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Outsourcing is Taking Three Forks

Megadeals!

Supplier Voice
ACS

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Compaq

CSC

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GM

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Wendell Jones

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James Brian Quinn

Application service providers (ASP) arrived en masse on the outsourcing scene last year and then proceeded to solidify their place in the marketplace. That was the major happening in the outsourcing world in 2000, according to Dean Davison, vice president at Meta Group, an IT advisory and research firm in Stanford, Connecticut.

ASPs, in Davison's definition, "commoditize" application services. Since ASP services are fairly standard across vendors, price becomes a significant point of comparison. ASPs are reaching down to smaller companies, which makes them unique in outsourcing.

The current market has more vendors than buyers. This imbalance leads Davison to believe this year will be a time of consolidation for ASP vendors. Many startups are going out of business because of a lack of both business and capital. Others are quitting after being sued for non-performance. He calls this "dotcom, part 2."

Davison predicts large suppliers like EDS and IBM will acquire ASPs. "ASPs are a fundamental change in the marketplace that they will have to react to," he says of the traditional IT vendors.

At the same time, these traditional companies will "restructure so they can compete on a more granular level." Suppliers in this sector will have to offer a commodity-like service, too. "Vendors can't expect a 30 percent profit in a commodity market," says the vice president.

After the consolidation period is over, the analyst says traditional IT vendors will adopt "a more fluid model." In the past, vendors did everything in-house. Davison describes the mindset as "we only do what's built here." Now vendors will sub out key components of their outsourcing mix to companies expert at that particular piece. Alliances and partnerships between companies will become more prevalent.

Lessons from the Outsourcing Primer:

• Currently there are more vendors than buyers in the ASP marketplace. This will lead to a consolidation.
• Traditional IT vendors may buy an ASP.
• Traditional IT vendors will begin to sub out different tasks to experts instead of trying to do everything themselves. Alliances will become common.

Publish Date: January 2001

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Copyright © 2001 - Everest Partners, L.P.

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