A Price War Cometh to IT Services

From: Firms Jockey for Space in Services by Justin Scheck, The Wall Street Journal, April 7, 2010

Outsourced IT services companies are coming out of the same recession we all survived.  Now,  they’re getting hit by a triple whammy of more low priced competitors, few dollars being spent and more contracts being negotiated.  That means that a price war is on the way.  Heck, it’s probably already here.

IT hardware companies like HP and Dell are trying to repeat IBM’s successes of the 1990′s by moving aggressively into IT services.  IT services now provide over 63%t of IBM’s revenue and provide a way to leverage the real value add of the services as the hardware becomes increasingly commoditized (Though I would guess that Cisco would disagree with that).  To accelerate that process, both HP and Dell have made major acquisitions to beef up their services arm: HP acquired EDS and Dell picked up Perot Systems.

To make matters worse, business process outsourcing, the practice of outsourcing to lower cost labor countries like India has helped spawn lower priced competitors that are gaining credibility and traction despite having stutter stepped with some reporting/ethical issues last year.  The problem is that whether big or small, high or low value,    they’re all looking for two things–growth of revenue and share.  The trouble is that demand for those services is down almost 17% this past year.  This is a perfect recipe for a price war as individual managers and regions drop price to try to hit their revenue numbers.  Expect profits to drop dramatically in this sector.

The saddest part of all this is that most IT services customers  are not price buyers.  They’re poker players.  That is, they want high value services for low prices. They know that IT services are a critical component of their global infrastructure and that only a few suppliers can really meet their needs.  They want those vendors as strategic partners.  But, they’ll use low price vendors as “rabbits” to drive down the prices of their higher value vendors like IBM, HP and Dell (and, yes, even might Accenture).  Not knowing how to respond, the vendors will likely resort to price discounts.  Thus proving that the smartest guy in the industry is Ross Perot–who was smart enough to sell high and move on.