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IT vendors acquire big VARs to meet IT operations outsourcing demand

Networking channel partners should expect more mergers and acquisitions among IT vendors and large VARs as vendors try to satisfy demand for IT and network operations outsource from their enterprise customers.

Fears of a possible global depression have given way to talk of an economic recovery. And as with any other recovery, such chatter is leading to a flurry of mergers and acquisitions.

One class of acquisitions will warrant networking channel partners' attention more than any other: Large IT equipment vendors are looking to buy large system integrators and IT services companies. The first domino to fall was Perot Systems, which Dell picked up for $3.9 billion. Then Xerox bought Affiliated Computer Services (ACS) for $6.4 billion.

Cisco Systems has made no secret of its intentions to be an active shopper, and many industry observers say it would make sense for Cisco to acquire an IT services firm, especially since one of its biggest rivals in the networking world, HP, has had so much success with its 2008 acquisition of EDS. In fact, Canada's Globe and Mail speculated last week that Cisco may be interested in buying CGI Group, an IT services company with $3.8 billion in annual revenue.

"I can't say that we're all that surprised [by the acquisitions], because if you take a look at the technology trends out there – mobility, convergence, globalization, cloud computing, utility-based pricing – it's getting increasingly difficult for companies to manage all of that," said Wesley Johnson, COO for Dimension Data Americas. "So I think [enterprises'] expectations are that the vendors will have a broader array of products and services available to help manage it all."

In other words, large enterprises with complex networks want to offload some of their network operations burden. IT vendors see this as an opportunity and are scooping up services companies to take advantage of the market demand. In fact, some IT vendors may want enterprises to start associating their brands with IT services and IT operations outsourcing rather than just order fulfillment. For instance, HP has retired the EDS brand, a brand that many enterprises associate with major IT outsourcing projects. EDS is now known as HP Enterprise Services.

"We have been taking similar steps ourselves," Johnson said. "We have over the last five years been moving away from being a largely technology-driven fulfillment partner to being more of a solutions and services-oriented integrator. For example, we provide SLA [service-level agreement]-based operational IT services, or IT processes. Our clients will outsource to use various parts of their voice and network infrastructure. So if you take a look at the portfolio of Perot and EDS, they do this today."

Paul Myerson, senior channel analyst with Enterprise Strategy Group, said the recent acquisitions are definitely very much about managed services, but they are also about getting a good look at what enterprises need.

"From the endgame perspective, the services companies get the first view into these large opportunities, in terms of planning, scoping, architecting, etc.," Myerson said. "The earlier they get in, the more opportunity there is to get the larger deal."

In any case, vendors and VARs clearly believe that managed services are the future for the channel. The question is, will networking channel partners that are trying to build up a managed services portfolio find themselves competing against their vendor partners?

"If you take a look at those companies [EDS, Perot, ACS], they provide a wide range of annuitized operational or managed layer services," Johnson said. "They have professional services as well – the transactional in-and-out services are part of it. But the strongest part of it is the annuitized managed services. Many of those companies have large outsourcing businesses. Those are large-scale, IT-related operational services for which a regional VAR is unlikely to be competitive today."

Myerson said the larger VARs that sell into the Fortune 1000 could feel some competitive pressure. "What they've got to do is be smart and proactively offer those services," he said. "Continue to be active as a value-added reseller, and just have services flow through that."

"In many cases," Johnson said, "these smaller service providers roll up under a broader service agreement."

Let us know what you think about the story; email: Shamus McGillicuddy, News Editor

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