Executive
Summary
The Digital Services Industry began when traditional management consultants
with accounting practices discovered that computers could relieve them
of the vast tedium of processing numbers and let them focus on their client's
business concerns, usually by applying the new technology to create new
business value. The world hasn't been the same since. Today, any business
of reasonable size is integrated with its support technologies, whether
the business is aware of it or not. With the rise of the World Wide Web,
the breadth of technologies and associated business services has exploded,
and will continue to do so without much in sight - short of an economic
collapse - to stop it. Forward thinking service providers provide measurable
value to their clients - and have indeed helped create whole new business
models and opportunities.
We
have called these innovative service providers Digital Business Service
Providers or DBSPs. Often these service providers are defined in terms
of e-business alone, but we take a broader view:
"A
DBSP is a company providing management, technology, and creative consulting
practices that strategically assist or significantly enhance the capability
of a client to deliver services, information and/or goods through the
use of an electronic networked environment, generally including the use
of IP related technologies."
Under
this definition DBSPs range in their abilities and offerings from the
esoteric worlds of advertising and branding to the technologies and infrastructures
that make a business work in a networked environment. The range of interrelated
needs of their clients means that these companies must be equally broad
in their skill sets and vision, even while occupying niche spots. New
niche providers arise on a continual basis, and often move rapidly, by
one business strategy or another, to expand services so that they can
provide 'end-to-end' services. However, one of the significant features
of this marketplace is that new niche players are already finding it impossible
to compete or expand against entrenched legacy providers. As a result
we're seeing partnerships between the two begin to blossom. This is a
sign of the market maturing in at least some segments. We shall identify
these segments, and some chief players among them, below.
In
this part of the series, we examine the rise and nature of the different
service providers that inhabit this space. In subsequent pieces, we shall
examine service provider market and technology trends.
The
Evolution of Service Providers
The Digital Business Service Provider space has only been in existence
a short while, and yet it can claim a long history. Service providers
arose from a variety of backgrounds as the opportunity and demand to provide
new services increased. These new opportunities result from the coalescing
of communications technologies with computers, related developments in
the telecommunications infrastructure, and the deregulation of many national
and international networks. The major outcome of this coalescence has
of course been the creation of the Internet.
Chronologically,
we'll break the history the into seven time periods starting with the
beginnings of commercial applications of computers. These rough time frames
span the epoch during which technology begins as a way of making efficiency
gains and ends as an integral component of a company's strategic survival
and business methodology.
Late
1950's to mid 1970's
Service Providers are dominated by former and current accounting and management
consulting firms. We see a new breed of systems architecture and programming
consultants such as CSC (Computer Sciences Corporation),
mostly geared for large-scale applications. Later in this period systems
integrators such as EDS appear. These are today's legacy (or traditional)
consultants. Verticals such as air travel booking systems (SABRE),
manufacturing and automation, and decision support/rudimentary business
intelligence tools appear.
The
first networks, including use of satellites, and first electronic mail
systems appear. Awareness of EDP (Electronic Data Processing) rises in
corporate hierarchies as a business asset, making it easier for service
providers to sell major projects and develop new capabilities. Many companies
operate with separate MIS departments in individual business units, leading
to a plethora of incompatible systems.
Mid
1970's to early 1980's
This era is still dominated by large-scale computing projects. Networks
are spreading to more customers as networking costs drop and new telecommunications
infrastructures come into effect. Systems integrators find their niche,
particularly since multiple 'packaged' solutions are becoming available.
This enables service providers to extend their expertise into customizing
and integrating the new packaged solutions, increasing the market they
can service. Implementation projects cost as high as $300,000 and software
packages are about $50,000.
Early
1980's to late 1980's
The PC changed everything. When IBM introduced the PC in 1981,
and the first killer application in the form of a low cost spreadsheet,
IT costs per user dropped quickly. Ethernet and token ring standards became
established, terminal emulation programs for PC's appeared providing connectivity
to mainframes as intelligent terminals. Connectivity became an important
issue. Suddenly everything could be distributive and connected. Service
Providers quickly tooled up in network technologies, adding the management
of these systems to their sales bag. The enormous backlog of systems integration
was not complete, and now had to be readapted to network and distributed
processing environments.
The
growing PC market was now penetrating into SMEs (small-to-medium sized
enterprises), and even homes had PC's. France experimented with a nationwide
electronic network. Management consulting involving IT strategies begin
to affect how organizations executed their business. Extensive MRP and
DSS systems extended the range of consulting services, particularly for
risk management and accounting based financial service consultants such
as Deloitte and Touche, KPMG, and PriceWaterhouse.
Companies like EDS and CSC become the systems integrators. SMEs were shut
out of these developments to a large extent, but took advantage of lowered
software costs to automate their businesses; small-scale service providers
and some of the larger consultancies such as Deloitte paid attention to
this market, but it was not their focus.
Meanwhile,
broadband services such as cable, fiber-optic and microwave, and many
communication standards were proposed or rolled out in the burgeoning
telecommunications industry. ARPANET expanded to over 10,000 nodes by
1987, and the Internet began to take shape.
Late
1980's to early 1990's
With the rush of network technology, packaged and open architecture solutions
and new technologies, lowered integration costs per user. Smaller organizations
were able to introduce new solutions in the crusade to improve business
efficiency. Larger organizations followed suit, using service providers
to compensate for inefficiencies or lack of expertise in their MIS departments;
this often pushed aside MIS management and led organizations to be more
dependent on their service provider.
As
systems became more complex, more companies came to engage with service
providers. The depth, breadth, and strategic consulting demands on service
providers were, as a result of these trends, greatly expanded. Deeper
involvement in the affairs of clients led to questions about the independence
of the legacy consultants who sometimes provided auditing and technology
consulting to the same companies, thereby often auditing their own work.
Further,
the discrepancy in pay and investment return was quite different for technology
and management consulting as compared to audit and accounting services.
The latter were left feeling like the poor cousins. The situation continues
to this day, but the management consulting arms of the major players are
divesting their technological fingers rapidly, yet at the same time attempting
to capitalize on the market. The problem is still undergoing review by
the Securities and Exchange Commission in the US.
Two
events in this period led to dramatic changes in service provider life.
On November 1, 1988 the first Internet worm was released, disabling approximately
6,000 of the 60,000 Internet hosts. Even though the Internet (then still
really ARPANET) lashed together educational institutes, there were direct
ties to commercial networks and free public access ramps. The release
of the worm sent shivers around the net, and the Internet security industry
was born.
In
1990, ARPANET was suddenly released from its Cold War cage, to form the
backbone of the new Internet. In 1991, Tim Berners-Lee, working at CERN
in Switzerland Launched the first prototype of the World Wide Web. Marc
Andreesen and a group of student programmers at the University of Illinois
developed MOSAIC, the first graphical browser and the forerunner
for Netscape.
Early
to mid-1990's
Although the Web excited many, established businesses were relatively
slow to pick up on the possibilities. One that was farsighted was MCI
(now WorldCom). It teamed with service provider PROXICOM to create
the first online mall -- marketplaceMCI - a failure by any standards,
but a brave attempt. PROXICOM exemplified a new breed of service
provider: one dedicated to web business. Such new niche web players quickly
grew in reputation, and business was beginning to awaken to the possibilities
of the Internet. Suddenly, there were people on the web, and where there
were people there was a market. Tapping into it was another problem. PROXICOM
was joined by the likes of RAZORFISH and USWeb (now marchFirst)and
many others.
The
legacy consultancies were aware of this new form of enterprise, but their
money was being made through Y2K - related activities, and their core
customers were not at the forefront of spending on new technologies. And,
truth be told, many were ill equipped for the creative challenge posed
by the Internet. Many Internet projects were also small scale and not
of interest to them, so the field was left to the new service provider
innovators. Some advertising agencies, such as DDB Needham,
were also curious about this new medium, and online advertising was born.
B2C
oriented service providers dominated this early phase, although many have
since changed their focus to B2B. Razorfish appears to have made this
transition. Organic.com, founded in 1993, and Agency.com
(founded 1995), are still recognized as B2C companies, but are increasingly
involved in back-office and legacy systems integration work. Robert Shaw,
former CEO of USWEB, recognized the ambiguity in B2C when, during USWEB's
1999 fourth quarter results telecast, he stated " the blurring of B2C
and B2B is happening; you can't really do the whole thing without understanding
the whole scenario."
Mid
1990's to 1998
Though
established business was waking up to the possibilities of the Internet,
the Y2K issue consumed most of their resources and energies. Rightly or
wrongly, the web became the haunt of the newcomer, and 'dot-com' companies
arose as online sales opportunities seemed to explode with each passing
day. With a roaring stock market, a huge potential and the online market
growing at an unprecedented rate, even very unclear business models seemed
to offer instant success.
Prior
to 1998, the Internet looked still very experimental, but a few apparent
success stories stood out: AOL by 1998 was a multibillion-dollar business,
and was beginning to move from its private network to the Internet, a
move that gave the web as a whole great legitimacy. Other early successes
included service providers such as Razorfish, Proxicom, SCIENT
(founded in 1997), and Appnet (founded in 1998). Interactive agencies
- branches of traditional ad agencies that brought branding and image
creation together with Internet technologies - were also founded.
During
this period, dot-com's started to arise as a powerful force on the service
provider marketplace, their numbers largely driven by the unreasonable
market caps achievable on the stock market through IPOs. This had several
effects that echo to this day. First, many service providers began to
offer services for creating businesses, not simply adding value to existing
businesses. In some cases some service providers were started and structured
on the premise of creating new businesses in the web environment. One
such company is SCIENT. SCIENT has since built its reputation and its
capabilities to deliver services to create businesses from a few Power
Point slides. Others, such as LANTE (founded 1984), have undergone transformations
from network integrators to e-Marketplace specialists, or at least tried
the transition with a good degree of success. Many such integrators have
failed in this attempt.
New
trends became important: globalization, localization, personalization,
privacy, security, Internet taxation, and even politicization. Suddenly
the web involved new skill sets and impacts that had as much to do with
traditional global issues as with modern technology. Technology companies
planning to make money on the web began to turn to traditional consultants
who were ill prepared for the new medium.
Additionally,
new Internet technologies such as Java and Active-X were bringing out
the collaborative and interactive advantages of the web. These new technologies
began to fit neatly into the new service provider skill sets.
1998
to Present (November 2000)
Although
the growth of dot-com companies is largely associated with the United
States it was and is a worldwide phenomenon, with some 10% of IPOs originating
from offshore based organizations (see figure 1 which gives the distribution
of IPO's outside the US on US exchanges up until January 2000). Unsustainable
market caps derived from wildly inflated revenue predictions by (often)
inexperienced entrepreneurs moved a whirlpool of money into these stocks.
Service providers
also jumped in on the act, and up to a year ago some were earning as much
as 50% of their revenues from dot-com business ventures. Many service
providers streamlined their processes, (thereby increasing business failure
risk), and developed incubators, accelerators, business production 'Supercenters'
(a term from service provider Xcelerate), test laboratories for broadband,
scalability, wireless, and whatever else the focus had to be, in order
to attract dot-com's to their houses.
Figure
1. IPOs from Offshore sources on US exchanges prior to January 2000
The new service
providers on the block were good at this, and their shares soared with
those of their clients. However, the party came to a reasonably abrupt
end when reality set in, and all the hype of the new business paradigm
collapsed back to one basic measure - profitability. The impact on service
providers was dramatic, and within a quarter, many reported that they
had shifted gears and were focusing on more stable lines of business.
Luckily, with Y2K out of the way, established brick and mortar companies
were now turning their attention to the Web. Even slightly before the
dramatic drop in valuations that occurred in March and April 2000, brick
and mortar companies were looking for ways to improve supply chain and
procurement processes. Early reports of substantial ROI in e-procurement,
and extended supply chain management using Internet based technologies
were proving attractive draws.
The odd situation
of dot-coms dying and brick and mortars turning to click-to-order, as
well as the growing importance of B2B, has created a brave new world of
partnering between the legacy consultants and the new upstarts. For example,
according to Walker Interactive some 80% of data on the
web is sitting on S/390 systems. Legacy consultants have the traditional
skill sets to deal with these legacy systems, while the new service providers
have skill sets focused on the newer technologies, including their creative
and strategy components. Though this does not mean that service providers
cannot offer a complete set of services for any engagement, it does mean
that there are likely to be higher risks when companies choose a single
service vendor for a broad based solution. Mitigating these risks has
led to partnering relationships among many service providers.
Finally,
as this market matures the problems of capitalizing on the advantages
of a ubiquitous network have opened a Pandora's box. The complexity of
integrating creaking legacy systems with new high speed and scalable Internet
technologies, and linking suppliers and customers into single demand-side
supply chains, presents an enormous challenge. One thing to expect is
that it will spur the development of new technical capabilities within
the service providers. Already, many specialist service providers and
second tier services are appearing; these range from online brokerage
and automated taxation services to wireless, broadband and Bluetooth product
support. The wealth of services that existed in the physical realm will
to a large extent be transformed to online businesses. The partnering
approach will play a heavy part in tomorrow's service provider world,
and partnerships should be taken into account when selecting the service
provider.
Digital
Business Service Providers - A Current Taxonomy
Based on
the discussion above, the current set of digital business service providers
divides roughly into the following groups:
- IT Management
Consulting organizations that have re-packaged, re-branded or created
consulting practices around the e-business label. To add creative design
and web architecture elements to their portfolios, they have invested
in smaller entities. Deloitte Consulting is an example of this process
with its venture capital program to obtain technologies and talent;
others are Andersen, PWC, and KPMG.
- Systems
Integrators who have migrated from systems integration into B2B. Often
these are reasonably successful but small (less than a thousand employees)
firms that realize that the main business focus has shifted from integration
to providing full services. Larger companies such as CSC and EDS are
also among legacy systems integrators who have made (or are making)
the transition. Smaller organizations such as OSPREY can also be placed
in this category.
- Traditional
Marketing and Advertising Agencies who are driven to provide Internet
services for clients. This group of companies is often ill suited for
the role of technologist, so unlike their roots in marketing and creative
solutions. However, relying on their marketing strengths may provide
a lower cost alternative than some using holistic SP's trying to cover
every base. Successful companies in this space are DDB Needham's integrated
communications and digital group (called Beyond Needham. JWT is another
legacy advertising organization that has embraced the web. There are
also newly created digital branding companies such as Four Points (absorbed
by Whittman-Hart which merged with USWEB/CKS in March, 2000), begun
by ex-executives of traditional advertising agencies but now focused
in the digital marketplace, and Digitas which rose from within Bronner,
Shlosberh, Humphrey to engulf its parent.
- Website
Builders And Web Creative Organizations. These are generally new companies
created within the past five years that started as creative boutique
website builders in the mid 1990's and have grown their capabilities
organically or by mergers and acquisitions. USWEB/CKS, Razorfish and
XCelerate are examples of these growing companies.
- Vertical
Market-Product Oriented Corporations that drive into the e-business
service provider space by providing opportunistic consulting arms to
sell and repackage existing products to e-business clients. These might
be labeled "product-centric service companies." IBM Global Services
(vertical: Computer products and services), Informatica (vertical: data
warehouses) and possibly such giants as AT&T and WorldCom (vertical:
Telecommunications) are examples of this breed of service provider.
Generally they are legacy organizations that see real growth opportunity,
sense the need to re-invent themselves to survive, or are merely remarketing
themselves with current jargon without any basic change in what they
provide.
It should
be pointed out that the situation is highly fluid. For example, Andersen
Consulting has undergone a rapid change within a period of 80 days from
November 1999 to January 2000. Released from its chains to Arthur Andersen,
it is expanding rapidly into new regimes, including forging a diverse
set of partnerships. In the extended world of the Internet one may wonder
what any company truly "is."
User
Recommendations
Given the
history and nature of the changing service provider world, it is clear
that a Digital Business Service Provider must have an extensive network
of capabilities. Users must consider all their requirements in light of
the interlocking partnerships and capabilities that may be called upon
during the course of a project.
Technology
trends are more closely tied to business opportunities today than at any
other time in history. You want to work with a service provider that understands
your strategy and direction and shows the ability to grow its skills to
meet your future needs. This is probably more important than low price
or even basic capability. Today, with the more complex environment of
the Internet, a new company may need to spend as much as $10M for a first
run to compete with online brick and mortar organizations. Barriers to
entry are much higher, and competition is likely to get stiffer. Opportunities
will most likely arise with new technology, and the service provider you
work with should be capable of riding ahead of the wave
On the other
hand, issues such as cost place a heavy demand on the user to manage projects,
and ensure the goal of the project is clear and within bounds. If you
are uncertain of the business vision, it is better to postpone the project
to a later date than to spend money without a clear goal. You must work
closely with the service provider, have a management structure that deals
with issues effectively, and ensure that the service provider also has
appropriate management and structure on its side.
Service
Provider Recommendations
It is essential
to form partnerships and alliances to build the skill sets that will continue
to add value to your clients, regardless of your current size or aspirations.
We believe that small companies are likely to find it impossible to provide
the full extent of service required; we believe that even companies in
the SME market will have this problem.
Larger service
providers must have critical mass, market niche or distinctive direction
to be successful in fending off challenges. We suspect that in time various
'camps' of service providers will be created, much like a set of suppliers
and buyers tend to loosely affiliate around products and services. For
you, new business creation may well become a task of picking the elements
in a supply chain of services and products, and of being able to bring
these to the customer in a rapid sequence. Perhaps the future contains
a digital marketplace for DBSP services.