A three-ringed circus: convergence discussed

By Gary Barnett, Chris Lewis and Dominique Raviart

Ovum recently held an event that discussed IT services, software and telecoms industry convergence. As we explained at the time, the discussion came about as we have been having lots of internal debates about the relative roles of the software, telecoms and IT services industries as they all converge. The many flavours and forms of convergence, or lack of it, will have a direct impact on both the businesses using ICT in the future and, more importantly from an industry perspective, on the shape of this emerging ICT sector.

Some of the main themes to come out of the presentations and discussions were:

• Customers want to reduce the number of suppliers across the board, but who holds the upper hand? The provider literally nearest to the business and the applications? Single sourcing on the old outsourcing model basis is not generally the answer. Multi-sourcing, even keeping in touch more directly with supposed sub-contractors in an ICT offer, is the order of the day. Today's CIOs can be very different beasts, with some focused on the lower level infrastructure issues and some floating higher and focusing on the more high-impact corporate strategies.
• Software and telecoms moving from a factory based product pushed the product out of the factory gates and had high margins, but is now being driven to new service models through convergence, and customer demand is driving requirements.
• IT services are shifting from a pure people-based business towards to a mass-production approach to project and outsourcing. Meanwhile, Western IT services firms are suffering from the big disruption brought into the market by India-based vendors, which are growing faster, are less expensive and are much more profitable.
• The factory-based sectors of software and telecoms have enjoyed much higher margins than the IT services industry. The 35-60% cushions of some of the old players and offerings look enormous compared to the low teens or single figures of the IT services market. As demand swings round to be the main driver in the ICT industry, more local customisation is needed and players need to be more people intensive and more customer focused, and we know that customisation equates to lower margins.
• Skype is obviously a major issue for telcos.
• Are these separate industries? We discussed the iceberg analogy of seemingly distinct industries that underneath are colliding. And we know what a mess occurs when such large objects crunch together!
• The pressure on all participants in the circus means that new business models are required, old practices need to be revisited and a more balanced view of what the customer actually wants (rather than what the industry can offer) needs to be the foundation of any approach.

The software perspective

The software industry faces some major changes in its make-up and its position in the ICT ecosystem:

• Software vendors face the growing need to establish revenue models that are both reliable and capable of supporting growth.
• A significant shift is taking place within software vendor sales models, in which the balance between licence revenue and support revenue is beginning to tip in favour of support.
• Software vendors face the risk of being separated from the final customer by third parties.
• Open source software is having a profound impact on the industry, but that impact isn't just around the software itself - the greatest impact lies in the business models that accompany open source. Open source companies operate by a fundamentally different set of principles. The obvious difference is that the software itself is free, which means that open source vendors have to find other ways to derive their income.
• Services companies are increasingly stepping in as intermediaries, placing software vendors at one level of removal from the end user on one hand and telecoms companies are increasingly looking at ways to move out of the 'bit-pipe cul-de-sac' and become business service providers in their own right.
• In the medium term, the challenge for software vendors is to find a comfortable and profitable spot in the ecosystem that allows them to collaborate with service companies - essentially enabling them to add value to the propositions of services companies. At the same time, they need to retain the clear water that exists in terms of customer relationships, reputation and channels between themselves and the telcos.

 The telecoms perspective

Fundamentals of the telecoms industry are changing away from fat, monopoly lead margins.

• CIOs want more solutions that are customised around their needs and not around the capabilities of a telecoms operator's network.
• Next-generation networks are primarily internal, supply side matters, and the resultant services might address customer needs but the jury is still out.
• Convergence means different things to customers and suppliers: making savings and making more profit are at odds, but managed services are the saviour.
• Managed services will, however, be made up of primarily communications based services and applications. Efforts will be focused on the emergence of multiple flavours of VOIP, collaborative software and unified messaging across all platforms, on top of basic connectivity and its management.
• Telcos cannot afford to go for the big-bang approach, as they aren't very good at doing the basics in their home territory.
• Telcos are aiming to create an ecosystem around the largest clients, where they act as prime contractor, subcontracting most of the work to SIs and IT service providers.
• The fundamental issue is that telcos need to understand their relative role in the new ICT ecosystem. And this system is fluid, depending on the customer and not on the industry.

The IT services perspective

• IT services firms live in harmony (!) with ISVs for which they implement, further develop and integrate their applications and infrastructure software. In particular, IT services providers complement applications that often do not cover the specific functional needs that clients have.
• The overlap between IT services and telecoms services is mostly around network services (LAN services) and hosting. The critical factor, however, is that IT services deliver services over all and telecoms players are striving to be services players. Historically, IT services players as a whole do not go very much into the field of network services. Yet implementation of voice over IP technology may change this divide over time.
• IT services is not the promised land many have believed it is: it is a low-margin, cyclical industry, yet a very large market.
• The main areas of concern today are internal issues, such as how to increase Indian headcount re-skill in-country people, industrialise service delivery or get ready for the next downturn. Convergence or overlap with telecoms and network service providers is not a great area of concern - as far as IT services vendors and large enterprise clients are concerned.

We will continue to monitor the juxtaposition of these three formerly distinct industry sectors as they, like icebergs, collide, grind against each other, fracture and ultimately either break down into independent ice flows or melt into the greater ICT ocean!

If you would like to know more about any of the presenters or the presentation material, please contact carol.orr@ovum.com.