Tough Going Still...

author-image
CIOL Bureau
Updated On
New Update

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.

Advertisment

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.

Advertisment

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.

Advertisment

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.

Advertisment

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.

Advertisment

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.

Advertisment

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.

IT
Outsourcing: The Hottest Growth Engine
  2002 2003 2004 2005 2006 2007  
IT
Consulting
IT
Strategy
5 5 6 7 7 8  
Business
process consulting
16 17 19 21 23 24 CAGR
9%
Change
management
1 1 1 1 1 2
IT
consulting total
22 23 26 29 31 34  
Systems
Integration
Packaged
apps implementation
74 78 81 86 90 94  
Custom
apps development
8 9 9 10 11 11 6%
Apps
integration
6 6 7 8 9 10
Systems
integration total
88 92 97 103 109 115  
IT
Outsourcing
Applications
outsourcing
7 7 15 25 39 49  
Mainframe
outsourcing
29 29 30 29 29 28  
Network
outsourcing
4 5 7 9 10 14 CAGR
14%
Desktop
outsourcing
12 14 18 23 25 27
Distributed
environment outsourcing
46 51 57 60 63 66  
IT
outsourcing total
96 106 127 146 167 184  
IT
outsourcing will be the star
growth engine at an expected CAGR of 14% till 2007. This will be driven
mostly by 50% CAGR for app outsourcing. Business Process Consulting will
pick up and carry along with it a growth in change management services.
Application integration services will be big — driven by the need for
enterprises to get more bang for their buck.
Advertisment

Sarita Rani

tech-news