Internet Growth Leads to Services Boom
By Joe Wilcox Arlington, Va.
8:58 PM EST Tues., June 08, 1999
Strong Internet growth will lead to a continued boom in IT services, despite a cyclical downturn due to year 2000, a leading industry group reported.
The Information Technology Association of America, based here, concluded three factors had the most effect on how successful services company were in 1998: scale, profitability and geography.
But rapidly evolving demand for Internet services has changed that in 1999. "Today it is things like growth potential surrounding new technologies and business processes, Internet and Web-based technology solutions and moving to higher-end, higher-margin project solutions," said Kevin Green, managing partner with Cherry Tree & Co., Minneapolis.
ITAA officials cited three reasons for strong service growth: unprecedented demand, labor shortages and margin expansion. But there is some short-term softening in the market due to year 2000, European Monetary Fund conversion and other issues.
IT service companies' average revenue declined to 32 percent growth in the first quarter from 43 percent growth in the third quarter of 1998, according to the ITAA. But long-term, pent-up demand for E-business projects will overcome short-term saturation in the enterprise resource planning space, consolidation through mergers and distractions over a possible economic slowdown.
The IT labor shortage is a major, often ignored driver of IT services and outsourcing, said Green, whose company is an investment banker backing IT service companies. In the Northern Virginia high-tech corridor where ITAA is located, there is an estimated shortage of 22,000 IT workers.
Another factor driving service demand is increased awareness by chief executives about technology's competitive advantages. Boardroom backing ensures IT managers have the necessary funds to move on new projects, for which they increasingly call on service organizations to complete the work.
Said Larry DeBoever, senior vice president of the Meta Group, Stamford, Conn.: "When you move closer to the board of directors, they are more concerned with the value than the cost of IT."
The United States continues to drive IT services, according to the ITAA, with about 49 percent of the world market. Western Europe and Japan follow, at 28 percent and 12 percent, respectively.
The top five service organizations by revenue in 1998 were IBM Global Services, EDS Corp., Fujitsu, Andersen Consulting and Computer Sciences Corp., according to the ITAA. IBM, EDS, CSC, First Data Corp. and Andersen Consulting topped the list of U.S. providers of IT services. Worldwide, Andersen Consulting had the best growth, 25 percent over 1997, followed by CSC at 18.1 percent.
Andersen Consulting led the worldwide market for Internet services, followed closely by IBM. PricewaterhouseCoopers, Ernst & Young and EDS rounded out the top five. The ITAA predicted explosive growth in Internet services, particularly for companies focusing on network infrastructure, design, Web-enabled applications solutions and strategic business consulting.
"We expect in two years to have 100 percent of our business in E-commerce," said Eric Jackson, director of global communications for Andersen Consulting. "It is fundamentally changing the landscape." The New York-based consultancy currently estimates about 40 percent of its business has an E-commerce component.
Systems integrators that add vertical focus, cross selling and E-business components to the mix would be best positioned to take advantage of the Internet service boom, the ITAA concluded.
"Speed, which had always been a key element by leading IT companies, is no longer measured in man months, but Web weeks," Green said. "The key to all of this is talent, which remains in short supply, so the translation is there is a tremendous opportunity for services companies."
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sn [hardware is not the future for cpq. IT service will be.] |
