In tech services, consulting beats outsourcing

Today in the Wall Street Journal, the fantastically-named Rolfe Winkler examines the duality of the technology services industry and the differing fortunes of several companies that have pursued each segment to interesting effect. Winkler primarily focuses on tech services giants IBM and HP, both of whom have a hand in the industry's two main segments: consulting and outsourcing. While IBM's consulting-heavy approach has propelled services revenue higher, he argues, HP's emphasis on outsourcing has led to stagnant growth and year-over-year revenue decline in tech services.

Winkler posits that consulting and outsourcing dominate the broader tech services umbrella. In the last decade, big tech companies have sought to jump on either (or both) bandwagons, typically through acquisitions. For example, HP bought outsourcing specialist EDS (now HP Enterprise Services) in 2008, hoping to become something of a leader in the tech outsourcing field. Meanwhile, IBM chose the consulting route, purchasing PricewaterhouseCoopers' major consulting units in 2002 to bolster its services output. Since then, IBM has joined the ranks of prolific (and revenue rich) tech consulting providers like Accenture, Infosys, and Wipro, all of which enjoyed double-digit revenue growth last year (the last two, Infosys and Wipro, are Indian firms turning the outsourcing trend upside down). Now, Big Blue is looking forward to a 2011 in which it is expected to achieve more than 5 percent growth.

It isn't just a consulting vs. outsourcing grudge-match for Winkler. Rather, it's about the trends that drove each company to different conclusions. IBM, with its world-renowned portfolio of sophisticated software, uses its expert consultants to sell, implement, and maintain software infrastructure; that requires a high degree of technical acumen, a service that clients have been willing to fork over the big bucks for. Conversely, HP relies mostly upon its hardware portfolio, which can be sold, implemented, and maintained by low-skilled labor from overseas. That kind of labor is cheap, abundant, and still in the ascendancy worldwide, so HP went for it whole hog.

It's clear that IBM's consultants have been able to beat HP's outsourced laborers in terms of revenue, but why? Winkler suggests that it comes down to the kinds of contracts IBM's consultants are more likely to win. IBM's "army of consultants is able to bid for more complex, higher-margin projects" than their counterparts at HP, who can only offer cheaper, lower quality alternatives that many potential clients could view as risky in light of the shaky global economy.

To catch up to IBM and its other tech services competitors, Winkler proposes that HP invest more heavily in its software portfolio, which will ultimately require clients to purchase not only the complex software, but also the well-paid consultants who know how to use it.

For more information:
WSJ: IBM Shows H-P How to Serve Clients