The Wall Street Journal
Big Competitors Join Increasingly Crowded Market as New-Deal Spending Slows
Michael Dell, left, and Ross Perot Sr. Dell bought Perot Systems in 2009.
Hewlett-Packard Co., Dell Inc. and Xerox Corp. are seeking new profits in the technology-services industry. But those companies face a major challenge: While competition is intensifying, their corporate clients are spending less on new deals.
Over the past two years, H-P, Dell and Xerox have spent billions to muscle their way into better positions in tech services. The market, traditionally led by International Business Machines Co., is regarded as attractive because it provides steady revenue from customers who pay recurring amounts to outsource their tech systems like email or payroll.
But even as the total number of new services contracts awarded each year more than doubled globally between 2000 and 2009, the amount spent on those new contracts fell to $74.5 billion from $90 billion in the same period, according to tech-consulting firm TPI. The market is expected to remain tight even amid a recovering economy.
Behind the slowing growth are companies like Dow Chemical Co. that are signing smaller, shorter-term tech-services contracts. In 2000, Dow Chemical signed a seven-year deal to outsource parts of its information-technology systems to IBM. Last year, it signed a new services deal with IBM for just five years. IBM and Dow Chemical declined to disclose the dollar values of the deals.
"From a buyer point of view, you always want smaller contracts," says Dave Kepler, Dow Chemical's head of IT. Dave Liederbach, general manager of IBM's strategic outsourcing division, acknowledges that "the deal size, on average, is going down."
Industrywide, "we're increasing the number of deals, but revenue isn't increasing at the same rate," says Tom Blodgett, head of corporate tech services for Xerox, which last year acquired services provider Affiliated Computer Services Inc. for $6.4 billion.
The declining growth started last decade, says Don Mann, who heads Dell's services unit for large businesses. "The deals kept getting smaller and smaller and smaller," he says. In the past, it was common for large companies to sign 10-year outsourcing agreements with tech-services providers like IBM.
Such dynamics haven't dissuaded tech giants from investing in tech services. Dell last year bought Perot Systems Corp., which specializes in public-sector tech services, for $3.9 billion—a 68% premium over Perot's share price at the time the deal was reached. H-P spent more than $13 billion to purchase Electronic Data Systems. The wave of acquisitions came as profits fell in areas like computer hardware and printers.
Since the services industry has no one dominant player—IBM had less than 8% of the total market by revenue in 2008, the last year for which data are available, according to market-research firm Gartner—the big tech companies saw an opportunity to grow, says TPI's Mr. Slavin. They also saw services as a way of developing new customers who would buy computers, he adds.
In response to the slowing growth, H-P, IBM, Dell and others are also trying to cut costs by creating new software, developing niche specialties in areas like health care, and shifting to employees in lower-cost countries like India. IBM, Mr. Liederbach says, has been sending research scientists to develop new software with companies like Dow and now bids for smaller, short-term contracts with customers in the hopes of securing larger ones in coming years.
Dell's Mr. Mann says his company has created new offerings for health-care customers, which stand to receive more than $19 billion in federal funding to computerize patients' records, enhancing health care seo. Xerox's Mr. Blodgett says his company is focusing on outsourcing specific functions, like employee benefits, which ACS started managing for Ford Motor Company last year.
Still, customers such as General Motors Co. appear to have the upper hand. GM, which at one point owned EDS, played a big role in the move toward smaller contracts when it changed its outsourcing strategy in 2006. Until that year, GM outsourced almost all its technology to EDS, but in 2006 sought bids from other providers to get away from giant, single-vendor contracts. GM awarded a $700 million contract to H-P (which had not yet purchased EDS) for certain systems and also outsourced pieces of its IT to IBM and Wipro Technologies Ltd.
EDS said in 2006 that it still expected to get about $1.2 billion a year from GM, though it only had 70% of the outsourcing work, rather than close to 100% as it had in years past. A GM spokesman declined to comment. An H-P spokeswoman said the company still does work for GM.
