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February 20, 2007
Has the tech services industry become overcompetitive?
Morton Meyerson has been in and around the tech outsourcing industry every since it emerged on the scene in the 1970s. He was an early employee at Ross Perot's EDS. (In fact, he takes credit for structuring the first outsourcing contract, in 1969, for Pennsylvania Blue Shield.) And later he ran Perot Systems. Now he's a grandfather, runs a family foundation, and he's an investor in tech startups and real estate. I got a chance to talk to him recently because he's backing a two-year-old outsourcing advisory firm called Alsbridge. He has watched this industry through all of the stages of its life cycle, and he thinks its on the wrong track now.
Meyerson thinks things were pretty good for tech service providers and their clients in the early days. "In the days of the 60s, 70s, and early 1980s, the companies in this business could make a healthy profit and deliver outstanding results for the client. We were making 30% after tax margins, yet we were able to cut the clients' costs by one-third to one-half and give them better quality and more information," he says.
Things changed in the 1980s when distributed computing came in and brought with it tremendous complexity. Then came the Internet, and more complexity. Industry growth rates went down. And a bunch of former EDS-ers formed the outsourcing advisory firm TPI and got really good at helping clients negotiate tough terms in their contracts. There went the margins. "In my judgment it went too low. If there was a problem, the service company couldn't fix it without losing all of their margin. So that led to arguments and litigation. What we have is an over-competitive market," says Meyerson.
The reason Meyerson got interested in Alsbridge was it offers a way out of this dead end. The Alsbridge philosophy is to get clients and service providers to see themselves not as adversaries but at collaborators. "You go from a win-lose negotiation to a win-win," he says.
This is more easily said than done, I'll bet. But I agree with the principle. Unless this industry becomes more collaborative, it's not going to work for either side.
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The industry is hyper-competitive because the emphasis is only on one thing: cut costs to improve profits.
Thanks to outsourcing, existing skills are scattered all over the world. New companies with new methods and models are popping up everywhere. Intelligence is no longer residing in a single place.
So, if you plan to use outsourcing for creating better value for customers and developing new forms of competitive advantage, you have no choice but to become collaborative.
Posted by: Aseem Prakash at February 21, 2007 02:42 PM
This is an uncomfortable truth of globalization. Electronic part manufacturers in Taiwan run on 2% margins, while high risk lumpsum tunkey oil & gas contracts running into hundreds of millions, if not billions work with just 6-8% margins.
For outsourcing, this seems to be eventually inevitable: either roll up your sleeves and get ready for the battle, or just forget your business.
Due to the highly fragmented nature of IT industry, if you push for collaboration, there will always be a competitor lurking who is willing to seal the deal.
Posted by: SKy at February 22, 2007 01:20 AM