Inverting the IT pyramid

As former tech leaders transform themselves into services outfits, IT services has become one of the fastest-growing areas, says Jeff M. Kaplan, managing director of Think Strategies.

In case you haven't noticed, information technology services are hot.

In fact, the IT services sector has become one of the fastest-growing segments of the IT industry. Whether it is IT outsourcing, business process outsourcing, managed services or utility computing services, any IT service that helps enterprises increase productivity and reduce costs is in demand.

The IT industry has been turned upside down, or inverted, as former technology leaders transform themselves into services leaders, and other companies seek to follow their lead.

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For instance, IBM and Hewlett-Packard have won the greatest recognition and most significant customer contracts in the utility computing market to date on the strength of their outsourcing and integration capabilities, more than the technical features of their utility computing products.

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For many hardware and software technology companies this shift in demand represents a significant challenge.
For many hardware and software technology companies this shift in demand represents a significant challenge. There is a fundamental difference between selling, delivering and supporting IT products versus services. The entire supply chain of development, packaging, pricing, promotion, sales, distribution, deployment, maintenance and management is different.

Even harder than changing the operational processes for many long-standing technology companies is changing the corporate cultures of these places. In most established technology companies, services have been the poor stepchild catering to the whims of the product units. Installation and maintenance services have been given away to win product sales. Service engineers have been thrown into customer sites to jury-rig unstable products, or appease dissatisfied customers.

Now, services are taking the lead and products are just piece-parts to business solutions. Many IT companies attempting to restructure their organizations so they can deliver more of their technical capabilities via services are learning how hard it is to invert their business models.

As an example, it has taken IBM over ten years to invert its operations to become the leading service-solution provider in the industry. Part of Big Blue's success has come from internal organizational and cultural changes, and part by acquiring consulting firm PricewaterhouseCoopers.

HP recently merged two of its major operating divisions--Enterprise Systems Group with Services--in hopes of emulating IBM's success. As further proof that HP computer systems sales are now more likely to be driven by the company's services capabilities than by their technical features, Ann Livermore, formerly executive vice president of services, is heading the newly merged group.

Utility computing isn't the only segment of the IT industry experiencing this inversion process. Oracle has quietly but methodically been shifting toward a services-led business model for a long time. The software and database developer now generates nearly half of its revenue from services ranging from consulting to hosting.

Smaller companies are getting into the game as well. Ariba just agreed to acquire Alliente, a privately held provider of business process outsourcing procurement services. Interestingly, Alliente was spun out of HP.

VeriSign recently acquired Guardent, a leading IT security services company, to accelerate the expansion of VeriSign's security consulting and managed service capabilities.

Putting services out in front is a dramatic change for the IT industry.
Putting services out in front is a dramatic change for the IT industry. Gone are the days when IT installation and maintenance services were slaves to the product side of vendor shops. Now, these services are instrumental in winning product sales.

As the demand for new technology continues to languish and product differentiation continues to fade, IT services has become a key strategic competitive weapon as well as an essential vehicle for delivering meaningful business solutions.

If the trend toward utility computing and on-demand solutions grows, the need to deliver these solutions via services will also escalate. The path companies must follow to transform themselves from product-focused to services-oriented organizations will be complicated. The inversion process for these companies will affect every aspect of their operations.

Therefore, enterprises considering the IT strategies and investments should pay close attention to how well companies can handle this inversion process, and satisfy IT requirements from a service delivery point of view rather than simply based on product features.