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Shoved into the Net

The Web has pushed traditional companies to scrap much of their internal information technology departments and turn to outsource companies for their technology development needs.

The Web has pushed traditional companies to scrap much of their internal information technology (IT) departments and turn to outsource companies for their technology development needs. A trend is developing among "Out Companies," as I call them, that are being fueled by competitors to jump into the Net. Sometimes these companies are pushed to jump in over their heads, a move that has many of them looking for outside help.

Internet Age companies such as Amazon.com have become so successful in such a short period of time that they have market leaders like Barnes & Noble running headlong into battle. Whether it's UPS running after FedEx, Charles Schwab running after E*Trade, Bank of America running after Wells Fargo, or USWest and Time Warner's RoadRunner chasing after @Home, the Web has pushed traditional companies to start acting like Out Companies.

Out Companies outsource to third-party IT providers for every function except their core competencies. Sometimes those third parties are strategic Internet service (SIS) providers, sometimes they are software companies. More often, though, these third-party outsource companies are turning out to be software/SIS combinations.

In fact, today nearly all traditional Fortune 1000 companies either already are Out Companies, or they're quickly becoming this kind of entity. Why are Out Companies coming out of the woodwork?

First of all, technology is becoming more central to how everybody does business. Information technologies have migrated from being used primarily as cost-savers to also being exploited as revenue-generators. As a result, companies like Cisco and Dell don't just use the Internet to tell employees about the company picnic, they use it to sell products as well.

Because computing and communications technologies are creeping into every aspect of business, the need to know exactly what is going on with respect to various standards and initiatives is increasing. As a result, companies whose core competencies don't involve mapping technological change are choosing to outsource this function. For example, ABC News looked to Starwave to create and maintain its ABCNews.com Web site. ABC still provides the news--its core competency--but Starwave employees put it together and get it out on the Web with a dash of original content.

The Internet has upset traditional ways and means of doing business. Even companies that don't think of the Internet or technology as their "thing" are being sucked into them at a rapid pace, just to keep up with serious competitive threats. While companies such as UPS and Hambrecht & Quist had never contemplated doing business over the Web, new, Internet Age competitors (or sometimes traditional companies that moved swiftly toward exploiting the medium) have forced the majority of businesses in the majority of sectors to re-evaluate their business models and approaches. For example, I doubt Barnes & Noble could have forecast five years ago that it would bring in over $200 million worth of revenue in the year 2000 using the Internet.

As traditional companies turn to the Net to make money, they're finding they need help. Sure, most Fortune 1000 companies have IT departments, but as they take on more tasks, IT costs keep skyrocketing. At the same time, these companies are discovering that doing everything in house isn't giving them a significant advantage over competitors who outsource.

While certain IT professionals undoubtedly should be part of an organization, it is unclear that an IT department should be seen as a core competency. I expect, therefore, that companies increasingly will focus on core competencies and sacrifice their IT cost centers in the process.

What does all this mean? Investors should look to invest in Out Companies, as well as in companies that provide the software/service solutions for them.

(Stay tuned for next week's Marketwise, in which we'll explore "In Companies.")

Dan Rimer focuses on his core competencies regularly in Marketwise.