Quick: what do companies such as Data General, Unisys, Wang Global, Compaq, Hewlett-Packard, and IBM want you to think when you hear their names? (Hint: It's not computer products). Answer: systems integrator. Ken Yamada investigates.
One of the hottest markets targeted by traditional hardware vendors these days is integration services. From IBM to Data General, vendors are bulking up integration units, planning new strategies, and making new hires aiming for big growth in IT services.
"By focusing on hardware only, you're in a death spiral in this industry," says Tim Tormey, a Data General services marketing director. The systems maker is pursuing a two-year goal of doubling its professional-services revenue by emphasising end- to-end solutions, which also broaden the company's market appeal.
System manufacturers are not the only vendors getting into the services business. Scores of networking, storage, and software vendors are also building or acquiring professional-services organisations to boost revenues, fatten margins, and get closer to customers. For many of these vendors, recognised brand names, a wide product selection, and long-established market presence represent a double-edged sword when selling services.
Although such virtues provide an edge in their traditional markets, they sometimes make vendors appear as though their first priority is pushing products. Although profiting from the IT-services boom, these companies must worry about competition from a vast field of independent integrators that underscore what the independents claim is a vendor-independence advantage.
Nevertheless, services are increasingly becoming key offerings from vendors. Faced with shrinking margins and the growing challenge of differentiating their products, vendors are seeing their fastest growth come from services. That's an observation appreciated by many of their shareholders and a trend that's encouraging forecasters to paint a rosy picture of the future. The worldwide systems-integration market is projected to grow at nearly 13 per cent annually through 2002, according to market researcher International Data Corp. While the US represents the largest market, Latin America and the rest of the world will grow an estimated 21 and 18 per cent respectively.
Four out of 10
Of the top 10 vendors ranked by worldwide systems-integration services revenue, four initially made their fortunes as hardware manufacturers - IBM, Hewlett-Packard, Unisys and Digital Equipment. Last year, systems-integration revenue from this foursome represented combined sales estimated at $US7 billion, according to IDC.
To succeed, these vendors must promote themselves as offering the best solutions regardless of brand. IBM is no exception. For example, IBM Global Services reps who joined a California Health and Welfare Agency project team appeared to be open-minded and didn't seem to push IBM products, says Cris Jensen, a deputy director of the agency.
The agency awarded IBM a $120 million contract for a three-tiered client/ server architecture serving 13,000 users. In return, IBM Global Services agreed to implement a Windows 95, MS Mail, and Word solution. Those specs disappointed some IBM product reps, who made a last-ditch effort to sell Lotus Development's Notes, Jensen says. IBM Global Services hasn't always enjoyed such smooth sailing. A few years ago some IBM consultants projected a condescending, know-it-all attitude that often vexed clients. Judy Schneider, social- and health-services IS director for the state of Washington, was one of those clients.
She remembers planning a project with an IBM manager who was the "embodiment of Big Blue arrogance". At the time IBM seemed to say, "We know it all, and if there's a problem, it's your problem," she recalls. Since then, IBM has fixed its attitude problem, Schneider says, which eventually allowed it to win a multimillion-dollar state project. While big vendors sometimes win such large state contracts, Washington prefers to work with smaller, independent integrators because they're perceived as more attentive, she says.
According to Susan Siew-Joo Tan, an IDC analyst, the jaundiced view of large vendors is alive and well. "Vendors generally don't have the market perception," Tan says. "Some end users don't want to join with a hardware company."
Such sentiments are more true for midmarket customers than Fortune 500 companies. In many cases, big companies prefer partnering with a big company such as IBM, Hewlett-Packard, and Digital.
Love nothing more
Of course manufacturers would love nothing more than to have customers buying both systems and services from them. For example, HP offers services related to various manufacturers, but "where it provides the greatest advantage, we want to leverage HP's product suite as much as possible", says Kathy Boyd, solutions-development and marketing manager for HP's Worldwide Professional Services Organization (PSO). HP's PSO staff grew 20 per cent last year to 5500 and is expected to grow more than 18 per cent annually.
And HP isn't the only one growing. Unisys's services business has consist-ently grown over the past five years from 43 per cent of total revenue in 1992 to 63 per cent last year. In 1997, Unisys lost $853 million on revenue of $6.6 billion, primarily due to a one-time charge related to the 1986 merger of Burroughs and Sperry. The company underscored its commitment to the services industry a year ago when it named Larry Weinbach, former managing partner and CEO of Andersen Worldwide, as its CEO.
Weinbach shifted the company's product focus toward high-end servers and away from PCs. "He recognised that our real strength is enterprise-class computing," says Barbara Babcock, a Unisys information-services vice president. In kind, Unisys offers the right services to go with its products, she says. Unisys pushes its own brand wherever appropriate but is otherwise a multivendor service provider, according to Babcock. "Typically what happens in the sales cycle is that [specific products] practically never come up near the beginning of the process," she says. "Customers trying to solve business problems are more interested in finding expertise and understanding their business needs. Only when you get to that point do you talk specifically about technology."
Some vendors, such as the newly combined Compaq/Digital, are using their strongest offerings as springboards to new integration projects. Digital's Windows NT expertise joined with Compaq's Wintel servers makes an especially potent combination. At Data General, the services group - consisting of both product support and integration - accounted for a quarter of the company's $1.5 billion total revenue last year. Under its professional-services moniker, integration - including data warehousing, imaging, NT, Unix solutions, and enterprise services - is a fledgling but promising high-growth operation. Last year, professional services contributed less than half of the company's $400 million in total services revenue, according to a spokesperson.
Professional services is key to Data General's strategy for opening new doors to sales of its high-end Windows NT servers, server-management products, and storage devices, as opposed to product sales that are heavily reliant on price slashing, says Data General's Tormey. "If you're just selling hardware, you're probably late in the customer's buy cycle," he says. Consequently Data General has been aggressively hiring new employees, particularly enterprise experts who are adept with Baan, Oracle, PeopleSoft, and SAP products.
By contrast, Sun Microsystems' approach to services is to stay focused on its own product support, insists Cheryl Helsing, a Sun professional-services director. "We are not going to follow the pack and try to become a management-consulting pany." Instead, Sun offers service and support of Sun products such as its SPARC systems, Solaris software, and technology related to distributed-computing environments. Its direct customer relationships tend to be with Fortune 500 companies that have complex computing needs. Its integrator partners are an integral part of the company's strategy; they take on a prime contractor's role while assigning Sun with solving Sun-specific issues, according to Helsing. Sun wouldn't disclose staff size or revenue of its professional-services group.
"We don't see our company growing into a total-solutions role," Helsing says. "We've had great success working with outside integrators that do soup-to-nuts work." The company won't compete with Sun VARs for projects, she says. Whatever the case, you can't deny that services make money. And that's why these vendors will stay in the game.
With Joe Tucci in Wang's pulpit preaching the IT services gospel, the once-great but eventually bankrupt minicomputer-maker has been resurrected. It has been five years since Wang Laboratories emerged from bankruptcy and evolved into an IT-services powerhouse. But chairman and CEO Joe Tucci still wrestles with the company's heavy karmic baggage. You see, Wang has an image problem. To some people the name Wang conjures up images of obsolete, proprietary office technology that led to the demise of a once-great company. Fortunately for Tucci, image isn't everything.
Today Wang Global is a $3.5 billion solutions integrator boasting 22,000 employees and dozens of branches worldwide. About 60 per cent of its revenue comes from pure services. Tucci envisions double-digit growth, total company sales rising to $5 billion, and expanding staff by 6000 during the next few years. "I can't help but be bullish on our future," he says.
Wang's outlook wasn't always so rosy. The company dominated the office-automation market during the '80s with proprietary minicomputers, but its fortunes eroded amid an onslaught of PCs and open systems. In 1992 Wang entered Chapter 11 bankruptcy proceedings, crushed by $1.3 billion in debt. Subsequently Tucci, a former Unisys sales executive, joined Wang and refocused the company on services, building from a core VS minicomputer-systems customer base.
He de-emphasised product manufacturing but continued to support VS installed bases, reassigning thousands of the company's 6000 employees. Many people received training in Novell networks. Wang also acquired nine service companies and service divisions of other companies while gaining their client bases. For example, Wang acquired Olsy-Olivetti Solutions, an Olivetti Group integration company, expanding its presence in Europe and Asia.
Wintel all the way
The company has placed its largest eggs in the Wintel basket. Striking a deal with Dell Computer earlier this year, Wang began providing service and support to the computer-maker's global customers. With Microsoft, Wang launched a campaign to sell enterprise solutions on Windows NT. To help reach its growth targets, Tucci says, Wang will train 2500 people as Microsoft Certified Systems Engineers and 170 as Cisco Systems certified specialists over the next two years. If he had pre- dicted Wang's rise as a solutions integrator when first emerging from bankruptcy, Tucci says, people would have replied, "I don't know about that". But now, he says proudly, "we did it".