulting firms forgot this - they made money, but their clients just lost money - now those clients are often reluctant to spend further funds with those firms (if the firms are even still around).
So what do I suggest - focus on value added, focus on building systems that customers want, and offer them in a model that both you and your customers gain value (i.e. don't price in such a manner than it is impossible for your client to make money, or conversely don't price your products, services, software, or consulting below what you need to make profit - neither route leads to long term success.
As the president and founder of a software and consulting firm started in 2000 I have observed this up close and personally - at present, my firm is focused on out consulting practice - looking at how we can continually add value to our clients - and still make money doing so.
-- Join us in Chicago May 1-4th for MeshForum -- writer, historian, tech geek, entrepreneur, internet junky since '91 --
Having worked for both a company that outsourced services and a company that handled outsourced services, I've seen both sides of the spectrum.
Companies need to learn what to outsource and what not to outsource. My personal opinion is that large scale projects need to be internal, with only small, specialized sections outsourced to the appropriate firm.
Small business can benefit immensely from handing off, for example, their websites and design services instead of bringing those services in-house. But does a large, multinational firm really benefit from turning these services out to another company? More than likely not, and in the long run it will cost them more.
The last company I worked for handled the website and design services for several large companies, on top of many smaller businesses. The large companies spent, on average, $300-400k per yer for web management and design, whereas the smaller firms only maxed out at around 12-40k per year. Proportionally these services where the same. The larger firms would have benefited from hiring and keeping internal these services.
Just my $0.02.
-===- "Those who would sacrifice freedom for security deserver neither" -===-
There will be no IT turnaround in 2003. Let me repeat that: THERE WILL BE NO IT TURNAROUND in 2003. So what your telling me is that if the economy rebounds in 2003 that suddenly the IT spending floodgates will open wide? All the .commers can come back? I think it will be even worse that that: companies are currently learning that they can live without the latest and greatest. Which means, of course, that when the economy does come back, that big companies (HP, SUN, IBM) aren't going to get the big IT paychecks they think they're going to get. Which means of course, that all these layoffs are more or less permanent.
"This isn't a study in computer science, its a study in human behavior"
Most HP/Dell/Compaq guys that come out to replace our components are exactly that, parts pullers.
You pay big $$$ from IBM/Sun/SGI for service contracts, and you get what you pay for.
But the Compaq and Dell techs come out and have no clue what's going on, and they get parts Fed-ex'd to their moms house and bring them out. When there's a REAL problem (read: more than a bad power supply) you're in trouble.
You may have a point. It seems that the more experience I gain in the IT industry, the more I realize how little true IT knowledge is in the marketplace. The problem is, can business management tell the difference yet?
I think, however, that you could do something like that on a ala cart basis. Outsource stuff piecemeal. Remote 3rd party backup, remote 3rd party network monitoring, etc... The customer expectations are different that level. The interface issues are smaller and more manageable. And in more narrow specialties, you have a better chance at getting ecnonomy of scale.
To be clear...
"Good Business" - both sides end up feeling the relationship was equitable.
"Bad Business" - one side, or the other, end up being, or feeling they were, taken advantage of.
"poorly run business" - a business that is willing to engage in bad business.
I bring this up because the masses of MBA being churned out are taught maximizing profit is the definition of "good business". That is, however, a new age viewpoint that actually ends up driving most modern companies into doing significant bad business.
Folks,
While we may be in an economic slump right now, we are forgetting that there are upcoming technologies that will likely drive a second tech boom in the second half of this decade.
I cite the following:
1. Cellular phone companies have started on the road to 3G cellular phone technology, technology that could completely transform the way people use cellphones. Imagine bi-directional 384 kilobits/second data transfer, about the same as low-end SDSL, but operating in a wireless fashion and well beyond the reach of 802.11b Wi-Fi; this could allow people to upload and download data fast enough that even high-resolution digital photographs or circa VHS quality video can be transferred quickly. To keep up with the competition from Europe and Japan, expect major rollouts of 3G cellular technology by middle of this decade. Because of the bandwidth requirements of 3G, this will need massive investments in infrastructure to support these new phones.
2. The mandatory imposition of digital television in the USA in accordance to the Advanced Television Standards Committee (ATSC) standards by late this decade. This will mean a lot of new investments in television broadcasting hardware, especially when you have to implement these standards for both over-air and cable broadcasting on a scale far beyond what we've seen so far.
3. The beginning of the switch from IPv4 to IPv6 addressing. Much of our current Internet hardware infrastructure is not yet suited to support IPv6, and many of today's computer operating systems don't yet support IPv6, either. As the switch to IPv6 accelerates there will be considerable investments needed in both software upgrades and network infrastructure upgrades to be IPv6 compatible. Yes, I know network hardware built within the last two years are IPv6 compatible but there is still a huge fraction of installed hardware that is not IPv6 compatible yet.
I would not be surprised there will be a surge in demand for IT hardware and services as these three technologies rapidly rise in usage by the end of 2010.
Its not that its cheaper to outsource, but rather that outsourcing expenses show up on a different financial table than regular employees. You can claim alot of cost cutting/employee reductions and boost your image to Wall St. Of course, you spend more and get less service. But hey, we cut our medical costs!
One of the reasons outsourcing companies are having it rough right now is because they are thinking of closing that loophole. Outsourcing expenses would have to be reported right with employee expenses. Businesses are waiting to see how that shakes out before spending more in this little accounting scam.
exactly, a good CIO slows down the technology himself. If it's six months old, read about it like you would read a sci-fi novel. Unless you have a special business needs that increas the attractiveness of taking a risk on the new solution, don't do it. The CIO is the one who is supposed to find the sensible tempo, it's the job of the software companies to keep moving forward and to create the new technologies today that won't really be mature and generally compelling for five or ten years.
-pyrrho
Nike and couple of others got succesful by doing exactly the opposite - they outsourced everything function except the marketing and branding.
Vertical integration is not the only way...