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Outsourcing is Taking Three Forks

Megadeals!

Supplier Voice
ACS

CEGY

Compaq

CSC

IBM

PwC

Customer Voice
GM

Analyst Voice
Wendell Jones

Gartner Dataquest

GIGA

META Group

Adrian Moore

Legal Voice
Raysman

Zahler

Academic
James Brian Quinn

From 1992 to 1994, many major corporations signed 10-year outsourcing contracts. The end of the tunnel is in sight, but now, the world is much different with the rise of the Internet. Robert Zahler, a partner with Shaw Pittman in Washington, D.C., says many of these buyers are "beginning to gear up" and decide what to do in this new business environment. They are wrestling with the choice of renegotiating with their current suppliers or putting the contract out for a competitive bid.

This time around, Zahler says these buyers "have experience" and "are more sophisticated" about their outsourcing needs. They "have a lot of issues" with their suppliers that they want to discuss.

Zahler saw 2000 as a transition year. Many companies were worried about Y2K glitches as the millennium dawned, so they were wary about doing much during the first quarter of the year. But companies made up for that lull during the final two quarters when there was an "enormous surge" in large new transactions. These were megamillion dollar contracts.

Zahler says his firm is working with three or four large customers who have been talking about their outsourcing deals for the last two years. He predicts they will come to fruition during the first quarter of this year.

2001 will see a "large amount of development in ecommerce," says the attorney. Currently, Zahler calls that market "immature." But that will change because firms have allotted a significant amount of money to this process "and spend it they will."

Outsourcing ERP Operations to Make Way for Ecommerce

In-house IS departments know they must focus on e-commerce to allow them to compete in the new economy.  The only way they can do this is to offload current tasks revolving around their legacy systems, like running Enterprise Resource Planning (ERP) applications like SAP. They are outsourcing this work as well as much of their e-commerce piece.

Zahler predicts firms will develop their ecommerce initiatives through alliances or partnering arrangements. The current business-to-business (B2B) exchanges are a sign of this trend. The participants are typically taking an equity interest in these exchanges. However, the landscape is too new to be sure that B2B exchanges will be the predominant life form, in the attorney's opinion.

From his perspective in Washington, Zahler predicts there will be more changes in the way businesses procure their materials and their services. Auctions may become a popular mode. Technology is making these permutations possible.

Last year companies were busy building data centers all over the world. These centers revolve around Web hosting and server farms, enhancing connectivity to the Internet. Zahler believes investment in infrastructure will continue this year, too. Companies will be buying the software that can be used on these platforms since they currently don't own it.

So far, Zahler says "BPO hasn't really taken off." But venture capital dollars are finding their way into the BPO world by funding pure-play players like Exult and LeapSource. He notes these BPO providers are signing "very large global" deals. "I think they will be competitors," he adds.

The application service providers (ASP) have become accepted as the replacement for licensing software. Companies like purchasing software on a subscription basis. Zahler predicts the ASP model will need another two to five years to develop into prominence. There may come a day when no one purchases a software license.

An ASP Shake Out

Some ASPs, however, are "under funded" and "do not have the scale" to be successful, in the counselor's view. He believes there are just too many of them. "There's no barrier to entry and it's easy to do," Zahler notes. He predicts the larger players will gobble up some of the smaller players to earn market share.

Lessons from the Outsourcing Journal:

• Many 10-year deals are nearing their completion date. Companies are gearing up for renegotiation.
• Big companies are outsourcing ERP applications and ecommerce development.
• Venture capital is flowing into BPO to create pure play vendors that will be major competitors.
• The ASP model is becoming an accepted way to use applications. But a shake-out in the industry will likely occur because there are too many ASPs.

Publish Date: January 2001

Copyright © 2001 - Everest Partners, L.P.

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