This category includes establishments primarily engaged in providing on-site management and operation of computer and data processing facilities on a contract or fee basis. Establishments primarily engaged in providing computer processing services at their own facility are classified in SIC 7374: Computer Processing and Data Preparation and Processing Services.
541513 (Computer Facilities Management Services)
One of the oldest of the computer services industries, facilities management includes interactive and batch data processing, data storage and retrieval, system diagnostics and maintenance, and network management. Customers hire facilities management companies to perform any or all of these services at computer facilities located on their own premises, much as they would hire a concessionaire to run a company cafeteria. Because relatively little capital is needed for equipment or buildings, facilities management initially attracted many entrepreneurs, the vast majority of who were small, privately owned enterprises.
Once a mainstay of the computer services industry in its own right, in the 1990s and 2000s facilities management evolved into just one of many services offered by companies specializing in "outsourcing." Although companies whose primary offering was facilities management still do a substantial amount of business, many companies arrange complex service agreements to include combinations of facilities management, remote computing (doing the client's data processing off-site), contract software programming, systems integration, communications network management, and software maintenance.
Because the profit margin for facilities management fell slowly but steadily over the years, its combination with more lucrative services had a growing appeal to companies in that industry. In addition, corporations with large in-house computing facilities began looking for service companies who not only could handle day-to-day processing but could also update aging computer systems. In the late 1980s, several large corporations arranged long-term contracts for computer services valued at more than $100 million. By the early 1990s, such mega-contracts exceeded $1 billion. For an increasing number of computer services companies, facilities management became just a single component of complex service agreements.
Strategic outsourcing had become the trend of the 2000s. Besides smaller corporations that hired contractors to manage their facilities and information technology (IT) needs, even the larger corporations hired contracting firms to manage their information systems. Strategic outsourcing consists of placing a company's computer budget and operations in the hands of another company in return for the assurance that operational savings and other improvements would result.
Many companies have found that their data centers, distributed networks, and related facilities can be handled more efficiently by others than by themselves. Programmers and experienced staff are difficult and expensive to hire. For this reason—particularly in industries where wages are generally low and data processing needs high, such as the insurance industry—facilities management services are frequently used. In addition, running computers is often outside the realm of expertise of a particular company. Managing the operations of complex computer systems tends to distract management from the primary focus of the business, whether it is banking, utilities, or health care. To eliminate this distraction and to cut costs, many companies hire a facilities management company to run their computer facilities on a contract or fee basis.
Facilities management companies generally charge a fixed annual amount to maintain a data center, then add fees based on processing volume. An in-house operation entails a large fixed cost; with facilities management, data processing became a variable cost. Data processing costs increase when the company's business activities increase and decrease when business slows. This pricing schedule allows more efficient use of the company's funds.
A facilities management company needs little capital to begin operations. Unlike a company specializing in remote data processing, which requires sizable data centers and extensive communications capabilities, a facilities management company has few equipment and building requirements.
Specialized personnel, however, are a crucial component for facilities management firms, not only for the obvious technical areas, but in marketing as well. Knowledge and skill are needed to sell an intangible service to repeat customers. Facilities management companies compete not only with others who offer the same service, but also with those who offer remote processing and with the customers themselves, who could revert to in-house handling of their computer facilities. This need to constantly cost-justify their service in the face of increasing numbers of competitors led to a steady erosion of profit margins in this industry.
Facilities management companies generally began by specializing in one field of business, such as banking, health care, or government agencies. They developed an expertise in the particular needs of that industry and drew new customers from within that niche. The division between companies providing facilities management to commercial customers and those catering to the government was especially strong. A company required extensive knowledge of the bidding process for government contracts and needed to meet particular government regulations to qualify as a vendor.
Companies that began by providing specialized service in a niche market first expanded geographically, providing that same service over a wider area. Many then expanded into new service areas, gaining new expertise through mergers or acquisitions of companies in different fields. In an industry that changed as rapidly as the computer industry, it was often risky for companies to provide only one service. Such specialization made them vulnerable to price cuts by competitors and to new products, laws, or regulations that made services obsolete or difficult to provide. The leading service vendors then expanded into multiple fields. They combined multiple services into a package tailored to individual company needs.
This increased packaging of services led to the trend of outsourcing, in which facilities management played a significant role. The most basic definition of outsourcing in the computer industry is simply the purchase of outside IT services, such as hiring a firm to handle payroll processing or manage a network; however, it often refers to the reduction or dismantling of in-house operations and the sale of fixed assets—like a data center or a telecommunications network—to a company specializing in information technology. The IT company then agrees to provide the services connected to those assets back to the client. Frequently, outsourcing deals of this sort also involve the transfer of personnel to the IT company. In addition to relieving themselves of the burden of running and maintaining their computer facilities, companies gain access to significant cash resources that were previously tied up in their computer equipment. Other companies enter outsourcing agreements without selling their facilities because they want an escape in case they regret the decision, because it is easier to rebuild in-house operations if the company still owns its computer facilities.
Facilities management was also integral in the development of transformational outsourcing. Companies that purchased mainframe computers and established their computer operations in the 1970s faced updating aged and outmoded computer facilities. Many companies saw advantages in open architectures that incorporated client/server computing and local area networks (LANs), but did not have the expertise to design new systems for themselves and coordinate the shift from the old system to the new. Transformational outsourcing placed the responsibility on others' shoulders. An IT company agreed to take over the client's existing system, design a new one, and handle all operations during the transition, be it gradual or abrupt. Such a contract involved facilities management, systems integration, and perhaps off-site data processing and other services.
Facilities management services began to be offered not long after mainframe computers and data centers became more common in the 1960s. At first, computers and the in-house operations associated with them were a matter of pride for companies profitable enough to afford this cutting-edge technology. However, it soon became apparent that specialists who could bring economies of scale to the activity could often operate these facilities more efficiently than those who owned them.
From its infancy, the facilities management industry was composed of small, entrepreneurial companies. Even after more than a decade of growth, 47 percent of data processing firms had revenues of less than $1 million, and 47 percent had revenues between $1 and $10 million. Of the remaining 6 percent, only half had revenues of more than $25 million.
By the late 1970s, it was already increasingly difficult to distinguish among companies that offered remote computing, software services, and facilities management. Major vendors offered several services that blended in various ways, depending on the needs of the customers.
From the late 1960s to the early 1980s, the data processing industry, including facilities management, fluctuated with the economy. The annual rate of revenue growth declined by approximately 10 percent during periods of recession in the early 1970s and 1980s. The following periods of economic acceleration produced a corresponding increase in the growth rate. Although the data processing industry was affected by the general health of the economy, it maintained a healthy growth rate throughout the 1970s and early 1980s. The lowest growth rate in that period was in 1982, when the industry grew by only 11 percent—a rate that nevertheless compared favorably to other industries at that time. Although facilities management individually had the smallest share of data processing revenue in the early 1980s, its annual growth rate at times exceeded the average for the industry. Revenues were $989 million in 1980 and grew an average of 13 percent annually to reach $1.4 billion in 1983.
In 1981, the market researcher INPUT projected a 21 percent compounded growth rate for the facilities management industry over the next five years. However, in the early 1980s, several developments in the hardware and software industries threatened the strong growth of the facilities management industry. International Business Machines Corporation (IBM) software became increasingly standardized, making computers easier to use and leading more companies to manage their facilities themselves. In addition, cheaper, more user-friendly minicomputers became common, adding to the do-it-yourself trend. However, declining prices and the need to keep up with competitors who had computerized led many more companies to buy computers, enlarging the overall market for computer services. Although the facilities management industry did not meet that 21 percent growth rate, it continued to grow steadily.
By 1992, revenues in the facilities management industry reached $3.8 billion, almost double the revenues of 1988. The rate of growth was approximately 18 percent per year between 1990 and 1992. Firms also became increasingly productive—average sales per employee rose from $110,000 in 1990 to $135,000 in 1992. By 1997, the facilities management industry's revenues had nearly quadrupled from its 1992 level to $15.1 billion.
Facilities management remained a strongly entrepreneurial industry throughout the 1990s. The vast majority of facilities management companies were privately owned and had revenues under $2 million. Private companies composed 99.3 percent of the computer services industry in 1992, though the remaining publicly held companies dominated the higher end of the revenue scale. Large information technology services firms, such as Electronic Data Systems (EDS) and Computer Sciences Corporation, continued to make inroads in the desktop technologies and networking markets in 1995, whereas companies' internal IT departments continued to feel more secure in their ability to build client/server applications. As a result, smaller and more specialized client/server integrators were forced to respond by thinking up new value-added services. The facilities management industry also remained a highly fragmented one, with companies specializing in providing services to a particular industry. According to Business Week , specializing often acted to a company's advantage, as long as the services it provided to a particular industry were comprehensive enough: "Profit margins are tightening in the generic outsourcing field, where they simply run existing systems for less money than customers can. But to broaden their scope, those giants will have to invest heavily in industry-specific software—or buy established specialty outsourcers. Either way, it seems, the specialists can win."
According to data from the U.S. Census Bureau, computer facilities management was a $15.1 billion business in 1997, and it showed little sign of slowing down as the new millennium approached. Census figures showed that more than 1,400 establishments with a total of nearly 72,000 employees were actively engaged in this business in the United States in 1997. The industry's annual payroll totaled almost $3.4 billion in 1997. Although facilities management companies had incentive to develop into full-service outsourcers, given the growing market and the improved profit margin involved, only a few had the resources necessary to offer that extended range of services. In addition to expertise in facilities management, an outsourcing vendor needed to understand systems integration, network operations, communications, and software development. Capital requirements were also higher. Frequently, a remote data center for off-site processing was required, along with an extensive communications network to transfer the data to the remote site. Additional capital might be needed to purchase the customer's existing computers or data center facilities and hire their information systems personnel. Only the larger IT service companies possessed the resources to accept such contracts. In an industry traditionally composed of small, entrepreneurial companies, only a minority were expected to take full advantage of this trend.
For those companies that did evolve into outsourcing vendors, many are turning to "enterprise resource planning" (ERP) applications and e-commerce. A major new growth area in outsourcing—applications-rental—was expected to be a $6 billion business by 2002, according to Forrester Research, a consultancy in the information technology field. Some of the large software companies that specialize in ERP applications are creating dynamic new business opportunities from the ground up. Working with Internet service providers (ISPs) and major hardware manufacturers, these outsourcing vendors want to make the latest business software applications available on a subscription basis. They are targeting companies with annual revenues of less than $500 million.
In perhaps an extreme example of outsourcing, the U.S. Chamber of Commerce in 1998 struck a deal with Cap Gemini America to handle its information systems, Internet access, telephone switches, Web site, virtual private network, as well as its data and voice wide-area network services. The 10-year agreement carried a price tag of $75 million, according to a spokesman for the Washington-based Chamber. Prior to striking its agreement with Cap Gemini, the Chamber had an annual information systems (IS) budget of nearly $7 million and an IS staff of 60.
Despite a poor economy, this sector of the industry was enjoying large increases in revenue into the new millennium. Computer facilities management generated an estimated $19.1 billion in 2001, up 16.5 percent from $16.4 billion in 2000, according to the U.S. Census Bureau. Revenue had grown 7.5 percent in 2000, and enjoyed an impressive 28.1 percent jump in 1999, when revenue totaled $15.2 billion. IT outsourcing as a whole had $120 billion in revenue in 2001 and was expected to grow 15 to 20 percent a year. However, despite large deals and rosy forecasts, some industry executives warned earnings were shrinking in late 2002 and that the industry was feeling the negative impact of the recession.
Meanwhile, more companies continued to outsource their IT operations, and several large deals were made in the early 2000s. American Express will give IBM Global Services $4 billion to run its global IT infrastructure over the next seven years, which was expected to save Amex millions in costs. Nextel Communications signed several IT outsourcing agreements in 2002, including a five-year, $234 million deal with EDS and a $1.2 billion deal with IBM Global Services and TeleTech Holdings. The deals were expected to save Nextel more than $1.1 billion in an eight-year period. Outsourcing, companies say, frees them to focus on their products, services, and clients rather than IT management.
No one particular company dominates the facilities management industry. As they grew, most facilities management companies added services outside of the industry. EDS, headquartered in Plano, Texas, is a major player with 2002 revenues of $21.5 billion, down 0.2 percent for the year. Besides computer facilities management for businesses and government, EDS is involved in consulting services, data processing, and computer network systems integration. EDS, which had about 137,000 employees in 2002, was founded in 1962.
Parent company IBM expanded its IBM Global Services in 2002 with the acquisition of PwC Consulting and has grown into a leader in this segment. IBM Global Services handles strategic outsourcing, business consulting, and integrated technology. IBM Global Services had total 2002 sales of $36.36 billion, up 4 percent from 2001.
Computer Sciences Corporation, with 67,000 employees and fiscal 2002 revenue of $11.4 billion, was founded in 1959 and is headquartered in El Segundo, California. The company began by working in a niche market, like many facilities management companies, and gradually became one of the largest of the IT services companies. Computer Sciences derived the majority of its business from state, local, and federal government work—much of it involving facilities management—and developed long-standing relationships with NASA, the Navy, and other defense contractors. Although it is considered one of the primary outsourcing firms, it no longer lists facilities management as one of its primary activities.
The growth in outsourcing at the turn of the century was phenomenal, and the demand for skilled workers was very high. The industry was booming, and many jobs such as programmers and systems analysts were available with very few skilled workers to fill these positions.
Although the nation's workforce of computer operators declined throughout the 1990s and was expected to continue to shrink well into the new millennium, all other occupations in this industry continued to grow at impressive rates. Data from the U.S. Bureau of Labor Statistics (BLS) showed that computer operators numbered 291,000 in 1996 and were expected to continue to decline sharply through 2006. Jobs in computer programming, which totaled 568,000 in 1996, were expected to increase between 21 percent and 35 percent by 2006, according to BLS projections. Employment in the ranks of computer scientists, computer engineers, and systems analysts, numbering 933,000 in 1996, was expected to increase 36 percent or more by 2006, according to BLS. Of the 933,000 jobs in this category, 506,000 were held by systems analysts, 216,000 by computer engineers, and 211,000 by other computer scientists, including database administrators and computer support specialists. More than three-quarters of the jobs in the computer services industry were classified as white collar.
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