U.S.-Based Data-Center Outsourcers Face New Challenge

Its power and scope was an indication of the company's own prowess.

Some took presentation of the data center to theatrical heights: visitors would recline in a viewing area and a curtain would part to reveal banks of consoles, giant projection screens worthy of NASA's mission control, and numerous technicians staffing the place.

An observer quipped that one vendor's showpiece computing center was so powerful it could probably control the rotational speed of the earth.

Times have changed.

To some industry executives, the need to constantly maintain and upgrade a high-end outsourcer's data center now makes it more of a millstone than a marvel.

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Richard Schroth, an outsourcing expert and fellow at consultant Katzenbach Partners LLC, believes established outsourcing players in the U.S. and Europe could have an "agonizing period" in store, as they struggle to control rising infrastructure costs.

Schroth, a former Perot Systems Corp executive, Roopa Unnikrishnan, a manager at Katzenbach Partners, and Nathaniel Mass, a senior fellow at Katzenbach Partners, collaborated on research which points to tough times for today's top-tier outsourcers.

Specifically, the Katzenbach Partners study suggests that a group of data-center outsourcers in India could ultimately wrest the global outsourcing leadership position from such companies as Accenture, BearingPoint, Capgemini, Computer Sciences Corp., EDS, Perot Systems, and Unisys.

Katzenbach Partners bases this analysis on a performance metric developed by Mass, called the Relative Value of Growth (RVG).

RVG is designed to calculate the extent to which a company is rewarded by increases in market capitalization following growth in either its business, its margins, or both.

Katzenbach Partners discovered that the best Indian outsourcing companies derive up to 85 percent of their market capitalization from the growth expectations of investors.

The Indian companies' high RVG ratings mean that they have plenty of incentive to invest in growth.

Such firms as Infosys, Satyam Computer Services, Tata Consultancy Services, and Wipro, for example, will have greater market incentives and capabilities to serve customers consistently, even in the third and fourth years of contracts.

That incentive may also give them a different approach to recruiting and retaining talented people than U.S.-based companies that are more constrained by cost, Unnikrishnan said.

When the leading outsourcers in India pursue personnel in China and Russia, they don't describe their activities in terms of lowering costs but in terms of finding talent to grow their operations, she explained.

"They are talking a different language than the companies driven by cost," Unnikrishnan said. They are saying, "We have the cost advantage already, let's think about growth and think about talent," she added.

In contrast, U.S. and European companies have lower RVGs, which the company interprets as meaning that they are chiefly incented to build value via cost cutting.

The cost pressures may compel outsourcers to pay less attention to older customers, transfer projects to more junior staff, and back away from businesses that demand greater innovation investment, according to Katzenbach Partners. That doesn't auger well for customer relations. Reports already indicate that quite a few outsourcing consumers have become disenchanted with the practice.

But Schroth said the market won't recognize the efforts U.S. outsourcers make in growing their companies until infrastructure costs have stabilized. And even though those outsourcers have moved some operations offshore, "there's still a massive infrastructure in the U.S.," he said.

Schroth believes outsourcers will need to shed additional costs. He pointed to the example of high-end consulting organizations that have become embedded over the years within outsourcing firms. "[Outsourcers] can't afford these guys," Schroth said of the outsourcers' captive consulting practices.

He cited EDS, which is mulling the possible sale of its AT Kearney consulting unit.

And the outsourcers' data centers, which once promised economies of scale, will continued to see cost cutting, Schroth said. The showcase data centers of past years now can be viewed in a different light, he suggested.

"We are looking at the new relics of history," Schroth said.