THINK IT Services

HP’s decision to acquire EDS cannot be faulted when measured against all the standard metrics for doing a mega-deal in the traditional technology world. It gives both companies greater scale and access to more corporate customers without a lot of overlap.

The problem is that we are in the midst of a fundamental change in the way customers acquire technology and the way they perceive their vendors. The HP/EDS combination doesn’t fit this new world order.

There is no question that EDS strengthens HP’s hand when it comes to building and managing complex enterprise data centers. The acquisition also gives EDS ready access to HP’s installed base of customers.

Wherever there are big systems integration and ongoing management projects to be won, HP/EDS will be in a better position to compete with IBM and the off-shoring companies than they were a day ago as two separate companies.

However, many corporations are looking for new ways to leverage technology that permit them to be less dependent on traditional data centers. This no longer means simply outsourcing their data centers to the IBM’s and EDS’s of the world, but transforming where and how they obtain computing power.

Check the market stats of the leading research firms who follow the outsourcing business and you’ll see the number and size of traditional IT outsourcing (ITO) deals has been declining for the past few years.

Corporations are fed up with the hassles of managing their own IT operations, but they are equally dissatisfied with the poor track record of traditional ITO deals.

The ineffectiveness of legacy systems and software combined with the inflexibility of traditional ITO arrangements has driven a growing number of companies of all sizes to evaluate and adopt a widening array of on-demand Software-as-a-Service (SaaS) and managed services.

This is a shift I first identified in 2006. Gartner finally recognized this trend two years later when it proclaimed in January,

“…the outsourcing market has reached a tipping point with regard to utility delivery models, and that change and innovation will take hold and accelerate in this area through 2008 and beyond. More providers are developing utility-based offerings across infrastructure, application and business process domains. The trend toward software-as-a-service (SaaS) is gaining the most traction…”

Unfortunately, EDS brings nothing to the table when it comes to SaaS, managed services or other utility-based offerings. Instead, it saddles HP with lots of aging people, facilities and business ideas that haven’t kept pace with today’s realities.

Since HP has also failed to establish any thought-leadership or demonstrate any market leading capabilities in the SaaS or managed services markets, it isn’t likely that it will be a catalyst for change within EDS’ calcified operations.

So, the question is how long will it take for the EDS acquisition to bring HP down or can the combined entities wake up in time to respond to the changing marketplace?

It is always gratifying to have the major research firms affirm my perspectives and THINKstrategies’ predictions.

Recently, Gartner predicted that the global outsourcing market will grow 8.1 percent in 2008, and that this growth would not be in the form of traditional IT and business process outsourcing (BPO) agreements, but fueled instead by growing the acceptance of Software-as-a-Service (SaaS) and other utility computing services offerings by companies of all sizes.

Let’s have some fun and do a side-by-side comparison:

According to Gartner, “publicly reported IT outsourcing (ITO) and business process outsourcing (BPO) contract values decreased overall by 50 percent in 2007.”

In January 2002, I wrote in a NetworkWorld commentary that the traditional outsourcing model was dying. Even at that time, the size and duration of these deals was shrinking because their rate of success was abysmal.

As I’ve been stating for many years, companies of all sizes must focus on their core businesses and rely on third-parties to perform various IT tasks in order to withstand intensifying economic and competitive forces. This has led many to adopt ‘out-tasking’ rather than outsourcing strategies, in which they contract for specific services which can perform particular IT tasks. As I stated in a 2005 NetworkWorld commentary, this sourcing strategy reduces their risks. And with the advent of powerful new on-demand utility computing services and SaaS alternatives, companies can also gain greater business benefits.

So, now Gartner is catching on and predicting, “the outsourcing market has reached a tipping point with regard to utility delivery models, and that change and innovation will take hold and accelerate in this area through 2008 and beyond.”

I made my own prediction of this shift in 2004 and allusion to a similar tipping point in 2005.

Gartner goes on to state, “The trend toward software-as-a-service (SaaS) is gaining the most traction, with major software vendors, such as Microsoft and SAP, and large Internet players, such as Google and Amazon, making announcements about new SaaS offerings and mass-customized software platforms.”

You could have learned about the same trends from THINKstrategies four years ago if you read my commentary, “IT’s the services, stupid!”.

Gartner suggests, “User organizations need to realize that the utility delivery model is a viable alternative to traditional outsourcing, and they should seriously consider utilities in their sourcing strategies.”

Although Gartner prides itself about having the ear of the CIO, CIOs were telling me about their growing interest in SaaS and utility computing services in 2004.

So, if you want to stay ahead of the Gartner hype-cycle, stick with THINKstrategies and check out our latest writings and publications.

I had the privilege this week of participating in an interesting webinar sponsored by Makana Solutions regarding the sales implications of Software-as-a-Service (SaaS) and other subscription services.

Tom Wilson, of the Wilson Group; Makana’s founder, chairman, and CEO Liz Cobb; and I discussed how the sales skills and processes differ in the on-demand services world from the traditional packaged product environment. Specifically, on-demand services come at a lower price-point which necessitates higher volume sales to be successful. This requires a transaction oriented sales process and telesales skills, rather than the long salescycles and highly personalized approach of traditional legacy software sales. Therefore, restructuring the sales process and retraining or restaffing the sales team is critical to transitioning to the SaaS and subscription service model.

Similarly, the support function also changes in the on-demand world. Rather than rely on technical support to react to problems implementing and maintaining software, customers expect their on-demand solutions to be easy to deploy and administer. They also expect their SaaS providers to ensure the availability and performance of their online applications, and to proactively assist them in utilizing the solutions and continuously enhance the solutions to make them more useful and easy to use.

Mikael Blaisdell explores these differences in greater detail in his recent blog, “SaaS & The Ghost of Computing Past.” It is worth reading his perspective which he will also discuss during his presentation at SaaScon.

As Treb Ryan of OpSource likes to say, in order to be successful in the SaaS business, vendors must stop thinking like software companies and start acting like web companies.

I’ve referred to this transformation as an ‘inversion’ process because it forces most established software and technology companies to re-think how they operate and how they go to market. It also will force them to replace many of their staff with a new breed of people that view their jobs and their customer relationships differently.

It is for these reasons that many established players will face traumatic changes in 2008 as customer interest and adoption of on-demand solutions will become as mainstream as ecommerce.

Gartner is predicting that economic and organizations forces will combine to fuel greater outsourcing, with SaaS gaining the greatest traction as a viable alternative to traditional IT and business process outsourcing (BPO). Gartner’s market assessment echoes my reasons for forecasting strong growth for on-demand services in 2008.