1 March 2002

Once Taboo doors opening

By Jim Strothman

Outsourcing thrives in era of new manufacturing business models, belt tightening, commodity software.

Once guarded like prized crown jewels, industrial manufacturing processes today are slowly becoming not so secret. Previously taboo industrial control doors are opening to information technology (IT) outsourcing vendors such as EDS and IBM, and control systems suppliers such as ABB and Invensys are also seeing new opportunities in operations areas.

Those are among several dramatic changes IT outsourcing providers have seen in recent times. Economic belt tightening, manufacturing moving from U.S. factories to Mexico or China, standardization, and industry consolidations are all helping reshape the manufacturing business model landscape.

"Five years ago, manufacturing processes historically were a domain manufacturers said was core. It was like intellectual property, kept close to the vest. Manufacturers never would have thought of outsourcing it," said Pradeep Nijhawan, global director of industrial manufacturing for EDS's Manufacturing Global Industry Group.

That has been changing worldwide, said Nijhawan. "The whole support of industrial control is being commodified." Instead of using dedicated, highly customized proprietary systems to control manufacturing processes, plants are increasingly cranking out product using off-the-shelf hardware and software, he said.

"We are in active discussions with large industrial product manufacturers making tools and components in what you would call more traditional manufacturing, as well as traditional IT," he said.

In addition, suppliers such as Invensys and ABB now require certification for implementing their software environment in a plant, the EDS executive noted. "Once you do that, it opens up the opportunity to consider outsourcing"-if not to EDS, then maybe to an Invensys or ABB, he said.

11% annual growth projected

While the economic recession has slowed growth in IT sectors, the North American IT outsourcing market is benefiting, as manufacturers and other companies try to find ways to save expenses, said Dataquest Inc., a Gartner Inc. unit.

Gartner Dataquest estimated the North American outsourcing market at $101.6 billion in 2001, an 8% increase over 2000 revenue of $93.8 billion. By 2005, the North American IT outsourcing market should reach $159.6 billion for a five-year growth rate of 11.2%, said Bruce Caldwell, principal analyst for Gartner Dataquest's IT Services worldwide group.

"In a poor economy, a compelling benefit of hosted solutions is the ability to deploy new technology solutions with little or no capital investment. Beyond the economic downturn, outsourcers should look for increasing opportunities . . . in the small to midsize business market," said Caldwell.

"The downturn in the economy will affect each segment of the overall IT services industry differently. Some segments, like outsourcing, will experience a short-term activity spike. Others, such as consulting, will experience a brief setback," said Ned May, senior analyst with IDC's Worldwide Services research.

Through 2005, IDC said it expects infrastructure services such as application outsourcing, network consulting and integration, and network infrastructure management to represent the fastest-growing segments of the market. Systems integration services will account for the most revenues, with $142 billion in 2005, IDC said.

Despite the recent turbulence in the U.S. economy, IDC predicted the U.S. will continue to represent the largest opportunity for IT service providers, accounting for 48% of the market's value through 2005. However, while the U.S. IT services market registers a 12% compound annual growth rate (CAGR) through 2005, Asia-Pacific, excluding Japan, will clock in with a CAGR of almost 23%, making it the fastest-growing opportunity for IT services, May predicted.

"The application service provider model is receiving strong endorsement in Asia-Pacific and is driving extremely aggressive growth in the application outsourcing market, which is contributing to the increase in the region's overall IT services market," May said.

Nijhawan said EDS typically prospects for business within four major areas in the manufacturing segment: process manufacturing, including plastic, glass, paper, and cement makers, for example, "but skewed to metals and metals-related manufacturers"; durable goods equipment manufacturers such as machinery and household appliance makers, fabricators, and assemblers; industrial conglomerates such as GE, TRW, and Textron (EDS recently landed a large, long-term contract with S&K Famous Brands Inc., a large Swedish concern); and engineering, engineering service firms, and construction companies.

Steelmakers eye IT revamp

Last June, President Bush launched an initiative to bolster the ailing U.S. steel industry, including seeking a Section 201 investigation (under the Trade Act of 1974) that could lead to temporary quotas or some other import relief. The Bush administration began pursuing two sets of negotiations: one seeking quick elimination of worldwide excess steel production capacity and the other setting long-term rules governing steel trade.

Bethlehem Steel, the No. 3 U.S. steel producer, filed for Chapter 11 bankruptcy protection on 15 October 2001, and consolidation efforts are under way with other U.S. steelmakers. Bethlehem Steel has stopped hiring and is looking to outsource IT staffing, including manufacturing processes, sources said.

In January, a group of top steel company executives led by U. S. Steel chief executive officer (CEO) Thomas J. Usher and Nucor Corp. CEO Daniel R. DiMicco agreed on the need for immediate action by the federal government to deal with injury to the domestic steel industry caused by surging imports.

Usher and DiMicco emphasized that as a minimum, a 40% tariff rate is a critical part of the remedy. The tariff, they said, must extend for a four-year period and cover the full range of products where the International Trade Commission has found injury. These products include slabs, all flat roll, steel pipe and tubes, rebar, and other long products.

Might spur offshore manufacturing

EDS's Nijhawan predicted that the 201-import issue "will have significant impact on the steel industry and IT services market." Tariffs would cause steel prices to jump, spurring U.S. manufacturers of appliances and steel-based industrial products, for example, to possibly shift more production or steel procurement offshore.

As an IT service provider to manufacturers, if an industry moves offshore, "we have to support them offshore," he said.

When production moves to places such as China, China's economic driver is seeking full employment and raising the gross national product. For IT service companies, that creates opportunities "to come in and say we'd like to be part of your growth," Nijhawan observed.

"In Southeast Asia and China, it's a different proposition than North America. "They are looking for technology transfer and skill set enhancement. In North America, top line cost reduction is a high priority."

In places such as India, where labor costs are low but skill sets are high, "that's perfect for putting in development centers. When we look at the manufacturing sector on a global basis, we look at what's the driver in that country," he said.

Supply chains, logistics targeted

Nijhawan said he sees expanding outsourcing opportunities in two other areas, as well: supply chain management and logistics. On the supply chain side, EDS and other outsourcers are allying with e-commerce software tools providers, then bundling the outsourcers' own IT implementation and support skills and services.

Process industries are driving outsourcing in logistics functions such as transportation and distribution, he said. Manufacturers are saying to themselves: "I don't know why I want to have all these folks on my staff. Why not let someone else manage our logistics area?"

"The logistics business function is a hot area that is starting to open up in manufacturing," Nijhawan said. IC