Summary of the Worldwide IT Services Marketplace, 2Q03

The worldwide IT services industry is in the midst of its biggest slump in memory. Whereas in previous IT-wide slowdowns IT services was relatively immune to macroeconomic and broader IT issues, the IT services industry’s fortunes are now inextricably linked to forces outside of its own immediate control.

As such, IT services suppliers are having to grapple with an uncomfortable situation in which they are forced to wait for the following:

• The emergence of better macroeconomic conditions
• The abatement of geopolitical instability
• A new and compelling overarching business catalyst
• A new and compelling overarching technological catalyst
• Most importantly, for memories of the late-1990s technology/business boom to fade or recede

While the first two of these points are on the horizon, the other three are still some way off. Consequently, the long wait for an end to this difficult period continues.

However, there is “light at the end of the tunnel.” Gartner Dataquest believes that the worst of the market slowdown is now behind us and that 2003 will see more favorable conditions return. While expectations of growth and new opportunity must be realistic (it is unrealistic to imagine that the 15 percent to 20 percent growth rates witnessed during the height of the Internet-driven boom will reappear anytime soon), signs indicate that purchasers of IT are beginning to look up from their quarter-to-quarter management focus and are reinvestigating and reinvigorating new business and technology initiatives.

Though this will likely lead to renewed opportunity for external service providers (ESPs) in the next 12 to 18 months, many of these opportunities will be of a different nature to the ones that have provided the bread and butter for service providers in the past.

This report aims at assisting suppliers of external services to understand the realities of the IT services market. More importantly, it helps ESPs understand the likely shape of these new opportunities in the future.

Summary of Key Findings and Highlights

Following is a summary of key findings and highlights:

• 2003 sees the IT market entering its fourth year of the slowdown following the Internet-driven bubble’s implosion.
• The most notable element of the market’s mood in 2002 was the realization that the slowdown was not a temporary aberration but was the result of a more fundamental change in the market’s attitude toward IT.
• While Internet-bubble momentum managed to keep the market going for awhile (the market grew by 4.3 percent in 2001), the petering out of this momentum and the more negative sentiment toward IT investment saw the worldwide market shrink by 0.6 percent in 2002.
• 2002 was one of the worst years ever for the U.S. IT services industry. Negative growth of 1.1 percent represented a hard and painful deceleration for a market that was growing in the mid-teens in the late 1990s.
• Gartner Dataquest expects a modest recovery in the second half of 2003 in those IT services markets that do not require significant solution innovation from IT services vendors.
• The worldwide IT services market is forecast to grow from $539.5 billion in 2002 to $707.3 billion in 2007 – a compound annual growth rate (CAGR) of 5.7 percent. This is a healthy set of numbers considering the huge size of this market.
• At this point in the technology investment cycle, when “technology investment” is something of an oxymoron, the need to understand exactly what IT contributes to a business is greater than ever. This should be a strategic initiative for IT services providers.
• Gartner Dataquest identifies four new application/technologies (the semantic Web, the grid, enterprise performance management (EPM) and “net fabric”) as being significant areas of innovation and opportunity taking shape behind the high-profile push toward Web services.
• Service and utility will be the overarching themes for new opportunity in the next five years as the IT industry undergoes its next paradigm shift. These new areas aim to address structural IT industry-wide problems of high cost/low benefit caused by industry immaturity.
• One of the most important new catalysts for IT spending in the next 18 to 24 months will be the creation of the U.S. Homeland Security department. The establishment of this new government department is clearly a long-term exercise but will urgently require huge integration, technology refresh and external services support.

Summary of Report Recommendations

IT services vendors should be realistic in understanding that a new boom is not just around the corner being held back by U.S. military action overseas, Securities and Exchange Commission (SEC) investigations or reduced stock market levels. The IT (and IT services) industry’s woes are much more fundamental than many appreciate or are willing to admit.

The first step in industry-wide revitalization is for vendors and, to an extent, buyers of technology and services to:

• Recognize that current reduced levels of market demand are the result of long-term structural changes in buyers’ requirements rather than simply cyclical trends
• Accelerate moves toward exploiting the on-demand/real-time enterprise/agile-enterprise dynamic; otherwise, vendors risk losing competitive ground in the new wave of demand (recognizing that IBM’s repositioning into on demand makes it easy to exploit these changes).
• Accelerate moves toward exploiting componentization and its most visible current expression, Web services
• Urgently develop new value-added offerings related to new technology areas such as the grid, EPM, the semantic Web and so on.
• Develop and deliver offerings with quantifiable short-term (sub-18 months) financial returns. This is not a new requirement for the IT services industry; it is, however, still an unsolved and increasingly pressing concern.

Only through the steps outlined here (among others) will vendors tap into new potential market forces powerful enough to create real and sustainable future growth.

Purchase the full Gartner report, “Worldwide IT Services Marketplace 2Q03 Review.”