Denis K. G., I didn't know how big IBM Global Services is. Over 150,000 employees!
IT still hot, even though dot-coms not
By: The Associated Press
7/9/01 11:40 AM
Source: News.com
SOMERS, N.Y.--Popular wisdom says the Internet technology business drowned alongside the dot-com companies that so characterized it.
But an unsung portion of the Internet economy not only survives, it thrives. The business of contracting out information technology services is earning billions of dollars and creating thousands of jobs per year.
"Outsourcing is hot," said Gary Helmig, research manager for Wit SoundView, a securities analysis firm in Stamford, Conn. "It's going to be a surprise performer."
Banks, airlines, insurance and other companies are setting up Web sites, internal networks, and e-commerce platforms to reach customers and far-flung employees. Such high-tech pursuits leave companies fumbling with computer personnel and equipment that stray from their core missions.
"Managing IT is becoming a huge problem," Helmig said. "It's not a core competency of most companies."
Now, many companies are calving off their information technology departments and hiring outsiders to nanny their Internet sites and computer networks.
Unloading such a department is especially liberating in the current lackluster economy. Analysts say a company can save 25 percent to 30 percent on computer systems and sometimes sell off assets like a $50 million data processing center.
Then, it only has to pay for what it uses, said Dennis McGuire, chief executive of Technology Partners International, a Houston-based company that brokers outsourcing deals.
"Computer processing power is increasingly becoming like electricity," McGuire said. "You buy as much as you use, and you get a monthly bill. And you don't have to build your own power plant."
Three companies handle most large contracts for information technology: IBM, Electronic Data Systems and Computer Sciences.
A contract can run $1 billion or more. Last fall, Plano, Texas-based EDS won the granddaddy of outsourcing contracts: a five-year, $6.9 billion deal to provide computers and services to the Navy and Marines.
The business saw $373 billion in spending last year, according to researchers at Gartner. Gartner estimates worldwide outsourcing spending of $833 billion by 2005.
As the practice grows, analysts say outsourcers will assume revenue-earning business functions and be paid on the merits of their performance.
"The focus will be on generating revenue through the use of technology," Gartner's Michael Palma said.
IBM, based in Armonk, N.Y., is the world's biggest outsourcer. Big Blue reports that outsourcing brought in $13 billion of its $88 billion in revenues last year. Contracts often span 10 years.
"There's logic to that," said Jay P. Stevens, an analyst with the Buckingham Research Group. "You want to go to a large, established company that will be in business for the term of the contract. You can't have any doubts about the viability of IBM."
IBM's mushrooming Global Services division, which handles outsourcing, consulting and other technology services, added 10,000 employees in the first five months of 2001 and accounts for almost half of the company's global work force of 315,000.
This year, Global Services--based here--brought in record sales of $10.2 billion in the first quarter alone, spokeswoman Nancy Kaplan said. Outsourcing revenue was up 16 percent that quarter over the same period in 2000.
IBM is being deluged with business from Japan, where wounded companies are shedding information technology departments to improve their bottom lines, Kaplan said. The company recently announced a $664 million, 10-year contract with Japan Airlines, one of 10 major Japanese plays since 2000.
"This is a productivity business," said Bob Zapfel, general manager of IBM's outsourcing business. "You have to consistently deliver productivity gains. That's our operating model."
At EDS, the computer services company founded by Ross Perot, the picture is just as rosy. Last year, its Information Solutions division saw $14.8 billion in revenue from outsourcing and other information technology services.
EDS hired 7,000 new employees in the first quarter of this year. The number of services contracts available for bidding rose by 40 percent in the first 90 days of 2001, spokesman Jeff Baum said.
He added that the company has an $80 billion backlog of business under contract--four times its 2000 revenue of $19.2 billion.
At the world's third-largest outsourcer, Computer Sciences of El Segundo, Calif., business is hopping--although analysts say the company is suffering from a drop in overall profitability.
The company's revenue rose about 12 percent last year to $10.5 billion. Of that, $4.6 billion came from outsourcing, spokesman Frank Pollare said.
Last year, Computer Sciences signed a seven-year, $3.5 billion contract with Nortel Networks, a deal in which it picked up some 2,200 Nortel employees.
Despite the huge dollar amounts, profit margins from outsourcing run smaller than, say, those of hardware sales or consulting, analysts say.
The outsourcer tends to lose money initially because they often buy outright the client's computer equipment or replace it with their own hardware. Christine Ferrusi Ross, an analyst with Forrester Research, said many contracts are not profitable for two or three years.
But the jewel for an outsourcer is a close relationship with the client. A company like IBM can use an outsourcing contract as an opening to sell more profitable services, like hardware, consulting or Web hosting.
"You're with them for years, day in and day out," Ross said. "This is something other companies can only dream about."
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