Inside Outsourcing

Once dominated by the Top 10 of the VARBusiness 500--the one-stop, soup-to-nuts single-tier supplier--outsourcing is now open to any service company with a marketable core skill or an ability to parse its portfolio of services into attractive specialties. The age of supply-chain integration has arrived at outsourcing's doorstep, and the VARBusiness 500 is abandoning responsibility for mega projects in favor of the management of discrete and clearly articulated pieces of outsourcing engagements. They are reengineering and handing off outsourcing functions that can be met more efficiently by companies that specialize in those areas. From product procurement, warehousing and configuration to distribution, delivery and e-commerce, outsourcers and their clients are learning that costs can be wrung out and logistical efficiencies gained by assigning specialized functions to experts. As a result, a new cast of characters is breaking down the doors of this once-exclusive club.

What's In a Name?

Compuware Corp. (VARBusiness 500 rank: 29), despite its protestations to the contrary and although it has as extensive a cache of network tuning products as any in the industry, is both a systems integrator and an outsourcer. Exodus Communications Inc. (VARBusiness 500 rank: 287) may look like a Web hosting company, but it, too, is an outsourcer. And forget what you know about Tech Data Corp. as a distributor; it is an emerging power in the outsourcing market.

The result of all this churning is a set of high-level outsourcing couplings linking companies that have been fierce competitors in the past or that merely come from very different disciplines in the computer industry. Perhaps the strangest of those pairings was last December's "Big Swap" outsourcing deal between IBM Corp. and AT&T Solutions (VARBusiness 500 rank: 34). The deal gave AT&T IBM's Global Network business for $5 billion in cash. The prize client on that list was none other than IBM itself. On the other side, AT&T outsourced some applications processing and data center management operations to IBM. The arrangement, in effect, took IBM out of the value-added networking business and launched AT&T Solutions as a billion-dollar networking specialist. The deal sent a message that seemed risky for AT&T Solutions.

"We were immediately categorized as a niche company because we defined ourselves as a network integrator," says Rick Roscitt, president and CEO of AT&T Solutions. "The sea change is here now, however, and companies such as IBM and EDS [Corp.] are realizing it's very hard to keep up with networking if you don't specialize in it full time."

As a specialist, AT&T Solutions is an anomaly among the Billion Dollar Club of integrators, but Roscitt believes that networking has emerged as both a complex discipline and a core differentiator in the rapidly emerging Internet economy. So the company will eschew the overall ownership of its accounts in favor of ownership of the network.

"What we've been saying to our general client base is: If you have a networking-centric solution, come to a networking professional and get it done. Don't go to a general-purpose shop," says Roscitt.

A similar swap took place in

February when EDS (VARBusiness 500 rank: 2) and MCI WorldCom Inc. announced that EDS would purchase MCI Systemhouse,MCI WorldCom's applications development and systems integration business,for $1.65 billion and, in return, MCI WorldCom would take responsibility for the bulk of EDS' global network. The latter part of the deal is expected to generate more than $7 billion during the next 10 years.

Distributing the Wealth

As unusual as the AT&T/IBM and EDS/MCI WorldCom deals were, the outsourcing arrangement between GE Capital IT Solutions (VARBusiness 500 rank: 3), a $9 billion solutions VAR, and Tech Data was even more surprising. The deal, a three-year agreement expected to generate more than $2 billion in incremental revenue for Tech Data, is precedent setting. Under terms of the pact, Tech Data, a traditional distributor, will provide GE Capital's product procurement, configuration and assembly, and logistics services. Part of the deal involves Tech Data's taking control of GE Capital's configuration and inventory facility in Frederick, Md.

Ironically, this part of the deal looks like a traditional outsourcing arrangement,right down to Tech Data's acquisition of the facility's employees.

The deal takes GE Capital out of the distribution business and hands off responsibility to a company that intimately understands the logistics and business efficiencies of stocking, configuration and delivery.

"There's no need for every service company to duplicate the expense associated with performing lower-level services on the food chain when they can leverage the infrastructure we've built," says Tony Ibarguen, Tech Data's president and COO. "They can create an end-to-end seamless supply chain without incurring costs normally associated with that."

As part of the deal, Tech Data has agreed to meet certain levels of performance; GE Capital, in return, will provide enabling functions, such as timely information and joint team building to facilitate that performance. The agreement is unique in that it is packaged in a formal outsourcing contract and involves the acquisition of facilities and staff by Tech Data, but it is hardly unusual that Tech Data is performing such a role for service companies. Supporting service companies is Tech Data's stock in trade.

As with its arrangements with its hundreds of VAR customers, Tech Data will continue to be a silent partner, leaving GE Capital in full control of the customer interface.

"They are not abdicating responsibility for managing the process in any way," says Ibarg%FCen. "They are responsible for the planning, the quoting and the processing of the customer order, but we are handling everything after that."

Two-tier outsourcing is not new. In the government, "subcontracting," as it is called, is not only sanctioned,it is mandatory. But two-tier outsourcing has no history in the commercial world, so it must evolve into some workable form. Outsourcing has picked up a lot of detractors along the way, many of whom think it has not generally provided the efficiencies it has promised. Distributors may be key to making two-tier outsourcing work. It is the one group with a history of channel conflict resolution, and Tech Data is planning to pursue more outsourcing engagements.

"This is something we've been in discussion about with other partners. Each has a slightly different set of requirements, so there are no cookie-cutter solutions," says Ibarg%FCen. "We are now able to leverage much of the methodology,and the program that was built for GE,to assist customers in engaging us in the same process."

Don't Call Them ISPs

One of Tech Data's future two-tier customers could be outsourcing newcomer Exodus. The $53 million Santa Clara, Calif.-based company looks nothing like the traditional VARBusiness 500 companies. Its value add is in its data centers located across the country, where it hosts more than 10,000 servers. Exodus is in the business of facilitating complex Web hosting for mission-critical sites. It offers secure, high-end facilities and related services,and plans to stick religiously to that mandate.

"It's important to tell customers what you do. They ask us to handle consumer sites and we say, 'That's not what we do,'" says Ellen Hancock, president and CEO of Exodus. "We're a business-to-business company. People say we should act like an ISP, but we say no to that. We interact with ISPs and hand our traffic over to them, but we're not an ISP."

Exodus has formal programs in place through which it works with the channel and from which it derives more than 30 percent of its business. The company is open for business with other members of the VARBusiness 500. Hancock believes that Exodus can supply some of the same service, delivery and supply-chain efficiencies that Tech Data offers.

"We have executives dedicated to related markets who seek partnerships with companies that have expertise in those applications," says Hancock.

Compuware, a veteran professional services company based in Farmington Hills, Mich., got past the outsourcing talking stage last year when the company announced a number of innovative projects in which it took control of specific IT functions for the customer. Most recently, the company announced that it will support 1,400 applications for Ford Motor Co. in areas such as manufacturing, marketing and sales, product development, purchasing, finance and human resources. Unlike traditional outsourcing contracts, no personnel were transferred; rather, Ford plans to deploy its 1,600 IT personnel to "strategic business development roles."

"The old version of outsourcing has a negative connotation. It involves businesses giving up control of their IT strategies to others," says Phyllis Recca, vice president of

professional services at Compuware. "We don't use the word 'outsourcing' when we talk to clients. It gives them hives. The CIO envisions losing everything, including his job."

So Compuware has made semantic and other changes, targeting lower-priority projects that aren't particularly strategic to the company and do not require a high degree of touch from the client. Compuware studiously avoided data center management and most of the traditional forms of outsourcing. "We've created this new flavor of outsourcing, and it works well for the client," says Recca.

Like everything in the VARBusiness 500 orbit, outsourcing is changing. It is picking up a second tier of specialists that don't want the contact with customers that was the lifeblood of traditional outsourcers. They are subcontractors in the generic sense. So begins a process of evolution that can only help the VARBusiness 500 deliver more targeted services under the drooping outsourcing banner.