By:  Lee Ann Moore, Chief Marketing Officer

The recent consolidation among IT services firms has raised many questions among our clients and the broader market about outsourcing service provider stability, what is on the horizon and factors outsourcing buyers need to consider. Their concerns revolve around gaining a general sense of, “What do these consolidations mean for me and my organization? Who are the viable players in this market? What options do we have as a large enterprise?”  To gain some perspective, I interviewed our CEO, Mark Toon, to better understand these issues.

What do the recent consolidations mean to the IT services market?

Toon: The IT services market has matured significantly over the past few years. As such, the recent acquisitions and acquisition announcements – HP/EDS, Dell/Perot and Xerox/ACS – are no surprise. In fact, we think they signal more consolidations to come. There are still a large number of providers with strong services capabilities in one area and visible weaknesses in others, making many ripe for partnerships. The loss of pure infrastructure providers is an interesting phenomenon. As services purchases tend to reside with executives at a higher level in an organization than pure hardware purchases, we see HP, Xerox and Dell all making these acquisitions in a move to become more strategic within their client organizations. Further, these previously pure hardware players are/will no longer be in a sub-contract/subservient position.

In general, we see these acquisitions creating stronger providers with stronger financials opening up an installed base with the services partners from which to expand accounts.

Are there different implications for the enterprise market and the mid-market?

Toon: Our enterprise clients have expressed concern over the limited number of competitors in the high-end IT services market. They feel, particularly in infrastructure services, the number of competitors has been reduced to an uncomfortable level. We see this as an opportunity for in the next tier of firms to step in and fill those critical third and fourth slots behind IBM and HP/EDS.

Mid-market firms have a host of providers from which to choose in the infrastructure and applications arena. In fact, we anticipate Dell’s acquisition of Perot will be of particular interest to this market segment as it will offer a strategic outsourcing partner for many organizations with revenue in the $1 billion to $5 billion range.

These announcements are all strong infrastructure moves in a market which is still heavily reliant and dependent on its infrastructure. Regardless of the amount of press cloud computing receives – and cloud computing can be a viable option for many smaller to mid-market companies – most of our clients are large enterprises focused on optimizing their own infrastructure and their applications within that infrastructure.

Should buyers of outsourcing services change their behavior or decisions based on these recent announcements?

Toon: In a simple answer – “no.”  First, any contract should protect a buyer of outsourcing services from any impact from a merger, acquisition or other business combination. Second, we see most of these announcements as positive as they create financially stronger service providers – providers that benefit from owning greater control and profitability of their supply chain, have the added scale of a broader client base and will now benefit from the longer-term services revenue stream. Finally, as we look to the future in a market ripe for further combinations, buyers would be well served to keep an eye on the emerging service providers as a healthy IT services market needs several strong competitors to provide viable options for both enterprise and mid-market buyers.

Filed under: Market Trends and News, Outsourcing by EquaTerra