Consulting firms see gold in outsourcing hills

“Those who can’t do, teach,” according to the old tongue-in-cheek aphorism. Most major IT outsourcing companies offer doing and teaching, but recent trends suggest that enterprises are demanding more of the former and less of the latter.

Outsourcing giant Accenture is a prime example of this trend. In posting its quarterly financial results last week – which showed a slight increase in revenue over the previous year – Accenture noted that its revenue from outsourcing increased 35% over its revenue in 2002, and that outsourcing now accounts for 31% of its $3 billion business. However, Accenture’s revenue from IT consulting projects – traditionally the major source of its revenue – dropped 8% over the course of the year, to about $2 billion.

In short, this means that outsourcing has become nearly a third of Accenture’s business, when it accounted for less than a quarter of the company’s revenue (23%) just a year ago. IT consulting, on the other hand, now makes up just two thirds of Accenture’s business, after accounting for nearly 80% in 2002.

Such shifts in revenue makeup may seem slight in the world of start-ups and mergers, but they are huge for a company like Accenture, which has operated for years on the same successful business model. Long ago a company that did more teaching than doing, Accenture is now finding that the market for doing the work is far better than the market for teaching. And Accenture is not alone – many other IT services firms are finding that the pastures are greener in outsourcing than in IT consulting.

To clarify this shift, it is important to draw a clear distinction between the two services. “Consulting” generally refers to the process of analyzing an IT environment, recommending changes to make it more efficient, and providing guidance as those changes are implemented. Although a company like Accenture may employ scores of personnel to execute a major consulting project, and may even write or rewrite code to facilitate the change, it does not actually operate systems or applications for the client on an ongoing basis.

In an outsourcing project, on the other hand, the third party service provider not only facilitates change, but actually operates and maintains the resulting systems and applications on the client’s behalf, usually over a long period of time. While consulting services are often represented as “projects” with a definitive beginning and end, outsourcing services are usually represented as “contracts” that can extend indefinitely, as long as the client is satisfied with the results.

The strong turn towards outsourcing, as opposed to consulting, means that a company like Accenture is now being asked not only to facilitate change in IT, but to actually provide the ongoing maintenance of the systems it works with. It means that IT consulting companies must shift their business models to devote more resources to operations – the heavy lifting – and fewer resources to developing methodologies and concepts for improving IT efficiency.

As with most other IT trends, the economy is the primary driver behind this shift. Enterprises today have less money to spend on integration and re-engineering projects, but they are in desperate need of additional human resources to help keep their IT operations afloat. Forced to make hard decisions about their core competencies, many enterprises are drawing lines that put IT on the outside. As a result, they need less advice on how to do IT and more services to do IT for them.

Will this trend continue? Most indications suggest that it will. Enterprises are doing fewer and fewer large integration or re-engineering projects, preferring to slice those projects into smaller, more manageable pieces. But the need for outsourcing – or at least, out-tasking – increases as enterprises attempt to heighten IT objectives without increasing internal staff. Next year, it is possible that companies like Accenture may see outsourcing as an even larger slice of the revenue pie.