OS/400 Shops Increase Spending on Services

Last June, Forrester analyst Andrew Bartels called services spending “the hidden giant of IT spending,” noting that the total dollars spent on services are “mostly hidden because it is fragmented into a dozen sub sectors. . . .” He notes that Forrester estimates that professional services represented 22 percent of all U.S. IT spending in 2004 and 2005, and he highlights the optimism that firms offering services feel that the services business will continue to grow.

Of course, Bartels is talking about the IT industry as a whole here, not just the SMB market where the OS/400 platform is well known, or more specifically, not the OS/400 market itself. OS/400 shops have not traditionally been the targets for major services firms, who tend to go after the larger, global enterprise companies with the big bucks to spend.

But is our community following suit in the trend to spend more and more dollars on services? I intend to answer that question in a series of articles in which I’ll look at outsourcing in OS/400 shops. By outsourcing, I mean outsourcing in all of its varied and glorious forms (and there are many, as Bartels implies). Simply defining the word “outsourcing” can be a challenge, but in this context, I will use it to mean spending on services or functions outside the company rather than building or retaining those functions internally.

A few ISVs, like Intentia International have not seen much change in services revenues over the past several years, according to Steve Polilli, the company’s media and analyst relations manager, although Intentia is adding more staff to its professional services team. However, from most reports, it appears that OS/400 shops are spending more of their budgets on outsourcing and services than they were just five years ago, if one believes the companies that are on the front line delivering those services.

For example, Profound Logic Software offers application development, Web development, and full outsourcing of iSeries-AS/400 administration. And, according to Alex Roytman, the company’s president, all of these services have been increasing as a percentage of its total revenue. “We find that there are great opportunities in the services area, and more and more iSeries shops are looking for an IT partner.”

OS/400 shops are definitely spending more today on outsourcing than they did in the past, says Roytman. “Today, having your applications on the Web is a must, which requires both back-end business programming knowledge and familiarity with Web skills like HTML, JavaScript, and CSS. Often, iSeries developers are experts on business programming, but have not yet caught up with the newer Web technologies. This is why iSeries shops are increasingly turning to outsourcing for Web application development.”

Roytman sees what he calls “two somewhat contradictory trends.” The first is that “more and more iSeries shops are realizing that the iSeries plus RPG is a perfect platform for Web application development, and their RPG programmers can also be Web developers. This diminishes the need for outsourcing.” On the other hand, he also observes many shops that now believe that they are not in business to write software, but rather to make automotive parts, write insurance policies, or heal sick people. “They would rather turn complex IT projects over to companies that specialize in writing software.” Roytman expects both of these trends to continue.

Lakeview Technology, offers a broad complement of information availability services for its MIMIX product line. This includes customer development and integration, as well as remote management administration and monitoring services, and full outsourcing of operations through partners such as Avnet. Additional service offerings include disaster recovery planning, high availability assessments, migration, and project management.

And, yes, it does appear that the demand for outsourcing services among OS/400 shops and SMB customers in general is rising, says Kristiina Ellam, Lakeview’s spokesperson. Spending on Lakeview’s products is on the rise, she says, and this is partly driven by executives who are addressing external compliance and internal service-level agreement concerns and objectives. As a result, Lakeview has increased its service offerings to both the SMB and large enterprise markets worldwide.

OS/400 shops are definitely spending more on services these days, says John Earl, chief technology officer for PowerTech. He maintains that it’s a function of specialization and that some skills are too rare, expensive, or infrequently used to warrant maintaining full-time staff to support those areas. “It just makes sense that if your primary business is manufacturing widgets, you don’t need to have one or more full-time system builders with LPAR experience on board. It makes more sense to rent the skill when you need it, and concentrate on building widgets.”

Earl believes that more and more highly specialized system skills will reside with system integrators, ISVs, and others that can afford to develop and hone these skills–and sell them to many different customers. Furthermore, he predicts that ISVs will be doing more programming because professional programmers whose skills are current will migrate toward these firms for the security of these jobs and the opportunities for growth they offer. Meanwhile, within OS/400 shops, he projects that an increasing number of staff members will be system administration and operational types, with a general systems background and strong business skills. “The really specialized skills that are more expensive will typically be rented.”

The other issue, Earl maintains, is scalability. “We are seeing more ISV solutions in companies and fewer homegrown applications. If a programmer is good enough to write code that can help one business, why not leverage that code to help 100 businesses?” Good question.

Chris Wilson, director of programming tools for Advanced Systems Concepts, reports seeing an increase in the demand for services in the past several years. Like Earl, he attributes this increase to specialization. “The typical developer or business analyst knows less about the entirety of the IT enterprise than a person in that role did in the past,” he says.

In the past, AS/400 experts could be expected to understand and have experience with just about all aspects of programming, installing, and maintaining the system. But as the OS/400 platform becomes broader and more sophisticated in its capabilities, this is changing. Companies moving toward Web-enabled applications, integration of their applications with other systems, both on and off the platform, and implementation of more current technologies cannot expect their employees to be Jacks of All Trades any more. No longer will the business analyst, the programmer, the communications expert, the security expert, the Java expert, the Microsoft expert, and all of the other levels of expertise come in a single package.

If your OS/400 shop wants and needs these capabilities, but has a limited budget for staff (and who doesn’t?), you’re going to need to buy some of this expertise outside the company. This factor alone may well account for the increase in spending on services.

Relative to increased spending on outsourcing, Wilson says that’s a “tricky question,” noting that, by his definition, “a company that opts for an outsourced iSeries application from an ISV isn’t really an ‘iSeries shop’ in the traditional sense. In general, though, I do believe the application service provider model has seen an uptick in the iSeries space given the advances in partitioning and the demand for robust applications in some of the niche vertical markets the iSeries does so well in. For these markets, I expect the trend to continue toward the ASP model. It’s a less expensive option for the customer, with most of the same benefits as owning a system yourself.”

I think Wilson is on to something in his prediction that the ASP model–which has now been polished up and renamed Software as a Service, or SaaS–will pick up more steam in the OS/400 base. The ASP approach is especially attractive to small businesses that may be new to the platform and may not have the baggage of heavily modified legacy code to cope with. This sales model offers customers the opportunity to get the best of all possible worlds, selecting the best application software for their businesses and accessing it on the vendor’s site via the Web. No software development. No hardware maintenance. Instant access to current releases.

Of course, this assumes that customers are willing to accept off-the-shelf, relatively uncustomized applications, but evidence shows that companies are willing to do this. Look at Salesforce.com. Small businesses describe themselves as “auto parts people” or “food distribution people” or “fill-in-the-blank business people” rather than as “IT people.” They want to spend their time growing their core businesses rather than on programming and supporting computers. And there are plenty of OS/400 application vendors out there ready to accommodate them. After all, an ISV offering a business solution has always been the best lever to move an AS/400, and with the System i5, this does not change.

I asked two final questions of the ISVs: “Is IBM supportive of the trends you are observing?” and “To what extent is IBM itself a competitor for the services sell?”

Most of the responses were predictable, well-practiced, and very IBM-politically correct, along the lines of, “We are happy to partner with IBM on any opportunity yada, yada, yada.” That is to say, no one was standing in line to tug on Superman’s cape (apologies to Jim Croce).

One ISV answered but wanted to remain anonymous. So, is IBM supportive of their services initiatives, anonymous source? “Not really. IBM bounces between being either oblivious to Business Partner challenges, or competing with business partners via its Global Services. We have to remember that there is no such thing as ‘IBM.’ It is really 50 different businesses wrapped in a single earnings statement, so the i5 brand can try to help, but sometimes not be helpful enough to offset the damage that Global Services does. I’ve seen the brand bend over backward to help business partners in accounts, only to see Global Services come in and undercut everyone’s efforts.”

Others like ASC’s Wilson disagree, maintaining that they have “yet to observe Global Services playing a significant role in the iSeries space.” Intentia’s Polilli shares that view, noting that “IBM generally does not seek business at the mid-size companies we serve.”

Perhaps the difference in perceptions lies in the markets of these ISVs and in the size of the companies they service. It’s certainly true that, at least until now, Global Services has not targeted the OS/400 space. Indeed, conversations I’ve had with several Big Blue Suits in Global Services might lead one to believe that Global Services folks can’t even spell iSeries (or AS/400 or System i5). A pop quiz might reveal that they aren’t even aware of the platform’s penetration in the broader IBM family of users. (The OS/400 platform accounts for about half of IBM’s 500,000 customers worldwide.)

But if IBM is successful in positioning the System i5 to be attractive to new customers, its attitude toward services as they relate to the OS/400 platform might change. IBM will go for the dollars, and if there are service dollars to be had, Global Services will be there and ISVs and IBM Rochester is going to have to contend with that.