The services market in Europe is currently worth £56bn and set to rise to £90bn in 2003, according to International Data Corporation (IDC). For resellers, services are a flourishing area of business. Although most resellers have traditionally provided maintenance, support and training as an integral part of their products, service is an increasingly important area of business for them, says Jamie Snowden, research manager of services at IDC. According to Snowden, the outsourced services market is growing, creating more opportunities for resellers. "Traditional resellers have seen a lot of growth, even though the market as a whole has not matured," he says. While traditional services are growing at perhaps only five per cent, says Snowden, resellers are increasing their share of business by about 20 per cent per annum. "Resellers are taking business from the traditional services suppliers, but on the whole it is probably business that they don't want anymore," he adds. "Companies such as Hewlett Packard and Unisys are looking for higher end contracts. A lot of this has to do with quality of service - these suppliers don't want to be seen to be providing a low-end service and they have a reputation to protect." The traditional services sector has seen a swing back from cost obsession to quality, believes Snowden. As the market was squeezed, companies addressing the broader market suffered, forcing radical consolidation. The pressure on cost also increased the pressure to meet expected quality levels. "There will be price-conscious customers, but the majority are going to look for service quality. There was a drive to reduce costs several years ago but a few people got burned," he says, adding that managing customer expectations remains the biggest challenge that services providers face. The rapid growth of outsourcing has also had a knock-on effect, says Richard Hibbert, managing director at management consultancy RCL. "Initially, the push was towards the complete outsourcing of a particular division of the business - for example, the IT department. This has since been regarded as a potential security minefield. The trend now is towards selective outsourcing of business processes. It allows companies to retain control of the areas that are seen as essential and too risky to be outsourced." This has, on the whole, had a positive effect on the channel. As outsourcing continues to grow, the managed services market, where only certain parts of the IT function are outsourced, has increased demand for the less specialised services most resellers can provide - for contact technical staff, network management and other non-core business functions. Key systems vendors such as IBM, HP, Compaq, Unisys and Wang, plus dedicated services companies such as Sema, FI and Cap Gemini, are not looking to provide such simple services - at least not on a small scale. They are trying to improve the quality of their services, seeking larger and more profitable nationwide or international contracts. Roger Cox, research director at Gartner Group, says many vendors are lured by the massive growth in business process outsourcing - estimated to be about 30 per cent a year - and the continued use of large-scale outsourcing. "Most of the top-tier players in IT consulting are moving into business process management areas. IT has become more business-critical and this is driving the growth. Many companies don't have the skills to support the technology." He adds that many businesses are 'de-structuring' - retaining core skills and functions and leaving specialists to perform other tasks. This creates a much higher dependency on business processes and the need to ensure they are consistent and reliable. 'High availability' and 'mission-critical' are key phrases in the maturing corporate market for outsourcing and managed services. TCO is still important, but more value is placed on the ability to keep systems up and running. The stakes are high and the contracts are enormous, and all the big vendors and consultancies have raised their game. The result is a gap in the market for traditional service provision, which corporate resellers such as Computacenter and Compel have moved quickly to exploit. The area will continue to open up, predicts Cox, especially after the year 2000 issue is out of the way, but an increasing number of companies are expected to compete. "At the corporate end of the market, demand significantly exceeds supply. At the lower end there is a lot of consolidation and scores of new entrants in the business process area," says Cox. Takeovers are likely as companies vie for control. The important thing, adds Snowden, is that much of what resellers can provide in services is dependent upon the product sale. But this is exactly what customers want: "Users don't want to be offered the box and nothing else. They want the services that go around the box, which is what resellers are offering them now." According to Hibbert, the pace of the services market has slowed down this year, as competition has increased in direct and channel vendor services and millennium-related work has been completed. But it is nothing to worry about, he says. "The need for consultancy and services is part of a cycle. We predict the slowdown will be turned on its head. By the middle of next year, there will be too much work for too few specialists." If Hibbert is right, prospects will improve for new entrants, particularly in the middle market, as key vendors continue to be drawn to larger contracts. Snowden thinks this part of the market is wide open: "It's difficult to imagine HP, Compaq, KPMG or Andersen Consulting targeting companies with between 200 and 300 PCs, and no one appears to be trying to address this area right now." With the rising use of IT in this sector of the business community, we are likely to see higher levels of demand for managed services and contracted services. But resellers will have to meet a broad range of requirements, says Hibbert. "Most companies want a one-stop shop to which they can outsource generic core processes," he says. "To succeed in the intensely competitive world of business, it is important that an organisation concentrates on what it does best. The expectation becomes more prevalent in smaller organisations. Even medium-sized businesses may want to buy all their services from one point." As value becomes more important, and suppliers seek out ways to differentiate their service ranges and keep their own costs low, we are seeing more services 'products' being offered. Some companies have been trying to address the smaller and medium-sized markets with products that set out processes and structures, says Cox, but this is a difficult market to develop. "It has not kicked in yet because most organisations do not consider themselves small or medium," he says. "They consider themselves large enough to have systems tailored for their own use." There is also a growing tendency for distributors to offer services as well, says Hibbert, either standalone or as part of a package. "It can work, but only if all parties buy into the business model and there is no fracture between the customer and the partnering supplier," he says. In other words, for the service relationship to work, there must be a clear understanding and agreement between the distributors and resellers. While third-party service provision can be effective, it is not what customers want most of the time. Snowden also thinks the packaging of services can be effective because it enables the distribution business to achieve an economy of scale and thus deliver a service at a lower cost than the reseller could otherwise provide. In turn, the reseller gives the distributor access to a wider potential customer base. Although there is potential for some conflict here - between resellers and vendors, as well as between resellers and distributors - Snowden does not believe there will be many problems. "It's part of the game. In every market that uses a channel, there is always a point at which people are cut out somewhere along the line if it is lucrative business," he says. He believes most vendors have settled on policies which use the channel to deliver most of the services to most of the customers. But they will have to manage the politics with care. "Resellers won't want to end up being cut out of the juicier business, but there can be a tendency for them to become the junior partners." With vendors, distributors and resellers all involved, and with specialist services, suppliers and consultancies all vying for a different part of the services business, it is easy to imagine a great deal of conflict, competition and, ultimately, consolidation taking place in the services area. But there are not many grey areas and the market is expected to resolve itself into a relatively orderly state. Hibbert says we are never likely to see the likes of Dell and KPMG, for example, fighting against each other. "Dell supplies services only to implement its own hardware. The additional service division was created as a knee-jerk reaction, after projected statistics indicated a decrease in hardware revenue. It had to look elsewhere to fill the gap and service will always offer a higher margin," he says. "Dell is not in the business of implementing or advising on applications. This is too close to business processes and involves change management. These are specific skills". Consultancy, traditional activity-based services (break-fix and support, for example) and outsourcing can be separated quite easily, says Snowden. The main growth area in services, however, and the one resellers are best placed to exploit, lies outside all these definitions. "The fastest growing area is package-based services and providing a 'soup to nuts' approach to delivering CRM or ebusiness systems, for example. It involves many more things - consultancy work, the direct supply to support, and more integrated technologies. It is more holistic now rather than just an implementation." Snowden says managed services and even outsourcing services fall into the all-embracing 'solution' definition. These markets are growing at rates substantially above the market average - Hibbert says it is about 50 per cent in ebusiness and 30 per cent in CRM and supply chain management. Resellers that can enter these fast-growing markets with a full set of services ranges are likely to find plenty of potential waiting for them. THE KEY PLAYERS COMPAQ With its purchase of Digital, Compaq became one of the world's leading providers of services to corporates and the industry. It bills itself as offering a full set of services for the IT life cycle, but its great strength is in post-sales support and maintenance. In the third quarter, services revenue represented $1.6bn of Compaq's $9.2bn total. In the UK, Compaq has 14 service centres and more than 2,000 staff. Its global network provides round-the-clock support. The vendor claims to responds to six million service requests a year - one every five seconds. Compaq's service customers in the UK include BT, the Cabinet Office, DML, P&O European Ferries, Ford, GEC, ICI, Siemens, Lloyds, Dresdner Kleinwort Benson, Vodafone, Glaxo Wellcome, the Ministry of Defence, Cable & Wireless and British Aerospace. Since the Digital takeover, it has promoted its ability to support the whole IT environment. Perception is important to Compaq as its legacy is in hardware; Digital's services identity will gradually fade with its name. This may mean Compaq will further emphasise its services capability during the next few months. But this doesn't mean it will not try to push services through the channel - it undoubtedly will and has said as much. The difficulty for Compaq lies, as it does with all vendors, in drawing a line between what it competes for and what it leaves for its partners. OUT OF SITE - THE PROLIFERATION OF REMOTE SUPPORT Market research company Frost & Sullivan has been examining the services and support market and has detected evidence of a drift away from field support in favour of remote support over recent years. On-site support may not be dead, but as data centres gradually fade away - thanks to the popularity of distributed computing - it is being gradually superceded by other methods. Helpdesks and call centres are expected to continue their proliferation in the coming years as the overall market continues to show a healthy growth rate. The workgroup support sector in particular is generating significant revenue for service providers, and is expected to form about half of the entire support market of the future. The repairs sector is being driven by manufacturers outsourcing warranty responsibility.
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