As hardware companies such as Hewlett-Packard-Compaq wrestle with crumbling margins, top-tier systems integrators are faced with their own paradigm shift many believe will intensify during the next 12 months.
Systems integrators are beginning to realize that Web services technology promises to eat into traditional high-margin revenues captured by projects involving low-level application integration programming.
Emerging Web services also pose a unique challenge to the likes of Hewlett-Packard Co., Compaq Computer Corp., and IBM Global Services, companies keenly aware that sustainable revenue growth is tied to their IT services capabilities.
Driving the revenue shift is an understanding that new methods of application integration dovetail with the generally understood definition of Web services: Loosely coupled software components are delivered over the Internet via standards-based technologies such as XML and SOAP (Simple Object Access Protocol). As a result, Web services represent a new component architecture for building and distributing applications and facilitating the integration process.
"I would say systems integrators have a lot to lose," said Greg Waldorf, a partner at Charles River Ventures, during a recent panel discussion on Web services in San Francisco. "You can't ship hundreds of people off to work on an integration project. It's just too expensive. There should be less money spent on software services, very gradually over a long period of time."
The challenge, in the view of some observers, is that as systems integrators look at how they can deliver Web services, they must adapt to the revenue shift by offering higher value-added services such as business process management.
A study released in late August by Jupiter Media Metrix reflects more than pure enthusiasm for Web services. Jupiter states that 60 percent of business executives interviewed plan to deploy Web services for integrating internal applications during the next year. Also, a recent Gartner Inc. report states that through the second half of 2002, 75 percent of enterprises with more than US$100 million in revenue will interface periodically with Web services.
The result, as Charles River Ventures' Waldorf describes, will be a shift in thinking among enterprises to long-term decision-making where a single Web services investment replaces regular heavy investments in individual integration projects.
"Integrators are going to have to come up with a new gig. They're going to have to be more relevant in terms of planning. This doesn't mean they're out of business; it will just be different," Waldorf said.
And that's exactly the point. Frank Campagnoni, CTO at GE Global eXchange Services (GXS) in Gaithersburg, Md., and a member of the InfoWorld CTO Advisory Council, is expecting to adapt as Web services become more ubiquitous.
"I believe that Web services will have a significant impact on our revenue structure because GXS is a services provider, and Web services will multiply our potential revenue channels," Campagnoni said. "We do not have to be the end-point delivering services directly to the customer. Under the Web services model, other companies will provide value and services to the customers as end-points, with GXS serving as the intermediary."
On the upside
As a result, large systems integrators are looking at how to turn what otherwise represents a revenue threat into new opportunities.
Steve Holbrook, IBM Corp.'s technology evangelist for Web services, in Orem, Utah, believes the change will give rise to a new heyday of business opportunities for integrators as they help enterprises jump on the Web services bandwagon. He holds this view despite realizing that many of the application integration tasks programmers currently perform will become commoditized.
It's also a view shared by Craig Donato, CEO at GrandCentral in San Francisco, a Web services-focused IT service provider.
"The complexity and cost of applications will keep going down. Eventually it may get to zero. This model will revolutionize the industry," Donato claimed.
Systems integrators will no longer need to focus their energy on IT plumbing jobs such as connecting data sources, Donato said, but on high-level issues directly associated with real business value, such as establishing interenterprise business processes and orchestrating data translation services. It is another sign that the changes will "fuel the need for systems integrators, not obviate them," he said.
Others agree that Web services will not completely drive out the costs associated with application development and integration, although they will lower it significantly.
"The right idea is thinking they can drive costs down, but not out. What Web services will do is take to the next level the prebundling of solution components so that they can be quickly and effectively tied together and applied to develop a business solution," said James Hall, Accenture's managing partner for technology business solutions in London.
Not easy
But despite the lofty claims that Web services promotes value-added business, industry participants agree that converting the dream to reality will not be a walk in the park -- particularly given that the concept of prebundled software components is not a new idea.
"If you look back in time, there have been a lot of times over the years that people have had high expectations for easing integration issues," commented Mark Hudson, HP's worldwide marketing manager for business and technology services. "But it's just not that simple. To assume the need for the human side is going to go away because of the standards; that isn't true."
Meanwhile, you can also forget about using Web services to discover a "magical source" of new cash flow, for example, said David Schatsky, senior analyst at New York-based Jupiter Research.
"It's not a money-making opportunity for companies in the near term, but a cost-savings one," Schatsky said.
Based on findings from its Web services report, Jupiter argues Web services in reality will not enable companies to sell computational services to parties they might not have prior relationships with. Obstacles include inertia around existing, comfortable relationships and the need for proven security and trust payment models; it will take years to open up the promise of new Web services business channels.
Consequently, early adoption of Web services technology will be focused on solving "down-to-earth, humdrum problems," regarding enterprise application integration behind the firewall, Schatsky said.
Chanlon Mullins, director of architecture and planning at Charles Schwab, in San Francisco, also sounded a note of caution.
"People are mixing that wild enthusiasm and disillusionment phase a little more quickly," Mullins said. "I don't mean to make that sound hopeless -- we have had similar challenges in the past. [The answer] is not just going to be [found by] throwing hardware at it."
Noting that the primary Web services transport layer, XML over HTTP, "is not exactly a speed demon," Mullins said it remains unclear how pervasive Web services will be.
In addition, he joins a chorus of executives who remain cautious because of vendors' past promises of standards and interoperability that failed to materialize.
But the technology is not yet proving to be the limitation. Many still point to existing demands that will keep systems integrators busy in the short term. "Systems integrators will have to specialize more and more to bring business expertise to the field they're in," said Dan Woods, CTO at Capital Thinking, in New York, and a member of the InfoWorld CTO Advisory Council.
He pointed to IBM Global Services as an example, saying that instead of having a sprawling practice that is everything to everyone, companies will likely have specific units, such as IBM Global Services Real Estate or Financials.
Next step
From the perspective of corporate users, that reality couldn't be more true. Mike Ragunas, CTO at Staples.com and a member of the InfoWorld CTO Advisory Council, says enterprise customers will look to systems integrators to provide custom development and help develop integration frameworks. Staples.com has worked in the Web services space for a few years; Ragunas says he is currently investigating Microsoft's .NET strategy.
Looking forward, he sees a situation where EAI (enterprise application integration) tools built within the Web services framework will result in less time to complete integration tasks due to the lack of low-level coding. "I find that when the tools get easier to use, what takes up the time is complex processes," Ragunas said.
Services companies such as Accenture are focused on developing and working with the tools that deliver these Web services. For example, Accenture is working closely with Microsoft on its .NET strategy.
According to Accenture's Hall, as Web services tools gradually roll out, systems integrators will evaluate the best solutions to recommend.
"People will increasingly bundle predefined business processes and services to develop much more powerful, far-reaching solutions than they were previously able to do. And the integration activities are still required; they will just take place at a different level," Hall explained.
Around the corner?
When will systems integrators, and enterprise customers in turn, really start to feel the changes brought about by Web services? Estimates vary widely. Some executives say within 12 months, others talk in terms of the next five years.
Perhaps the next important signpost will come during the second half of 2002, when analysts say Web services technology will mature to the point that enterprise application vendors will be rearchitecting all of their software around common standards.
Web services numbers game
Software, application integration, and Web services budgets are on the rise.
-- 63 percent of 250 IT executives surveyed expect to increase external software support spending between 2001 and 2003.
-- Through the second half of 2002, 75 percent of enterprises with more than $100 million in revenue will interface periodically with Web services.
-- Systems integration services will account for $145 billion in revenues by 2005, largely in the infrastructure services market.
Sources: Gartner, IDC.
Eugene Grygo contributed to this report.