The IT Services Business Keeps On A-Growing

Maybe it is because I have 10 gallons of London Porter homebrew gurgling behind me in my office as I write this–hopefully it will be ready to bottle by the Memorial Day weekend–but it occurs to me, watching IBM as I do and Hewlett-Packard‘s proposed $13.9 billion acquisition of Electronic Data Systems, that the services sector of the IT racket is like a sprinkle of yeast in a giant vat of sugar water. It is perhaps going to keep growing until it eats all the sugar in the pot.

While the market researchers at IDC and Gartner probably would lose their jobs if they brewed in the office, they certainly do concur that spending worldwide on IT services is just going to keep growing each year.

According to the latest estimates put out by the company, IDC expects that companies and governments will spend an aggregate of $746 billion on external IT services in 2008, up 6.8 percent from the $698.5 billion spending level set in 2007. Because of economic pressures, and sometimes despite them, and a move to hosted applications, software as a service, and utility computing, IDC is projecting that spending on IT services will reach $965 billion by 2012, the limit of its five-year forecasting model.

These figures were published last week in a report called Worldwide Services 2008-2012 Forecast: Finding Opportunities in a Challenging Time, and that report says that the hosted application part of the services space is still tiny, but will grow at a compound annual growth rate of 15.9 percent over that five year span, the highest growth rate in the outsourcing services area. Plain, old business outsourcing services will grow by a 10.4 compound rate over the same five years.

“In these tough economic times, service vendors are faced with both new and old challenges,” explains Marianne Hedin, program manager for worldwide services and SOA at IDC and the author of the report. “The worldwide services competitive landscape keeps intensifying with many new entrants with new business and pricing models as well as the strengthened capabilities of up-and-coming players that are extending their reach into new markets. This is a time for service vendors to aggressively review their portfolio of offerings, account targets, investment strategies, business processes, and delivery practices.”

Over at Gartner, the analysts have just finished building their IT services sales model for 2007, and they reckon that global sales for IT services rose by 10.5 percent in 2007 to hit $748 billion. (Gartner has not publicly released projections for 2008 through 2012, but you can bet that paying customers get access to that data.)

“This strong growth, combined with strong first quarter results for market leaders, runs counter to the gloomy and widespread economic concerns arising in the United States,” says Kathryn Hale, research vice president for Gartner’s worldwide IT services group. “Many providers are successfully selling buyer value propositions that external spending on IT services and solutions can help customers save money and be more productive, even in a profoundly uncertain economic climate.”

Then again, maybe some companies are getting sick of having IT shops and trying to do everything themselves. Anyway.

According to Gartner’s 2007 rankings, IBM had the top revenue spot in the IT services business in 2007, with $54.1 billion in sales, up 12.2 percent. EDS was the number two vendor, with $22.1 billion in sales, but only grew by 3.4 percent, compared to Accenture (formerly the IT practice of accountancy Arthur Anderson long before it got into trouble at Enron), which had stellar 19.7 percent sales growth in 2007, hitting revenues of $20.6 billion. (You can see now why EDS was eager to merge with HP.) Japanese IT giant Fujitsu was ranked number four in IT services in 2007, with $18.6 billion in sales and slower-than-market growth of 3.9 percent. HP was ranked fifth with $17.3 billion in services sales, up 8.1 percent. (You can see now why HP wanted to merge with EDS.) CSC accounted for $16.3 billion in sales, up 7.7 percent, last year.

Here’s the amazing bit. The top six vendors only comprise 19.9 percent of the market. In servers, PCs, and other software segments, the top six vendors have the vast majority of revenues. Not so in IT services. Other vendors accounted for a whopping $599 billion in sales in 2007, up 10.7 percent and, in aggregate at least, setting the market pace. The top 360 vendors have about 70 percent of IT services sales last year.

There is just a huge amount of consolidation that has not happened yet in the IT services sector. Think about where the system space was 30 years ago, and you have the right parallel. To bring it on back to the yeast comparison, not only is there a lot of sugar for the yeast to chew on, but there are hundreds of different microbrewers making beer. To my mind, this is called an ecosystem, and this is a better way to provide a product. A monopoly is a terrible thing–unless you happen to have one.

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