Thursday, 14 May 2009

Is the tech sector past "synergies"?

When an industry sector is immature, nobody knows what the right divisions are between companies.

The technology sector has clearly gone through many iterations of asking itself this question: hardware and software used to be provided as part of the same package, but now they are almost completely separate. Internet access, hosting, web design, domain registration and software development used to overlap (at Inon we provided all of these services in the late 1990s) but now it's rare to see someone offering more than one or two of these.

There are roles for integrators, but the integrator usually subcontracts a large share of project revenue (60-80%) to third party specialists and retain only the consultancy element in-house.

So is it time for BT to sell Global Services? Robert Peston has an analysis of their losses today, and it doesn't look good.

Ten years ago most customers didn't really understand the Internet, and how it related to existing software, hardware and communications. BT was a safe pair of hands and managers in large companies tended to feel that it was sensible to outsource this expertise.

But BT came from a network background and took a long time to get the Internet too. Only a few years ago they still seemed more interested in selling physical connectivity - Megastream fibre or ISDN lines - than fully provisioned Internet access. Of course regulatory constraints had an impact on them, and they've always been at a simultaneous disadvantage because of this (only partly offsetting their advantages as a former monopoly).

Perhaps that's why it was attractive to set up Global Services, a new company in an unregulated industry. I really wanted Global Services to work for them, and to some extent it has - clearly they are generating revenues. But it never felt like a business which had a clear idea of what it was for - and whether it was supposed to be there to generate work for the rest of BT, or to provide the best possible consultancy and services for its clients.

Admittedly system integration seems to be a hard business to run well - we hear about eye-watering project overruns at Accenture and EDS all the time - but at least those companies seem to make money. Global Services might never manage that until it is set free.

When a new industry emerges, the attractions for suppliers of combining all possible services are great. They don't know where the demand is going to be, what price levels will be sustainable for different services, or even what they'll be best at doing. Certain kinds of expertise are transferable; and understanding how to implement all the parts of a project, end to end, is a valuable asset. But over time, as sufficient demand emerges in subsectors, specialists emerge to lead those sectors. It becomes very difficult for integrated companies to compete.

IBM still seems to manage it, but I could imagine them getting rid of their hardware division and turning into a services company. There's little rationale for BT to do that when their network division still makes so much money. It feels like it's time for Global Services to stand on its own. It will probably be all the better for it.

Update: I forgot to mention one reason why Global Services might be better off attached to BT. One of the key requirements for taking on huge IT projects (at the multi-billion pound level) is that you should have the financial strength to cough up if they go wrong. £3 billion penalty clauses are only meaningful if you are either a huge firm yourself (Accenture) or have a big parent company to stand behind you (BT Global Services). Then again, does the networks part of BT really want to support its offspring in this way?

2 comments:

Anonymous said...

Funny you talk about selling Global off - it almost was 7 or 8 years ago - BT had a spin-off called Syntegra which was getting pretty good in that market - external facing, project focussed - BT itself bid for NHS, and largely staffed it with Syntegra to the exclusion of all else, leaving the doddery internal facing managers from what was becoming global to handle the other big contracts they were winning - fish out of water, as these managers had never seen outside BT before. A lot of jealousy towards Syntegra from the internal dodderers led to Syntegra being dismantled, and all that expertise being lost. The culture Syntegra develped was in the Accenture/EDS mould, and given resource might have made a better go of it. I know I was a Syntegra person, & proud of it. BT threw out the baby with the bathwater when it ditched Syntegra, and lost the very skills it now so sorely needs, subsuming very good managers in Syntegra to hopelessly inept people from it's then internal IT division which is now Global. While BT Group owned the NHS bid, Syntegra senior personel ran it, and initially advised to no-bid, knowing and anticipating the problems. Those people were soon cast aside and BT bid anyway as it wanted the prestige of winning such a bid with no concept of how to fulfil it. The then NHS supremo Richard Grainger knew organisations were bidding for that reason, & hence loaded contracts massively against suppliers, which to his probable surprise they lapped up. Unfortunately those responsible have long left BT and the incumbent team are stuck with this massively flawed legac. I have great sympathy for my ex-colleagues still there trying to make some sense of the pigs ear that is the NHS IT programme.

Anonymous said...

I fully agree with the comments on BTGS and the business that was Syntegra. Syntegra employed knowledge based specialists who understood their market and who specialised in risk management in the Systems integration space. BTGS is NOT a systems integrator it is a network services company which is a good distance away from an integrator. The NHS project is a Syntegra legacy project that is staffed and managed by BTGS people. It is then no wonder that the costs are out of control. I am confident if BT had adopted the Syntegra model then he story would be very different today. Singed Tim Smarty Pants