Permanent Volatility

"The basic point that strikes home with us is that volatility in the market is here to stay,it's a permanent part of business," Ozan says. "Companies have to recognize that to be successful they need to be adaptive and flexible."

It's a lesson that can be applied to virtually any solution-provider business, especially those fortunate enough to find themselves on the 2002 VARBusiness 500 ranking of the industry's largest. Just take a look at this year's list (beginning on page 85), and it's clear the industry is in a state of flux. While the largest companies, like IBM Global Services VB1 and EDS VB2, kept growing,thanks primarily to recurring revenue from large-scale outsourcing work,many of their smaller peers faced their greatest challenges amid shrinking revenue and reduced market opportunities. Companies including Razorfish VB230, Agency.com VB214 and Stonebridge Technologies VB294 saw revenue cut by more than half in 2001 as they tried to restructure their businesses. Former VAR500 companies like Proxicom, Emerald Solutions and iXL became targets of acquisition, while others, like Gobosh, Infinite Technology Group and Zefer, were less fortunate, falling off the list, thanks to the harsh realities of bankruptcy.

Despite the chaos, countless success stories can be shared,stories of companies that managed to defy the odds and adapt to changes in the economy. For one, the combined group brought in revenue of more than $320 billion in 2001, marking a 5.7 percent increase from the previous year,not bad considering 2001 was regarded as one of the worst economic periods in recent history.

And individually, success can be measured in various ways. For a company as large as EDS, success came in the form of $2.3 billion in additional revenue,an increase of more than 10 percent from 2000. For European heavyweights like Dimension Data VB108, 2001 brought successful forays into the North American market. For smaller players like Minneapolis-based Analysts International VB88 and Salt Lake City-based SBI and Co. VB318, success meant holding steady while so many of their peers collapsed around them. No matter how you look at it, the members of the 2002 VAR500 succeeded where so many others in the business failed.

We asked Ozan and other VAR500 executives to share their strategies for success. Here's what they had to say.

Adapting To Volatility

Cap Gemini Ernst and Young knows a thing or two about predicting change and quickly adapting to it. While still a part of Ernst and Young, it was the first former Big Five consultant to recognize the need to split its business from accounting and auditing work.

As luck would have it, the decision to merge with European giant Cap Gemini in late 1999 came at a perfect time, several years before the debacle known as Enron put the spotlight on Big Five firms and sent other Big Five competitors such as Andersen, PricewaterhouseCoopers and Deloitte Touche Tohmatsu scrambling to find ways to spin off their lucrative consulting businesses.

"We did not predict the Enron situation, but we knew that somehow, someway, over some period of time, consulting would have to separate from accounting," Cap Gemini Ernst and Young's Ozan says. "We were the first mover in that regard, and it turned out that we got at least a two-year head start."

But more than good timing, the match made perfect sense for both companies from a solutions perspective. While Ernst and Young's services division was particularly strong in business consulting and solutions involving CRM, supply chain and back-office reengineering, Cap Gemini's expertise was in pure technology and outsourcing. So the combination of the two made for a strong contender in the IT solutions market.

"Basically, we believed early on that there's great value in having a strong global presence and end-to-end solution capability, coupled with strong industry knowledge to deal with the major companies of the world," Ozan says. "Today, there are relatively few companies that can play in that league. We certainly are one of them."

The company has since taken full advantage of its jump, with more than $2.6 billion in revenue last year, up about 45 percent from 2000. And this year, the Americas division of Cap Gemini Ernst and Young is on track for even more growth.

The growth has everything to do with the company's decision to embrace the notion of permanent volatility early on and to structure a sales message around helping clients build flexible businesses with variable costs and modular components that can be easily adapted, Ozan says. Although that sounds pretty straightforward today, the strategy was fundamentally different from those employed by most companies only a few years ago. "In the 1990s, reengineering was all about getting a shorter cycle time and so on, but in many respects it also meant putting a fixed infrastructure in place," Ozan says. "That was fine then because you could predict more clearly what customers wanted for a longer period of time. But it does not work today."

More recently, the company established a new mantra for its clients and employees: Don't just blame the economy,defy the economy. As part of that, it identified the three main characteristics of companies that have successfully turned themselves into "adaptive enterprises." They are "read and respond," which means being connected enough to receive early warnings of key events and fast enough to respond to them; "plug and play," or creating modular capabilities that can be easily adapted; and "learn and leverage," becoming flexible and empowered so responsiveness becomes a natural part of business. "It's the point of view that we can take control of volatility and turn it into a competitive advantage for our clients," Ozan says. "I think that's creating the new business models of the 21st century."

Four Decades of Differentiation

Although it has been in the solution-provider business for the past four decades, today's EDS is nothing like it was even three years ago. That's because the $22 billion company, under the direction of chairman and CEO Richard Brown, made a decision to alter its management structure and focus heavily on client satisfaction.

EDS' work has never been about flash. In fact, it's the recurring revenue from IT outsourcing and business-process outsourcing that has more than made up for lowered demand on the consulting side of the business, keeping the company insulated from some of the pressures felt by other solution providers.

"We don't have any dog businesses out there," says Bob Segert, managing director of corporate strategy and planning, and the man responsible for driving EDS' growth. He believes every one of EDS' businesses,even consulting,has the ability to sustain double-digit growth over the long term. But in the short term, multiyear, multimillion-dollar outsourcing contracts serve as a good buffer.

The real question is how long outsourcing can provide substantial opportunities. While analysts say the sector will continue to grow, it's also clear that competition is heating up as more and more large solution providers recognize the benefits of recurring revenue and big-ticket contracts. But Segert's not worried. When it comes to true outsourcing, he thinks EDS has few competitors outside the likes of fellow VAR500 leaders IBM Global Services and Computer Sciences Corp. VB5.

"There are a lot of people who pretend to be in the outsourcing market," he says. "But if you look at a Global 2000 company that really wants to outsource its entire IT infrastructure, there are only a select few people that can even do that."

And when it comes to the big players, EDS says its differentiators are its global reach,offices and infrastructure in just about every major city on the planet,as well as unmatched experience. "We've got a 40-year head start in terms of being able to develop common processes, methodologies, tools and training systems," Segert says. "Just the overall intellectual capital that we've built up over the past 40 years is a tremendous advantage."

Added to that is EDS' breadth of capabilities, including strategic consulting through its AT Kearney division, deep technology expertise and implementation support, and experience operating and running clients' infrastructures externally.

In the past few years, with the arrival of Brown, EDS has improved the way it measures and ensures customer satisfaction, employing a Web-based "service excellence" dashboard tool to let clients provide comments on their experiences so executive teams have access to continuous feedback.

Still, Segert says his biggest challenge now is capitalizing on EDS' past three years of slow, steady momentum to increase growth in the face of sluggish spending. "EDS has done a very good job of getting its cost structure and value proposition in line, so we're very market-competitive right now," he says. "But the key for us right now is translating that into above-market rates of growth."

To do that, the company is taking two courses of action: One is making sure it has the right people in the right jobs to improve market-facing areas such as sales, client relationships, marketing and strategy. The second is putting more focus on its value propositions, leveraging industry-specific experience to improve service lines in areas such as financial services, manufacturing, government and health care.

"The last thing you want is to have your infrastructure services turn into commodities," Segert says.

Dimension Data's Big Debut

While recent history has shown that large-scale roll-ups aren't a guarantee for success (consider former VAR500 company MarchFirst), the folks at Dimension Data North America appear to be off to a good start. Despite a poor economy that stunted growth for so many of its peers, the organization brought in $408 million in 2001, assuring it a spot near the top of the VAR500.

Although Dimension Data hadn't entered North America in a big way until last year, its executive team members are no strangers to the U.S. IT solutions market. That's because most of them came from Proxicom, one of eight companies acquired over the past two years by $2.5 billion global solution provider Dimension Data Holdings as part of its push into this competitive space.

Executives say the company's strong debut is a result of a smart acquisition strategy to purchase market leaders in a number of different vertical and technology categories, as well as geographic regions, and then unify them with a tight focus. "Instead of going to market regionally, we took a national approach, collapsing the eight different companies into three lines of business," says Mike Beck, former executive vice president of Proxicom and now COO of Dimension Data North America.

While those three lines are connectivity and infrastructure, e-business integration and managed services, to date Dimension Data has been seeing the most demand for customer-facing solutions, like CRM, call centers and IP telephony. Then come advanced architectures and systems integration as strong growth areas.

Some clients want all of the above. That was the case with a major health-care service provider that hired the company to consolidate its call centers and integrate existing architectures to maximize output and efficiencies. "It's using what we call EBPR,electronic business process reengineering,to do simple things, like streamline processes in a way that increases their ability to carry cash flow and things of that nature," Beck says.

While financial services, health care and automotive remain the company's primary verticals, there's also a lot of activity in entertainment and media around digital-asset management. AOL Time Warner is one of its major clients there.

Meanwhile, the biggest challenge for the 1,100-person organization remains brand awareness, Beck says. And the company was not immune to 2001's slowdown; the reduction in e-business-consulting demand forced the company to lay off some

workers. Fortunately, Beck says, since then the strong network side of the business has made up for weaknesses in other areas.

To differentiate itself from the larger players, Dimension Data markets its strength in infrastructure, knowledge of networks and protocols, as well as its application and systems-integration expertise, portraying itself as a company that can unlock value for clients using existing technology investments. For example, one of the company's largest automotive contracts, a former Proxicom client, had as many as five separate Siebel implementations that didn't communicate with each another.

"Tying them together doesn't require additional capital spending," Beck says. "It just depends on how you architect that network and tie the systems together using EAI tools. That's the common thread,the space we're trying to own."

Getting Closer To the Clients

Just three years ago, Analysts International found itself at a crucial turning point. The 36-year-old solution provider was coming off a strong growth spurt, driven by its emerging managed-services work as well as a strong Y2K-related business. But after the one-two punch that was the dot-com implosion and the

larger economic slowdown, the company, like so many others in its space, was faced with some hard decisions about its future.

"We saw that we were really going to have to change our business, diversify our services and streamline our operations," says Mike LaVelle, a 14-year company veteran who was recently named president and CEO.

The first step was to expand its capabilities by acquiring infrastructure and application-development company Sequoia- NET.com. The second step was to restructure the entire company, decreasing the overall business from seven regions to two and from 40 autonomous branch operations to 14 district sales offices.

The goal was to create a leaner, more agile organization with stronger ties to customers' needs. "So now, the district sales offices interface with the customer, and all of our support functions, like infrastructure, business solutions, recruiting and administration, support the districts based on customer demand," LaVelle says.

It was that strategy, started more than two years ago, that helped Analysts International survive 2001. While it recorded revenue of roughly $552 million, down slightly from $558 million in 2000, it managed to hold steady on the VAR500 during a time when so many of its former competitors dropped way behind or fell off the list entirely.

Now, with 2001 just a bad memory, the company is looking forward to identifying growth opportunities. Today, Analysts' solutions fall into two categories: supplemental resources and managed-services offerings for Fortune 500 companies wanting to reduce costs and increase productivity, and application and infrastructure services for smaller clients in need of technical support to install networks and build applications.

While Analysts has strong relationships with vendors ranging from IBM to EMC to Dell, its strongest relationship has been with Microsoft. In fact, one of the company's consultants was recently named among the top .NET consultants in the world. "We cover the spectrum within Microsoft, but we are focusing a lot on .NET because we see it as an exciting place to go," LaVelle says.

Part of its go-to-market strategy around .NET includes the creation of "managed teams" that can accomplish specific goals in a certain amount of time and at a specific price. The idea is to develop highly specialized, portable project teams that can be used throughout the industry on a project-by-project basis.

Although LaVelle believes the IT services market has bottomed out and is on the upswing, he isn't expecting any major increase in demand. And he has changed the way he views the competitive landscape. Companies that not too long ago were among Analysts' biggest competitors are now being seen as potential partners whose offerings can complement Analysts' solutions. It's a direct result of what LaVelle calls a changing world that has put more emphasis on ROI.

"Most businesses are focused now on increased productivity and reduced costs," he says. "Businesses want to learn how they can get more out of their investment in IT and how to do more with what they have already spent. Companies like ours,service companies,have to make sure that we're very cost-effective, and we're bringing a lot of value for every dollar our customers spend."

SBI Holds the Course

While so many of its peers were crashing and burning, SBI and Co. managed to grow in 2001, thanks to an aggressive strategy to expand vertical capabilities and a strong focus on client relationships.

"We want clients to see value in what we do and see returns on the investments they are making with us," says CEO Ned Stringham, whose company posted 2001 revenue of $64.6 billion. "We do that by making sure we understand their businesses, focusing on a set of industries where we have real knowledge about how that business works."

But perhaps the most important part of SBI's strategy has been the acquisition of companies and assets to complement and expand its core offerings. Last year, the company purchased some of the assets of the former MarchFirst entity, and later scooped up fellow VAR500 company Emerald Solutions. "Those have been very good acquisitions for us, and we brought in some great talent,people who understand their clients and have a core set of clients they are working with," Stringham says.

Stringham also credits the decision to keep SBI private as a key factor in its steady performance, since the company didn't have to focus on restructuring balance sheets and income statements to appease a fickle Wall Street crowd. "A number of public companies last year had a very difficult time positioning themselves as a sustainable go-forward business, and the distraction of managing public market issues only takes away from their clients," he says.

That's not to say all was rosy. Aside from the economic slump, the events of Sept. 11 had a negative impact on the company's growth, especially in the transportation vertical, which makes up a large part of SBI's overall business. But the company leveraged its deep vertical expertise to make the most of the situation. For instance, SBI was instrumental in the launch earlier this year of American Airlines' new AA.com Web site, as well as a site for the airline's cargo business. On the manufacturing side, there's the work the company's doing with fast-growing client Flowserve.

"They've got this objective of growing from a $4 billion company into a $10 billion company by 2010," says Stringham, whose company is doing everything from process-design work in Flowserve's plants to designing portals to implementing ERP systems. "We're helping them [pull a lot of different economic levers to improve their performance."

With so many of SBI's regional and midtier peers merging or going out of business, the $100 million firm has found itself in a unique position in that it consistently has to go up against the industry's biggest solution providers. That has become a tough game in recent months as larger players, faced with overhead and large benches of consultants, began cutting prices in the face of increased competition. But SBI's plan has been to pitch its expertise rather than play the pricing game.

"We've always organized ourselves with highly experienced people, and we have been able to compete successfully," Stringham says. "We don't have big overhead and a lot of senior partners hanging around trying to think lofty thoughts. We're pretty lean and mean operators."