Tough Going Still...

Forrester Research’s recent TechStrategy report on ‘Ser-vices Market

Sizing through 2007’, is a mixed bag of prognostication for the industry.

Christine Ferussi Ross and team conducted a survey among vice-presidents, IT

directors and business unit decision-makers a t145 North American firms last

quarter. The idea was to understand demand for two distinct classes of offerings

in 2003 and beyond: consulting, system integration and IT outsourcing services.

Exceptions aside, mega-deals are not really the fad of the moment. Growth will be driven by the need to integrate existing applications or from pent-up demand because of investments withheld in 2002. Little over 50% of those interviewed said they would spend less than $10 million on outsourcing this year.

Bottomline findings



97% of respondents said they would be buying consulting and SI services during the

year. Of these, 41% are likely to increase their spend from 2002 levels.

92% said they will buy new IT outsourcing services in 2003. Of these 37% said their budgets would increase. Compare this with 54% in February last year who’d said their

spend would actually decrease. The more interesting story, however, lies in

where exactly that IT spend is set to go.

Within those numbers



While most companies have promised higher spends the bigger growth is likely

to come from outsourcing projects than just consulting and SI services.

According the report IT consulting is expected to grow about 5.5% this year

with a compound aggregate growth ratio of about 6% till 2007. This would mostly

be led by business process consulting with change management also piggybacking

on BPC growth.

System

integration services are also likely to grow by just over 5% during the year

with a 6% projected CAGR by 2007. This will largely be led by growth in

application integration services as customers seek to knit together various

existing applications.

Some of the AI spend will also be influenced by the movement toward web

services. Custom application development will grow at a more sedate 3.4% during

the year and a CAGR of 6% till 2007.

The

good news for Indian vendors it that IT outsourcing will remain a key growth

area. In 2002 outsourcing accounted for about 47% of the entire IT Services

budget. According to Forrester this is likely to grow by a CAGR of 14% till 2007

and will by then account for 55% of the entire IT services budget or about $184

billion.

IT outsourcing growth will be driven by the continuing thrust in application

outsourc-ing. Though most customers stated this as their priority area, longer

sales cycle might lead to relatively slow growth this year. However, the study

believes over the next five years, application outsourcing is likely to show a

phenomenal CAGR of 50% and will be the fasted growing portfolio.

There is, however, a catch.

According to Forrester RESEARCH,overall IT services spend is expected to go up by 8% in 2003 and show a CAGR of 10% through 2007. About 80% of the firms interviewed said they would maintain or increase their services spend budget this year.

Bigger budgets, but smaller deals



Despite market perceptions to the contrary, the study states that this is

not really the year or era of mega-deals. Customers will spend more, but they

will most likely parcel out the work in smaller modules to multiple vendors. At

the moment for instance, customers use an average of four to five outsourcing

vendors. While this may consolidate somewhat, the sizes of individual deals will

not be large. This will in turn require higher sales and marketing spend by

Indian companies. Some like Infosys have already witnessed this phenomenon

reporting an increasing number of smaller deals at a time when their sales and

marketing spend has almost doubled.

Guess what? Price is more important than ever before. When asked about the two most important criterion for outsourcing, more than half the respondents said "price". Compare this with only 25% stressing on price in a similar survey in February, 2002. Key: Billing rates may not be falling, but they still matter the most.

Much of this will be due to the fact that 2003 spend will be driven either by

improvement to existing systems or due to pent-up demand for investments

companies held back on last year. For instance, the study says less than

one-fourth of the customers are likely to purchase an ERP solution next year.

Most work would be either incremental changes or minor enhancements.

In addition, "Risk aversion is rampant," says the

report. That will affect investments in both leading edge technologies and the

willingness to try start-up vendors. As a result, middle- and small-level

companies will come under increasing pressure.

The most significant thing is the continuing stress on

pricing. Though billing rates seem to have finally hit the bottom and are not

likely to decrease further, customer obsession with pricing continues. Of all

those survey 52% said price would be their main criterion — compared with only

25% who stressed on price in a similar study done in February, 2002.

While five-year projections are always suspect in the

services business, the news for Indian IT services providers in this year at

least is–growth is imminent, but it will require a lot more effort as

individual deals will be smaller, and price still matters.

Sarita Rani