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Microsoft's role as outsourcing firm filled with 'what ifs'

If Microsoft formally moves into the business of providing IT services, there are plenty of potential pluses and minuses, analysts say.

It would be a cruel irony if any Windows administrators lost their jobs because of Microsoft, when many of them have invested in careers based on the company's technologies. But with Microsoft signaling interest in becoming an IT service provider, it's a

Look at the growth that [IBM Global Services] has seen. If I was Microsoft, I'd be salivating.

Patrick Fetterman, VP at Mi8, a service provider

scenario that's not far-fetched.

Microsoft last week acknowledged that it will provide services to St. Louis-based Energizer Holdings Inc. as part of an ongoing IT project that calls for Microsoft to manage the battery company's Windows environment end to end.

While an expanded role for Microsoft in the outsourcing business could be a blow to some in administration, IT executives might see things differently. Should Microsoft enter the field, Redmond would simply become another choice among the industry's largest service providers, which include IBM, EDS Corp. and Hewlett-Packard Co. For Windows-only shops, however, using Microsoft as an outsourcer could have some added benefit.

"Hardware and software have become so commoditized, though, so if you standardize on Microsoft, you would think there would be some synergies there," said David Burke, a CIO with Raycom Media, a Montgomery, Ala., broadcasting company that manages its own IT in house.

Little choice but to explore new avenues


For more information

Read more about the Energizer outsourcing project


Learn why Gartner sees a grim 2005 for unsavvy IT shops

experts see the possibility that in five to 10 years, all software might be free. Should that happen, software companies will need new ways to earn revenue, and becoming a service provider is one option.

"Microsoft doesn't have a hardware business, it has a software licensing business," said Dana Gardner, an analyst at Yankee Group, a Boston consulting firm. "It has had a great success -- playing its channel partners as a sales force and collecting their licensing while others hustle.

"If that licensing structure comes under assault, [Microsoft] has to segue to a professional services, or subscription, outsourcing play," Gardner added.

Microsoft has already been branching out

Microsoft's potential entry into the service provider business is a concern for potential rivals and for investors, experts said.

In the past decade or so, Microsoft has entered many auxiliary lines of business, including Expedia, MSN and Carpoint. Such ventures compete for attention within Microsoft and take away from the company's focus on core IT customers, said Jonathan Eunice, principal analyst at Illuminata Inc., a Nashua, N.H., consulting firm.

"I guarantee that when some of the larger travel agencies heard Microsoft was entering the travel business with Expedia, that they were negatively impressed," Eunice said. "Same is true with AOL and the ISPs when Microsoft came in as an ISP. It seems like unwarranted competition."

Outsourcing firms watching with interest

The service provider community in particular does not want to see Microsoft coming into their business.

Indeed, most service providers have been watching Microsoft's moves for a long time, even those that only offer some outsourced services, such as Mi8 Corp., a New York service provider that hosts Microsoft Exchange services.

"It would definitely create a sense of channel conflict around companies like us," said Patrick Fetterman, vice president of marketing and business development at Mi8. "This is something we have gotten on Microsoft's case about, and they always say, 'No, no no. It's not our strategic direction.'

"But look at the growth that [IBM Global Services] has seen." Fetterman added. "If I was Microsoft, I'd be salivating."

Potential concerns for investors

As for investors, they watch for growth and consider the potential margins and pitfalls for any new business opportunity. The services business requires a big investment and headcount, Illuminata's Eunice said. Further, human resources can go stale from year to year and require retraining as the requirements of customers change.

Another issue to consider is whether Microsoft can make it given its skill set and resources. The Energizer outsourcing effort will be handled by the internal IT department at Microsoft. While Microsoft has the resources to run such an operation, it's easier to meet one's own IT needs than the needs of another company.

"The issue is multi-tenancy," Eunice said. "It's one thing to own a house, but it's another to be a landlord of an apartment building. The service levels are different. Internal Microsoft people will be concerned about whether or not their internal needs are being met."

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