Services: Farming It Out At A Faster Pace

>>Tech-services outfits will see more business, though the rate of growth will slow
>>Companies will keep moving work from the U.S. to lower-cost areas overseas

The folks at Procter & Gamble Co. (PG ) would rather create great consumer goods than run big computer operations. So last summer, P&G executives sifted through six feet of proposals before handing over the management of their sprawling technology systems -- PCs, servers, data storage, the works -- to Hewlett-Packard Co. (HPQ ) in a $3 billion megadeal. Add in contracts for office management, accounting, and human resources, and P&G will farm out more than $4 billion of work in coming years. The goal is simple: "To lower costs and create better service" by relying on information- technology experts, says Filippo Passerini, P&G's global business services officer.

A steady stream of customers like P&G is boosting the fortunes of information technology (IT) services providers such as HP, IBM (IBM ), and Unisys. The public and private sectors shelled out about $579 billion to the top 20 IT service providers last year, 8% more than in 2002, according to researcher Gartner Inc. (IT ). Growth will continue in 2004 but will moderate to 4.8%, putting sales at $606 billion.

The benefits are quickly apparent. Rather than maintaining an accounts payable staff or a 24-7 customer-service department, companies increasingly trust outside providers to do the job more efficiently. "They're avoiding capital expenditures and the depletion of their own scarce intellectual resources," says Peter Allen, managing director at TPI Inc., an outsourcing advisory firm.

So-called business process outsourcing (BPO), the fastest-growing IT service niche, will rise 8%, to $121 billion, in 2004, according to Gartner. Among IT players, IBM has a leg up, thanks to its acquisition of PricewaterhouseCoopers' consulting arm in 2003. According to Goldman, Sachs & Co. (GS ) analyst Laura Conigliaro, Big Blue generated $2.3 billion in BPO sales last year and will nearly double that, to $4.5 billion, in 2004.

Fast as they're growing, U.S. providers of IT services face increasing competition from hard-charging foreign rivals -- especially in the mature market for outsourcing technology. Offshore players such as India's Wipro Ltd. (WIT ) are challenging American companies by making tech professionals available for as little as 25% of the going U.S. rate. To counter, majors such as IBM and Accenture (ACN ) emphasize their tech savvy, global reach, and their own offshore centers. "Clients are interested in spreading risk across geographies," says Martin Cole, an Accenture global managing partner in charge of outsourcing.

Slowing Services

It's not all good news in services. Most companies have slowed spending on so-called integration services -- the installation and upgrading of enterprise software from SAP, PeopleSoft, Oracle, and other smaller players. Getting these complex programs up and running can be a mammoth task -- and such projects have often failed to deliver their expected value. That may explain why spending on integration will increase just 2.4% this year, to $63.9 billion, says researcher IDC.

The prospects for another once-thriving segment of the industry are barely better. After flat growth last year, revenues from strategic consulting -- developing an organization's long-term technology plan -- will creep up 3.4%, to $123 billion, in 2004, according to Kennedy Information Inc., a Peterborough (N.H.) research firm. That's partly because soft demand has forced down fees by some 40% from their peak, to around $75 an hour, says Tom Rodenhauser, president of Consulting Information Services LLC in Keene, N.H. "There's a continuous drive to reduce costs -- everywhere," says P&G's Passerini. In 2004, whether tech is handled in-house or outsourced, frugality and caution will remain the bywords.

By Roger O. Crockett in Chicago and Spencer E. Ante in New York

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