As hardware companies such as Hewlett-Packard/Compaq wrestle with crumbling margins, top-tier systems integrators (SIs) are faced with their own paradigm shift, which many believe will intensify during the next 12 months.
SIs are realising that Web services technology threatens to eat into traditional high-margin revenues captured by projects involving low-level application integration programming.
Emerging Web services also pose a unique challenge to the likes of HP, Compaq and IBM Global Services, companies keenly aware that sustainable revenue growth is tied to their services capabilities.
Driving the revenue shift is an understanding that new methods of application integration dovetail with the generally understood definition of Web services: loosely coupled software components are delivered over the Internet via standards-based technologies such as XML and SOAP (simple object access protocol). As a result, Web services represent a new component architecture for building and distributing applications and facilitating the integration process.
"I would say systems integrators have a lot to lose," says Greg Waldorf, a partner at US-based venture capital firm Charles River Ventures. "You can't ship hundreds of people off to work on an integration project. It's just too expensive. There should be less money spent on software services, very gradually over a long period of time."
The challenge, according to some, is that SIs must alter their approach to delivering Web services and offer higher value-added services such as business process management.
A study released in late August by US-based Jupiter Media Metrix reflects more than pure enthusiasm for Web services. Jupiter states that 60 per cent of business executives interviewed plan to deploy Web services for integrating internal applications during the next year. Also, a recent Gartner report states that by the second half of 2002, 75 per cent of enterprises with more than $US100 million in revenue will interface periodically with Web services.
The result, as Waldorf describes, will be a shift in thinking among enterprises to long-term decision-making where a single Web services investment replaces regular heavy investments in individual integration projects.
"Integrators are going to have to come up with a new gig. They're going to have to be more relevant in terms of planning. This doesn't mean they're out of business; it will just be different," Waldorf says.
And that's exactly the point. Frank Campagnoni, CTO at e-commerce provider GE Global eXchange Services (GXS), is expecting to adapt as Web services become more ubiquitous.
"I believe Web services will have a significant impact on our revenue structure because GXS is a services provider, and Web services will multiply our potential revenue channels," Campagnoni says. "We do not have to be the end-point delivering services directly to the customer. Under the Web services model, other companies will provide value and services to the customers as end-points, with GXS serving as the intermediary."
On the upside
As a result, large SIs are looking at how to turn what otherwise represents a revenue threat into new opportunities.
Steve Holbrook, IBM's technology evangelist for Web services, believes the change will give rise to a new heyday of business opportunities for integrators as they help enterprises jump on the Web services bandwagon. He holds this view despite realising that many of the application integration tasks programmers currently perform will become commoditised.
It's also a view shared by Craig Donato, CEO of Web services-focused IT provider GrandCentral. "The complexity and cost of applications will keep going down. Eventually it may get to zero. This model will revolutionise the industry," Donato claims.
Systems integrators will no longer need to focus their energy on IT plumbing jobs such as connecting data sources, Donato says, but on high-level issues directly associated with real business value, such as establishing inter-enterprise business processes and orchestrating data translation services. It is another sign that the changes will "fuel the need for systems integrators, not obviate them", he says.
Others agree that Web services will not completely drive out the costs associated with application development and integration, although they will lower it significantly.
"The right idea is thinking they can drive costs down, but not out," says James Hall, Accenture's managing partner for technology business solutions in London.
"What Web services will do is take to the next level the pre-bundling of solution components so that they can be quickly and effectively tied together and applied to develop a business solution."
Despite the lofty claims that Web services promote value-added business, converting the dream to reality will not be a walk in the park - particularly when the concept of pre-bundled software components is not new.
"There have been a lot of times over the years that people have had high expectations for easing integration issues," says Mark Hudson, HP's worldwide marketing manager for business and technology services. "But it's just not that simple. To assume the human side is going to go away because of the standards . . . that isn't true."
Meanwhile, you can also forget about using Web services to discover a "magical source" of new cash flow. David Schatsky, senior analyst at Jupiter Research, says "it's not a money-making opportunity for companies in the near term, but a cost-savings one".
Based on findings from its Web services report, Jupiter argues Web services will not necessarily enable companies to sell computational services to parties they previously didn't have a relationship with. Obstacles include inertia around existing, comfortable relationships and the need for proven security and trust payment models. It will take years to open up the promise of new Web services business channels.
Consequently, early adoption of Web services technology will be focused on solving "down-to-earth, humdrum problems", regarding enterprise application integration behind the firewall, Schatsky says.
Chanlon Mullins, director of architecture and planning at investment firm Charles Schwab, also sounds a note of caution.
"People are mixing that wild enthusiasm and disillusionment phase a little more quickly," he says. "I don't mean to make that sound hopeless - we have had similar challenges in the past. [The answer] is not going to be found by throwing hardware at it."
Noting that the primary Web services transport layer, XML over HTTP, "is not exactly a speed demon", Mullins says it remains unclear how pervasive Web services will be.
In addition, he joins a chorus of executives who remain cautious because of vendors' past promises of standards and interoperability that failed to materialise.
Currently, the technology is not setting the limitations. Many still point to existing demands that will keep SIs busy in the short term. "Integrators will have to specialise more and more to bring business expertise to the field they're in," says Dan Woods, CTO at Capital Thinking, a US-centric provider of Web-based financial services applications and technology.
He points to IBM Global Services as an example, saying that instead of having a sprawling practice that is everything to everyone, companies are likely to have specific units, such as IBM Global Services Real Estate or Financials.
From the perspective of corporate users, that reality couldn't be more true. Mike Ragunas, CTO at US-based office supplier Staples.com, says enterprise customers will look to SIs to provide custom development and help develop integration frameworks. Staples.com has worked in the Web services space for a few years and Ragunas is currently investigating Microsoft's .Net strategy.
Looking forward, he sees a situation where EAI (enterprise application integration) tools built within the Web services framework will result in less time to complete integration tasks due to the lack of low-level coding. "I find that when the tools get easier to use, what takes up the time is complex processes," Ragunas says.
According to Accenture's Hall, as Web services tools gradually roll out, systems integrators will evaluate the best solutions to recommend.
"People will increasingly bundle predefined business processes and services to develop much more powerful, far-reaching solutions than they were able to previously. The integration activities are still required; they will just take place at a different level," Hall says.
Estimates vary widely as to when SIs, and enterprise customers in turn, will really start to feel the changes brought about by Web services. Some executives say within 12 months, others talk in terms of five years.
Perhaps the next milestone will come during the second half of 2002, when analysts say Web services technology will mature to the point that enterprise application vendors will be re-architecting all of their software around common standards.