Weekly Review: Full Service Providers Come Up Empty

The concept of the full service provider, or FSP, suffered a severe blow when its earliest proponent, Breakaway Solutions, last week filed for Chapter 11 bankruptcy protection.

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The FSP moniker gained popularity for a brief spell at the peak of ASP excitement in the first half of last year. Companies embraced the FSP label so that they could grab a slice of the anticipated ASP market without abandoning their core IT services businesses, as ASPnews reported at the time (see How Much Service Makes an FSP?, June 16th, 2000).

The companies mentioned in that article last June make up a sad roll-call today. At the time, hosting company PSiNet had just completed its merger with IT outsourcer Metamor Worldwide in order to seize the opportunities of the FSP market. A few months later, it imploded under the weight of the acquisition, writing off an incredible $1.1 billion on the Metamor deal alone, before finally succumbing to bankruptcy in May this year.

Also mentioned was the freshly agreed merger of Atlanta-based IT services companies Eltrax Systems with Cereus Technology Partners, who subsequently became Verso Technologies on completion of the merger. Verso last year hired almost 150 consultants and support personnel in the run-up to its launch as an FSP. This year that entire effort has been unwound, with Verso calling a halt to its FSP activities and instead morphing to become a softswitch networking specialist. The change of strategy led to an $85 million write-down of goodwill in its Q3 financials, almost ten times its $8.9 million revenues for the quarter.

The full extent of Breakaway's losses and write-downs is not yet known, but it was particularly hard hit by the past year's business downturn. Its use of the FSP term was a shorthand means of conveying that it straddled three separate bandwagons in one go, with its core business in Web consulting, backed up by ASP services and also targetting the then-booming dot-com sector. Breakaway was still expanding at breakneck speed late last year, seemingly oblivious to the wheels simultaneously flying off all three of those bandwagons, leaving its business grinding to a sudden and calamitous halt.

These stories should sound a warning to all those who continue to set any store by the FSP model. Yet there seem to be plenty enough still ready to be taken in by its siren calls. Established IT services companies are all too easily persuaded that there's a compelling logic to adding ASP outsourcing or software-as-a-service offerings to their existing IT services portfolios. The evidence suggests that such strategies are doomed to fail, and fail big-time. With services giants EDS, IBM Global Services and CSC all now eagerly pitching ASP offerings into the market, there could be some very interesting, albeit painful, outcomes.

Speaking of Mighty Falls ...
The topic of giants riding for a fall rather neatly dovetails into last week's biggest story, the attempted merger of Hewlett-Packard with Compaq Computer. It seems highly unlikely that this ill-starred union will ever be consummated. Yet one possible scenario has a strange logic to it.

The key to this deal is that it is not actually one merger, but two quite separate combinations. One finishes off the consolidation of what used to be called the minicomputer industry, bringing HP together with the remnants of DEC and Tandem, which Compaq acquired in the late 1990s.

The other unifies Compaq's strength in PCs with HP's pioneering track record as a maker of handheld appliances, going all the way back to the earliest pocket calculators. Do not be surprised if, in four to five years' time, the merged entity ends up splitting into those two separate businesses, one dedicated to servers, and the other dominant in client devices. The only difficult question to decide answer: Which bit will get which name?

This review of the week's news highlights is by ASPnews.com founder and consulting analyst Phil Wainewright. A comprehensive news digest is published every month in the ASP News Review newsletter, available exclusively to subscribers.

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