IT services: The world according to Gartner

Circuit EC / Mumbai

THE market for worldwide IT services grew 6.2 percent to $569 billion in 2003, up from $536 billion in 2002, according to preliminary results from Gartner. Accelerating activity in offshore outsourcing, in which companies shift jobs across national borders, contributed modestly to the overall growth.

US-based vendors continued to lead the worldwide IT services market, attracting 59 percent of total spending. IBM remained the largest competitor, with revenue rising 6.2 percent to $42.6 billion, and its market share unchanged at 7.5 percent.

Indian players: small but growing fast

India-based vendors represented a small segment of the worldwide market, with 1.4 percent of total revenues. However, their revenues collectively increased 29 percent, compared with only 4 percent growth among US-based vendors. India-based vendors depended almost entirely on exports, with 92 percent of their revenues coming from customers outside India and only 8 percent from within the country.

“Vendors based in the United States and India have been most successful at driving sales outside their native regions,” said Kathryn Hale, principal analyst for Gartner’s worldwide IT services group, based in San Jose, California. “Vendors based in other countries tend to sell primarily in their own country, then expand within their local region. As a result, vendors based in the United States and India are more experienced in global sourcing and best positioned for global expansion.” (Global sourcing is another term for offshore outsourcing.)

“The gradual merging of the Indian economy with the global economy is opening up the Indian market for international competition,” said Ravindra Datar, principal analyst for Gartner IT services research in India, based in Mumbai. “This is encouraging enterprises here to invest in technology and global best practices, further driving demand for IT services in India.”

Falling dollar inflates growth

The strengthening of many international currencies against the American dollar had a significant impact on revenue results in 2003. “Although the growth of the services industry improved compared with the decline of 0.3 percent in 2002, growth rates were inflated by changes in the exchange rate of the US dollar,” Hale said. “Vendors operating extensively outside the United States reported inflated growth after converting local currencies into dollars.”

EMEA takes a hit

The effect of the weak dollar is evident in the growth rates of different regions in 2003. North America grew only 1.1 percent, while Western Europe reported the highest growth at 11.8 percent. However, measured in local currencies, IT services spending in many West European countries actually declined, affecting the growth rate of the overall Europe, Middle East and Africa (EMEA) region. Based on euros, the EMEA IT services market declined 4.8 percent in 2003.

“Annuity-based services, primarily IT management and process management, continued to drive the EMEA IT services market, while project-based work (consulting and systems integration) recorded the slowest growth in the market as discretionary budgets continued to be cut,” said Robert De Souza, principal analyst for Gartner’s IT services research in Europe, based outside London in Egham.

IBM remained the leader in EMEA IT services, with its $14.6 billion in revenues representing 11.6 percent of total revenues in the region. EDS held on to the second position, though its IT services revenue was less than half that of IBM in the region.

APAC—no real rebound yet

IT services revenue in Asia/Pacific grew 10.3 percent in 2003. Much of the growth occurred in the latter half of 2003 as the global economy gradually improved and Asian countries recovered from the spring outbreak of Severe Acute Respiratory Syndrome (SARS). However, the biggest contributor to growth was the strengthening of local currencies against the US dollar.

“For example, revenues of IT service providers in Australia, Singapore and Indonesia grew in 2003 in US dollar terms,” said Twiggy Lo, forecasting analyst for Gartner’s IT services research in Asia/Pacific, based in Hong Kong. “But when viewed in local currencies, revenues actually declined.”

In China, the IT services market grew 6.8 percent, with revenue reaching $3.7 billion. “Merger and acquisition activities by local service providers such as Legend, Digital China, Neusoft and UF Soft continued in 2003 as a quick way to build solution sets in end-to-end services,” said Jacqueline Heng, principal analyst for Gartner’s IT services research in Asia/Pacific, based in Singapore. “Global service providers are still educating the marketplace, and, for some providers, this is starting to pay off. Enterprises in certain industries such as telecommunications and finance are becoming more sophisticated in their IT services demands.”

The growth rate in Japan was 11.3 percent in 2003, but, as in other regions outside North America, much of the increase was currency-related. In yen terms, revenue growth in Japan was 3.5 percent. “Although there were some signs of economic recovery towards the end of 2003, the full-fledged rebound of IT services did not occur last year,” said Rika Narisawa, principal analyst for Gartner’s IT services research, based in Tokyo.

Tough times for consultants

On a worldwide basis, IT management services and process management services remained the IT services industry’s best-performing segments in 2003, with growth rates of 10 percent and 9.3 percent respectively. Gartner analysts attributed the relatively strong growth in these segments to the continuing need among companies buying IT services to control costs. Vendors offering consulting services had another tough year, growing only 0.1 percent, as customers continued to rule out large or technically difficult projects.

“Through 2004, outsourcing will continue to drive growth in the worldwide IT services market, with IT management and process management growing faster than consulting services, and development and integration services,” Hale said. “Outsourcing activity transfers IT spending from internal resources to external services. In addition, business process outsourcing often transfers internal spending that was never in the IT budget to external providers. One example is human resources benefits. All of this creates market growth in IT services while leaving the overall IT budget little changed in a period when we expect enterprises to continue to maintain tight controls on IT spending.”