Sun acquires StorageTek, Lawson merges with Intentia …the M&A binge continues. I believe, underneath these transactions, the industry has been moving towards the way the Japanese manufacturing ecosystem is structured. GM, Ford in autos and Boeing, Airbus in aviation are similarly structured. Original Equipment Manufacturer – the OEM – with Tier 1 suppliers that supply major “systems” like nose gear assemblies, and Tier 2 and 3s which supply various parts and materials.
That is in the manufactured, product world. “Business process OEMs” like Citibank and GE and UPS are emerging and will increasingly compete with IBM and EDS and SAP to provide mortgage and health care and plant maintenance and countless other processes.
They will encourage vendor tiering as product OEMs have done. And since their business process OEM supply chain is more digital, this will hugely affect the IT/BPO industry. Major vendors (HP, Microsoft) will become Tier 1 vendors just as Delphi and Federal-Mogul are to autos. Specialist IT vendors will increasingly subcontract to them – as Tier 2 or 3 suppliers.
Here are some implications:
a) Tier 1 candidates include hardware/infrastructure heritage vendors (IBM, HP, Sun, Cisco), some from telecommunications (Verizon, BT), some from software (SAP, Microsoft, Oracle), others from IT services (EDS, Accenture, TCS/Infosys), with possibly some wild cards from content and BPO worlds. OEMs will expect more stringent quality, collaborative design, timeliness, security and other service levels of these providers (than have traditionally been expected or delivered by most IT vendors). The plumbing/infrastructure investments and the performance guarantees the OEMs will expect will limit the number of viable Tier 1s to no more than 50 around the world. Tier 1s will have to learn to not try to own or build everything themselves, but to leverage the best Tier 2 and 3s.
b) As we see in Detroit, Tier 2 providers are at times more profitable than the Tier 1s or the OEMs. Others that end up undifferentiated, though suffer through price pressure via reverse auctions. Tier 2 and 3’s will learn to align with Tier 1 vendors rather than try to break their necks and bank accounts selling direct to the OEMs. For all of Larry Ellison’s talk, he cannot buy up everything. For most offerings, he will need to partner with a bunch of Tier 2 and 3 contributors.
c) The OEM CIO becomes huge in this world. He/she will decide how much to buy v/s build, who to buy from, understand their economics (yes, even tier 2 and 3 economics) intimately, drive performance scorecards, collaborate more with vendors - and yes, at times “be like Jose Lopez at GM” - tear up vendor contracts and dictate what you will pay and ask for price reductions across your Tier 1,2 and 3 suppliers. In some cases, they will “encourage” Tier 1s do business with specific Tier 2s.
d) The Business Development function in vendors will become much more important as alliances, some long term, some tactical are formed and unwound.
Silicon Valley – digest your consolidations. Then start learning from Detroit about the realities of industry tiering.