Already a Bloomberg.com user?
Sign in with the same account.
THEY MAKE A KILLING MINDING OTHER PEOPLE'S BUSINESS
One of the top corporate names in Dallas is Electronic Data Systems Corp. Since Ross Perot founded the company in 1962, it has grown into an $8 billion computer-services colossus. Now owned by General Motors Corp., EDS counts among its main businesses outsourcing--managing a customer's data processing operations for a fixed price. So when Dallas County awarded a seven-year, $35 million outsourcing contract, who got the business? Not hometown favorite EDS, but Systems & Computer Technology Corp. of Malvern, Pa.
Who? SCT, a $91 million outsourcing and software company, is one of dozens of small outsourcers that are thriving in the shadows of such giants as EDS, Computer Sciences, and IBM. Often more specialized by industry than the big players, they are grabbing highly lucrative contracts and establishing a strong second tier in computer services. EDS, known for striking megadeals worth $100 million or more in outsourcing, tried to win over Dallas officials by showing them one of its few municipal clients, a Los Angeles hospital. But SCT's dozen previous municipal contracts won it the contract, says Chairman and CEO Michael J. Emmi.
Outsourcing, or facilities management, is a $12.2 billion U.S. market this year, estimates J.P. Richard, vice-president of Input, a market researcher. And it is headed for $27.7 billion in 1997, he says. But the business is highly fragmented. EDS, the leader, commanded just 13% of the total last year, leaving plenty of room for specialty companies to carve profitable niches.
Many, such as BISYS Group, ALLTEL's Systematics Information Services unit, and FIserv, have concentrated mainly on the banking industry. Others are focused on health care, utilities, and telecommunications. "We're not trying to be all things to all people," says John E. Steuri, Systematics chairman and CEO.
Lately, the small outsourcers have begun to catch Wall Street's attention. Their appeal: defensible niche marketing, growth rates of up to 25% per annum, and seemingly safe, predictable earnings. The BISYS Group, in Little Falls, N.J., for example, has $73 million in revenues, of which no customer generates more than 2%. And more than 90% of those revenues recur each year, says Chairman and Chief Executive Lynn J. Mangum. BISYS, the result of a 1989 leveraged buyout of a division from Automatic Data Processing Inc., sold 40% of its stock publicly at $11 a share last March. Now it trades at $17 1/8. "We didn't even know the term 'outsourcer' two years ago," says Mangum. "Now, we are one."
What's prompting many businesses, and banks in particular, to outsource is a pressing need to replace homegrown, 1970s-vintage systems. Those are getting difficult to update in response to new regulations and computer technologies. "It's a dynamic environment," says James C. Mendelson, computer services analyst at Morgan Stanley & Co. "The services companies act as a buffer." Typically, they can convert customers to newer, more useful systems, while slashing technology costs by as much as 50%.
BANK ON IT. SCT points to George Washington University to show outsourcing's benefits. Like many institutions, the Washington (D.C).-based school was feeling the pinch of tighter funding, while administrative costs were rising--by 11% a year. Operations were difficult to change because they were closely tied to an early-1980s IBM mainframe.
Last year, SCT replaced that $4 million system with a more powerful $500,000 Sequent Computer Systems Inc. machine. It runs SCT's Banner software for universities and will serve 1,000 desktop computers, giving teachers and administrators instant access to student information, class schedules, and the like. Counting hardware, software, and cutting the computer staff by 25, the new system costs George Washington $4.8 million a year to run, compared with $7 million on the mainframe.
What's ahead for these companies? Strong growth, most likely, as virtually every industry considers outsourcing to help cut costs. As for new competitors, the main candidates are EDS, IBM, and the other biggies. Profit margins are tightening in their generic outsourcing field, where they simply run existing systems for less money than customers can. But to broaden their scope, those giants will have to invest heavily in industry-specific software--or buy established specialty outsourcers. Either way, it seems, the specialists can win.John W. Verity in New York