Mergers and the rush for services

Peter Judge: What's going to happen this year? One sure bet is some more mergers, as big companies try to buy their way into services.

It is safe to say that the year is now properly underway. As I write this, some of the biggest IT companies are preparing to release their quarterly results -- Apple, Intel, Yahoo! and Sun, for starters. My colleague Rupert Goodwins was off to the BBC on Wednesday night to predict (on World Business Report) what would happen, and then explain (frighteningly early on Thursday morning on BBC1 TV) what actually took place.

"How embarrassing can that be?" he chortles, as he leaps into a silver Mercedes, driven by a chauffeur who's clearly seen him many times before.

What will the results show? It's a safe bet they will not be good, but they won't be completely disastrous. No-one says anything except that this will be a flat year, with tech stocks staying at low prices, and vendors struggling to make any headway.

So what does this mean is going to happen this year?

In one word: mergers. Some vendors have cash piles built up during the boom times, while everyone's stock price is at an all-time low. If revenues are low in your home business area, now is the time to pick up a bargain.

But what partners will IT vendors be looking for? Many mergers will do the usual things -- eliminating a rival, or filling in gaps to create a broader supplier. If Sun merged with Fujitsu, for instance, that might create a stronger Sparc-based entity, although Scott McNealy wouldn't naturally buy that kind of merger. As a rugged individualist not much interested in what the rest of the industry thinks, he'd be more likely to pal up with Apple.

But there's a much bigger prospect for mergers this year, and it is to buy your way into new areas. And the biggest of these will surely be services. Not "Web services" -- though we can expect to see some activity continuing there. We are talking about plain old services: consultancy and outsourcing.

Services itself is expected to change, as consulting, systems integration and support become parts of the big "end-to-end" service provided by outsourcing. Or we should say "business process outsourcing" (BPO), the trendy new term that expresses the fact that services company want to take on not just the technology, but whole parts of business administration for their customers.

This looks a good play for system vendors. Hardware sales are down. Software sales are not spectacular, but services are supposed to still be strong. Vendors with money in the bank are therefore getting into services. IBM's merger with PwC was the biggest instance of this. Persistent rumours suggest that HP would be thinking of buying a services company like Deloitte Consulting, if it weren't too busy with the restructure following its merger with Compaq.

But it's not simple. If a systems vendor buys one consultancy partner, it might alienate the others. The upside for that systems vendor is that it might also cause problems to rival systems vendors who used to sell significant amounts of kit through that consultant.

However, if the merger looks like a short-term play, it could alienate the user. If a consultant looks like being a lapdog for its new owner, users will look elsewhere for someone with a more independent vision.

Big system vendors and software vendors all have effective routes into services, so mergers will have to be carefully handled. PwC is integrating into IBM's Global Services division. Others would have to do something similar.

The shoe that hasn't dropped yet here, is Microsoft. The company's own services activity is still underdeveloped. The company makes obscene amounts of money simply selling desktop and productivity software -- or upgrading organisations' licences to use that stuff. Why should it bother with services?

The answer is that Microsoft still wants to break into big enterprises, and big enterprises want partners to provide whole solutions, not just boxes of bits. Microsoft already has a partnership with Accenture, called Avanade, but the activity there is just a fleabite compared to what Microsoft wants to be doing. The only problem is the culture clash. Microsoftism and Accenturism don't mix, as I've said before. Whatever it says, Microsoft simply does not do solutions.

Is there anything that might change this? Well possibly. New Year cynicism makes me sceptical that Web services can possibly deliver everything they are supposed to. But, the main thing they offer is quick ways to build solutions from standard components.

If Web services take off and turn out not to be total hype, then chief information officers and integrators can start to deal with technology differently. Could this make the development process so easy that everyone can do it, and anyone can deliver solutions -- even Microsoft?

And conversely, could it relegate the old, big software vendors, like Oracle, SAP and the rest, to become little more than research and development units inside big solution vendors?

By this time next year, we will be a little bit closer to an answer.

See the Finance News Section for the latest financial news in the high-tech sector.

More enterprise IT news in ZDNet UK's Tech Update Channel.

Let the editors know what you think in the Mailroom.