Posted on: Monday, July 9, 2001
Outsourcing boosts high-tech companies
Associated Press
SOMERS, N.Y. — Although the demise of dot-coms continues, an unsung portion of the Internet economy thrives. The business of contracting out information technology services is earning billions of dollars and creating thousands of jobs per year.
"Outsourcing is hot," said Gary Helmig, research manager for Wit SoundView, a securities analysis firm in Stamford, Conn. "It's going to be a surprise performer."
Banks, airlines, insurance and other companies are setting up Web sites, internal networks and e-commerce platforms to reach customers and far-flung employees. Such high-tech pursuits leave firms fumbling with computer personnel and equipment that stray from their core missions.
"Managing IT is becoming a huge problem," Helmig said. "It's not a core competency of most companies."
As a result, many firms are closing their information technology departments and hiring outsiders to manage their Internet sites and computer networks.
By doing this, analysts say a company can cut its costs by 25 percent to 30 percent, and can recoup much of its initial investment by selling off such assets as a $50 million data processing center.
Then, it only has to pay for what it uses, said Dennis McGuire, chief executive of Technology Partners International, a Houston-based firm that brokers outsourcing deals.
"Computer processing power is increasingly becoming like electricity," McGuire said. "You buy as much as you use and you get a monthly bill. And you don't have to build your own power plant."
Three firms handle most large contracts for information technology: IBM Corp., Electronic Data Systems Corp. and Computer Sciences Corp.
A contract can run $1 billion or more, and can last as long as 10 years. IBM, based in Armonk, N.Y., reports that outsourcing brought in $13 billion of its $88 billion in revenue last year, and last fall, Plano, Texas-based EDS won a 5-year, $6.9 billion deal to provide computers and services to the Navy and Marines.
The business saw $373 billion in spending last year, according to Gartner Dataquest, which estimates that spending on outsourcing worldwide will hit $833 billion by 2005.
As the practice grows, analysts say outsourcers will assume revenue-earning business functions and be paid on the merits of their performance.
"The focus will be on generating revenue through the use of technology," Gartner Dataquest's Michael Palma said.
IBM's mushrooming Global Services division, which handles outsourcing, consulting and other technology services, added 10,000 employees in the first five months of 2001. The division accounts for nearly half of the company's global work force of 315,000.
This year, Global Services — based in Somers, N.Y., — brought in revenue of $10.2 billion in the first quarter alone, spokeswoman Nancy Kaplan said. Outsourcing revenues were up 16 percent over a year ago.
Much of IBM's business comes from Japan, where it recently received a $664 million, 10-year contract with Japan Airlines.
EDS, the computer services company founded by Ross Perot, reports that it received $14.8 billion in revenue from its Information Solutions division, which handles outsourcing and other information technology services.
EDS hired 7,000 new employees in the first quarter of this year. The number of service contracts available for bidding rose by 40 percent in the first 90 days of 2001, spokesman Jeff Baum said.
He added that the company has an $80 billion backlog of business under contract — four times its 2000 revenues of $19.2 billion.
At the world's third-largest outsourcer, Computer Sciences of El Segundo, Calif., revenue rose about 12 percent last year to $10.5 billion. Of that, $4.6 billion came from outsourcing, spokesman Frank Pollare said.
Last year, Computer Sciences signed a seven-year, $3.5 billion contract with Nortel Networks, a deal in which it picked up some 2,200 Nortel employees.
Despite the huge revenue figures, analysts say many outsourcers must cope with thinner profit margins.
This is largely because firms must put out a huge initial investment, buying their client's computer equipment or replacing it with their own hardware. As a result, Forrester Research analyst Christine Ferrusi Ross said, many contracts aren't profitable for two or three years. • On the Web:
