For Some CIOs: Access to Less Expensive Capacity

My prior posting laid out the premise that CIOs look at the IT Services & Outsourcing industry today in three different ways.  Part 1 of the 3-part story wasn't particularly revolutionary.  It assessed the appetite for transformation-oriented, integration-heavy, services.


In that posting I said that there were really only five service providers that are considered "up to the challenge" of implementing a holistic transformation for a client.  (Actually, I initially wrote that there were four, but I revised my assessment!)  In my opinion, these are:  Accenture, CapGemini, CSC, HP, and IBM.  


Those five companies can marshal the technological, business process, financial, and domain expertise required to bite off a big change program.  That's how I think CIOs look at the market.


Classification #2 is what I call the wage-oriented segment of the IT Services & Outsourcing market. I can count over a dozen high-credible service provider who go-to-market as a provider of lower-cost expertise provided via remote delivery models. Of interest, I think that only CSC and Accenture are among the "Transformational Five" that also serve the wage-oriented demands.


I've come to learn (and appreciate) that the companies in the business of wage-oriented services are quite capable organizations. They typically excel at knowledge transfer, process standardization, and automation.  Simply said, these providers can industrialize a repeatable task.  Don't ask for break-through improvements or holistic reengineering, but the benefits of high-quality production can be considerable. 


For many CIOs who aren't looking for transformation, the existence of a healthy ecosystem of wage-oriented providers has been a blessing.  Much of the cost-management that occurred over the past 5 years was achieved through effective use of offshoring - via Captive Centers and outsourcing.


In fact, to many traditional ITO providers it seemed that the ability to leverage wages was the CIO's alternative to outsourcing.  Why go through a long and cumbersome contracting process when you could get the benefit of wage arbitrage relatively quickly and with less disruption?


Well, just as the market for big transformational sourcing initiatives has been challenged by the economy and the capacity for large change programs, the market for wage-oriented sourcing has experienced its own stress.  Considered by many CIOs as being more variable than domestic employees, some offshore initiatives saw contraction during the recession. Certainly, we saw a reduction in discretionary project work.


Some analysts are asking if the runway for wage-oriented sourcing is exhausted.  I think no, but I think the maneuvering space is much smaller. Offshore sourcing is here to stay as a tool for the CIO, and the universe of providers in this segment will remain rich in numbers. Their profit margins might not remain as healthy as the past, but the business model is proven and the economic flow is considerable.


If you buy into my premise that a CIO looks into the industry through a different lens for transformational services than he/she does for wage-oriented services, then you might be asking what's driving some of the M&A we've seen recently. Where to Dell and Xeros fit in this profile?


That question is answered through the third dimension of the industry landscape. For, as we enter 2010 and hear the incessant buzz from the clouds of innovation (pun intended), the CIO has an entirely different set of Providers from which to choose when it come sot managed services.


Up next:  component-oriented sourcing.