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Big acquisitions spark IT services outsourcing initiatives

Dell and Xerox's splurge on services companies could mean more IT services outsourcing initiatives for smaller, independent VARs and integrators..

Big tech vendors continue to splurge on high-end IT services. The latest is Xerox Corp., which pledged to buy Affiliated Computer Services and its business processing outsourcing expertise for $6.4 billion in cash and stock.

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Dell acquisition of Perot Systems spurs channel conflict fears

Last week, Dell launched a buyout of Perot Systems for $3.9 billion. That deal was seen as Dell's response to Hewlett-Packard's purchase of Electronic Data Systems (EDS) last year. And, observers said HP's EDS merger resulted from that company's obsession with IBM's gigantic services business.

Small integrators could get cut of giants' IT services outsourcing initiatives

Enterprise-focused VARs and integrators watch all of this with great interest. Perot and EDS play pretty much exclusively in the largest of the large accounts. They see the acquisitions as a possible threat to their enterprise business but balance that risk with a potential big opportunity. EDS, Perot and IBM's services arm often subcontract or outsource chunks of these IT services initiatives to smaller, more nimble and specialized integration firms.

Basically, the big hardware companies are "rolling up services" said Harry Kasparian, CEO of Corporate Technologies Inc., a Burlington Mass.-based IT solutions provider that works with Sun, NetApp and other tech vendors.

There should be no competitive beef beween these new monoliths and other IT integrators as long as the Perots and EDSes of the world maintain their current, relatively high pricing on IT outsourcing, said executives with independent integrators.

"You'll pay top dollar for these people -- upwards of $300 to $500 per hour for those consultants, whereas you can get other people in the $50 to $75 range," said Frank Basanta, director of technology at Systems Solutions, a New York city-based IT services company and reseller.

Kasparian said the nagging fear is that these newly minted service giants "will start doing predatory pricing, but they have to be careful of that." Most of these big hardware companies want to maintain their relationships with regional and specialized integrators that can bring them into accounts, he said.

IT services companies like Corporate Technologies and Systems Solutions must keep their skill levels high and retain their specialized, value-added expertise. "We need to operate in the least understood, scarcest skill part of the market," Kasparian said.

Huge services companies by their nature are slower and less nimble than smaller, more focused entities. They tend to go in and look at the big picture deal, do what they have to to win it and sweat the details later, said Mike Chadwick, executive vice president of Prolifics, a big IBM software partner. At that point they often bring in specialized help from outside IT services firms.

"Those guys are so non-nimble, whereas smaller companies like ours really know the toolset and technologies that address specific problems," he said.

Scott Jenkins, CEO of The EBS Group LLC, a Lenexa, Kan., Oracle solutions provider, said IT services outsourcing is nothing new among vendors trying to boost their stock price. "Dell and Xerox are using their cash and stock to buy revenue they aren't creating by sales expansion. Also, service revenue [has a] higher margin than hardware. And, Wall Street gives 'diversified' vendors a much higher market cap multiplier."

Still, there is persistent worry among IT integrators that, eventually, the price pressure that has eroded hardware and software margins will afflict services as well.

The net impact on VARs and integrators is that this IT services outsourcing does eat away at market opportunity as these big conglomerated companies "bundle hardware, software and services," Jenkins said. Ultimately, that will lower the price of services as they take less margin on them to rack up larger revenue transactions, he said.

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