META Group Report: Putting the Service Provider First

By Dean Davison

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META Trend: During 2001/02, IT vendor management teams will increasingly integrate service levels with business objectives and use benchmarking to "market align" prices. Tactical contract management will continue, but strategic approaches will demand transaction (e.g., financial, service, technical) management and regulation (2001-04). Complex service provider interface functions will emerge (2001-05) to balance multi-sourced cross-process issues.

Divisions of Global 2000 (G2000) companies are leading a minority shift toward selecting a technology service provider before making application decisions. Although we anticipated this shift to occur by 2003/04, we are surprised to see the trend already taking root.

The change is being driven by G2000 companies trying to instill entrepreneurial behavior into business units by developing and launching smaller, nimble lines of business (LOBs). These LOBs are agnostic to specific applications, infrastructure platforms, and other parameters important at the corporate level. Instead, critical measures are placed on time to market, acceptance of change, and the ability to scale IT services with demand as the lines of business grow (whether slowly or rapidly). Indeed, service providers are being viewed as a lower-cost entry point for complete packaged IT services, global (or at least international) coverage, with variable pricing that scales to the business size and scope.

Despite our earlier predictions of delayed growth until 2003/04, we believe some near-term growth (2001/02) will shadow changes in corporate investment strategy. Moreover, we still do not expect wide-scale growth before 2003/04.

During the next 12 months, startup xSPs (i.e., service providers) will become overly optimistic based on the experience of this "false" start in the market, but will settle back from their euphoria in early 2002. Most IT organizations will still select an application that meets internal operational and integration requirements and then consider hosting options. During 2003/04, xSP offerings will be widely adopted by smaller companies, invoking an important shift as IT organizations choose a vendor before the application. This "primary" position will strengthen through 2006/07 until service providers supercede applications as the "first" decision.

Looking Forward

Our research also indicates a shift in the types of applications being managed by third parties. Currently, the market is centered on ERP applications (e.g., SAP, PeopleSoft). Although a few ASPs are positioning services around the CRM market, we believe such solutions are not feasible for most users because of the surrounding business process re-engineering (e.g., changes in sales processes) required to leverage CRM applications. During the next five years, we believe the greatest opportunity for xSP solutions lies in the following markets:

Differentiation among service providers (through 2004) will be based on the applications they host and their expertise with specific applications. Increasingly, beginning in 2002/03 but becoming common by 2005, vendors will exhibit expertise around the integration of applications or on business solutions independent of specific applications/solutions.

Doing It Now

Companies selecting a vendor first must meet all the following criteria to avoid false claims or mistakes that can be costly to remedy:

Among many vendors, the two best positioned to provide such services are Corio and Jamcracker. Although they differ dramatically in business strategy, each offers specific skills or capabilities to make them feasible alternatives. Although larger vendors (e.g., EDS, IBM Global Services) will likely develop offerings, they will be unable to develop profitable offerings that target midmarket companies.