Stirring the soup of service providers

One indication that a technology trend is gaining mainstream attention is when it becomes a target for mergers and acquisitions. Recent acquisitions in the managed-services and software-as-a-service segments of the IT industry are not only clear signs that these new methods of dealing with age-old technology challenges are winning broad-based acceptance, but also that they are fundamentally changing the way other industries do business.

In July, storage-product vendor Iomega announced plans to acquire CSCI, a San Diego-based managed-services provider (MSP). In the company's announcement, CEO Jonathan Huberman said, "Iomega is taking the first step toward becoming a managed-services company."

Iomega wasn't the first company to make the move from a productcentric to a services-driven orientation. Over the past few years, other prominent technology companies, including Sun and Cisco, have acquired MSPs with mixed results.

With escalating concerns about computer viruses and other potential IT threats, managed- security service providers (MSSP) also have become attractive acquisition targets for hardware and software vendors. Last month, IBM acquired Internet Security Systems, a pioneer in the managed-security services market. MSSP deals in the past few years include Symantec's acquisition of Riptech and @Stake, and Verisign's acquisition of Guardant.

Shortly after Labor Day, the array of acquirers expanded with Cognizant's acquisition of AimNet Solutions. Cognizant is a U.S.-based, offshore services company with strong skills in applications development, integration, reengineering, consulting and business process outsourcing. AimNet offers a suite of managed and professional services that help small and midsize businesses, as well as large-scale enterprises, with their IT infrastructure requirements. According to company officials, escalating customer demands that Cognizant assume greater application and IT infrastructure management responsibility drove the acquisition.

At the same time that the MSP sector has become a hotbed of acquisitions, software-as-a-service providers also have attracted attention from a rapidly expanding assortment of suitors. Last month, ADP acquired Employease, a human resource management software-service provider, marking the first acquisition of a software-as-aservice provider by a business services company. This month, Illinois Tool Works acquired Click Commerce, a provider of software services for supply-chain management, and AT&T acquired USinternetworking, an application service provider, to expand its hosted services.

Each of these transactions is in response to escalating customer frustration with the hassles and costs associated with managing today's business applications and IT infrastructures.

The latest round of acquisitions shows that a growing number of technology vendors, BPOs and even traditional manufacturers are seeking to satisfy their customers' changing needs. Buying a managed-service capability to assume greater responsibility is a noble undertaking. But to be successful, these acquirers will need to transform their corporate cultures from a productcentric to a services-driven orientation.

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Copyright © 2006 IDG Communications, Inc.

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