META Group Report: Putting the Service Provider First

Jun 15, 2001

Dean Davison

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:

  • Commerce chain: The use of external service providers enables companies to break through political obstacles and competitive barriers to collaborate with other companies to create shared applications and toolsets that not only share transaction data, but also actually integrate business processes such as business forecasts and customer information, as well as completely integrate distribution channels end to end. We believe such advances will fail without an independent third party (the xSP) to provide agnostic technology services. Indeed, such service providers are more likely to be current technology leaders (e.g., EDS, IBM) rather than startup ASPs.
  • Collaborative applications: xSPs will play a significant role in hosting applications that provide internal and cross-company collaboration. Applications such as computer-aided design (CAD) currently stand out, but will expand to include tools such as Microsoft Office as it increases the collaborative capabilities of its suite.

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:

  • Being completely agnostic to specific application or technologies, including integration with other corporate systems, legacy interfaces, or data conversions
  • Being capable of tolerating technology risk such as unplanned downtime, technology transitions, or other uncontrolled changes
  • Being relatively insensitive to price changes if prices increase significantly beyond early estimates (sometimes by 2x)
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.
  • Corio: As an "original" application service provider (ASP), Corio was launched by integrating applications and positioning them toward small and medium enterprises. Corio has since branched into e-mail and ERP solutions but retains an understanding of smaller organizations. Although most companies find Corio responsive and helpful, a few have struggled to get responses from account managers that meet their custom needs. We believe divisions of larger corporations should be able to successfully work with and design technology solutions that range from ERP implementation/integration through basic e-mail/collaboration tools specific to the business. Companies requiring strong business expertise (i.e., vertical knowledge) should not depend on Corio to develop such skills (even if it promises); they should instead turn to other vendors already in possession of the needed skills.
  • Jamcracker: Jamcracker does not provide or host any of its own applications; rather, it works with various ASPs to integrate the needed solution. Therefore, Jamcracker can acquire and deliver nearly any combination of services. Clients should be careful of existing versus future integration (e.g., has Jamcracker truly integrated the applications or it is it merely sharing data over XML?). Moreover, clients should not expect Jamcracker to provide services at the lowest prices in the industry - there is a cost to integration and we do not believe Jamcracker intends or is capable of playing the low-cost card. Jamcracker has superb financial backing (Accenture) but must seek secondary funding during 2001, which has been a problem for other high-quality companies. Although we do not anticipate problems, funding remains a risk that IT organizations must consider.

    Business Impact: Service providers offering business solutions will increasingly enable improved collaboration across applications, business units, and company boundaries.

    Bottom Line: IT managers should continue to select applications ahead of hosting/service providers, but avoid optimistic vendor promises for the next several years.

    Copyright 2001 META Group Inc. 208 Harbor Drive, P.O. Box 1200061, Stamford, CT 06912-0061. Web: Telephone: (203) 973-6700. Fax: (203) 359-8066.


Comment and Contribute

Your comment has been submitted and is pending approval.



Comment and Contribute

Your name/nickname

Your email


(Maximum characters: 1200). You have characters left.