Technology Services: A Market in Transition

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A Market Primer: How Cloud Computing, the Rise of India and the Consumerization of IT are Changing the IT Services Business

The market for technology services is changing dramatically, driven by macro forces of cloud computing, virtualization, mobility and data growth. In addition there are ten major trends impacting services organizations, including:

 

  1. The shift to cloud-based opex-oriented spending is pressuring services organizations to shift business models and capitalize on cloud-based offerings – either directly or through partnerships and acquisitions.
  2. Large outsourcing deals are drying up, projects are getting smaller and more tactical; favoring services companies with greater speed, good cost structures and the ability to pivot off of emerging trends.
  3. Services organizations are specifically gearing up to provide services designed to accelerate the adoption of emerging technology, especially those that are driving the macro trends of the industry (cloud, big data, mobile, etc).
  4. New entrants including Amazon, Google, Apple and smaller specialized players (e.g. Dropbox, Carbonite, etc) are bringing consumerization to enterprise IT; forcing a trend toward simplification, speed and flexibility.
  5. IT Services companies are innovating, adopting new technologies to better organizations and resolve problems more quickly – these include the use of chat and big data analytics to provide more proactive service.
  6. Consulting and strategic alignment is an increasingly important area for services companies and many are beefing up their consultative staff and capabilities.
  7. The rise of India. Services firms based in India are outpacing the growth of traditional services companies. This trend, combined with the shift to cloud computing is forcing traditional services companies to re-think business models and find new sources of innovation and growth.
  8. High profile security hacks and some prominent cloud failures have CIOs rightly concerned. This is both an opportunity and threat for services companies and IT organizations.
  9. The mobile enterprise. Demand for mobility in the post-iPad introduction era is spawning new demand on services organizations to architect mobility into the enterprise. We are seeing the transition from a PC-era to a mobile device era, dramatically pressuring IT infrastructure and organizational tensions.
  10. Big data analytics. Quantitative geeks are becoming more important as data and information become the new source of competitive value. Services organizations are increasingly becoming focused on exploiting big, fast data architectures for competitive advantage.

 

ServicesAngle: The market is in transition, with new entrants forcing changes to competitive models on established players. IT buyers will be required to determine if existing suppliers can navigate through the change and will be forced to pick winners and losers.

How Large is the Business Technology Services Market?

The worldwide IT services market is huge, estimated by Gartner at $821B in 2010. This compares with spending on worldwide hardware ($353B) and worldwide software ($232B). Growth is comparable to the technology markets (~5% YoY 2009-10) although historically a bit slower due to its large size.

Importantly, the marginal economics of the services business is challenging. Specifically, as volume increases, marginal costs increase. Unlike software, which is a 90% gross margin business, many services businesses have diseconomies at volume of due to complexity at scale.

ServicesAngle: Growth will follow the hot trends. The key for services players will be to navigate the decline of traditional business while investing adequately in new capabilities.

Taxonomy: How is the Market Segmented?

The services market is highly fragmented with the leader IBM generating approximately $50B in services revenue worldwide, or less than 10% of the overall market. As such, the market is notoriously difficult to segment. Traditionally, the services industry refers to “professional services” (consulting, integration, outsourcing) and “maintenance” (technical support, field service) which comprise the sector.

A basic taxonomy could look like this:

Services Segment Types of Services
Consulting
Assessment
Project Based Business Process Design
Network & System Design
System Integration
Application Development
Testing
IT Management
Application Management
Hosting Services
Outsourcing Cloud Computing (PaaS, SaaS, etc)
Network Management
Help Desk
Business Process Outsourcing
Deployment and Installation
Support and Education Hardware/Software Support
Training, Education & Certification

A broader view would include managed services from telecom/networking firms.

Other IT-related services that don’t fit neatly into this taxonomy include:

  • Disaster recovery services (hot site/cold site)
  • Security services
  • Storage services
  • Data center services (including data center construction and management)
  • “Intelligent building” services
  • Green/sustainability services

ServicesAngle: Increasingly, cloud-based services will dominate activities within the sector. Those suppliers that can profitably deliver on the promise of cloud computing will prosper. Users should beware of service level agreements of new entrants and ensure that corporate and compliance edicts are met.

How is the Market Divided?

Unlike technology product markets, the largest player in the worldwide services market holds less than 10% market share (IBM Global Services).  The market is highly fragmented and sees revenues divided up between:

  • Consulting and integration firms
  • Outsourcing firms
  • Independent support & maintenance firms
  • Product companies with service & support businesses
  • Distributors, resellers and other channel companies with services businesses
  • Regional VARS
  • Local Mom & Pop service companies

Major players in the services market sector include:

  • IBM Global Services
  • Accenture
  • CSC
  • Deloitte
  • Unisys
  • Cap Gemini
  • SAIC (heavy govt. focus)
  • Atos Origin (Europe)
  • GlassHouse (storage, data center)
  • Contoural (regulatory compliance)
India-based Firms
  • Tata (TCS)
  • HCL
  • Wipro
  • Infosys
  • Congnizant
Cloud Consulting Firms
  • Appirio
  • Astadia
  • Bluewolf
  • Cloud Technology Partners (cloudTP)
  • Cloudscaling
  • MomentumSI
Tech Firms with a Services Business
  • IBM
  • Dell/Perot Systems
  • HP/EDS
  • EMC
  • Oracle
  • SAP
  • HDS
  • Fujitsu
  • Cisco
  • Microsoft
Cloud service providers:
  • AT&T
  • Verizon
  • BT
  • Orange
  • CenturyLink
  • Rackspace
  • Amazon
  • Nirvanix
  • Salesforce
  • Mozy
  • Carbonite
  • Box.net
  • DropBox
  • Symantec
  • Spare Backup

ServicesAngle: New players are emerging fueled by small and mid-sized businesses transitioning rapidly to cloud computing. The consumerization of IT is setting a new bar for existing services companies.

 

What are the Key Services Market Trends and Themes in 2011?

The IT services market is being impacted by many of the same forces that are changing the larger IT world – virtualization, consumerization, advent of cloud services, information growth/Big Data, mobility, social media.

Here are some other key trends relevant to the Services market:

  • The consumerization of IT dramatically impacts the services sector because it cuts out the fat and is impacting the profitability of many companies. Those firms that can master the art of simplicity are best positioned.
  • Impact of “off-shore” services companies on the market as a whole
  • Opportunities to sell services in developing regions (BRIC countries)
  • Impact of cloud services on the traditional services markets, especially outsourcing
  • Impact of new and emerging innovations and technologies specific to services
  • The shift to cloud computing is disrupting existing services models
    • It is also creating ‘co-opetition’ amongst partners
  • Industry consolidation (e.g. IBM/PWC, HP/EDS, Dell/Perot) is creating a base of larger suppliers that is fighting hard for marketshare. These industry leaders are creating vacuums for smaller players to partner with traditional service suppliers such as Accenture and CSC. Companies such as SAP, EMC, NetApp and Cisco are capitalizing on these trends and tightening relationships with services companies.
  • Convergence of compute, networking and storage is creating new partnerships, go to market strategies and services capabilities are shifting as a result. Services companies are increasingly leveraging single, logical blocks of infrastructure to provide horizontal infrastructure for application services. This simplifies integration and speeds time to market. It is also forcing service organizations to create new value streams above and beyond straight hardware integration. As such, consulting is becoming increasingly important to services organizations

ServicesAngle: The services sector has historically been viewed as sl0w-moving. While its sheer size will decelerate change at the macro level, internally, services companies are undergoing massive sea changes as they move to simplify, deal with smaller projects and help companies do more with less. In many ways, IT organizations are mirroring their services suppliers and can learn much from these vendors.

Who Buys IT Services?

Virtually every IT consumer purchases IT services, including:

  • Corporations
  • Medium/small business
  • Small-office/home-office (SOHO)
  • Consumers/prosumers

Corporations, State and Local Governments

Large companies buy consulting & integration services, big outsourcing deals, disaster recovery services, huge technical support agreements (often across geographies), software maintenance, application development, and a lot of training and education. They buy these services from large consultancies, integrators and outsourcers, as well as their product suppliers.  If they have reseller relationships, qualified resellers also can provide them with services on the products they resell, but many corporations get serviced directly by technology product companies.

Medium/Small Business

These companies typically have smaller in-house IT staffs so they need services in some ways more than the large corporations. They are less likely to be able to develop applications without help.  They may need more hands-on consulting, integration and training when implementing a new set of products, OS upgrade, etc. They more typically get services from the channel firms (resellers) than do the larger corporate buyers.

Small-office/home-office (SOHO)

These businesses have the least available IT support and are highly dependent on a third-party for services, especially if there’s a problem. They are also typically less sophisticated, e.g., able to solve their own IT problems. These firms often have a single local servicer who knows them well and can meet most of their needs.

Consumers

The quality of technology customer service for consumers has historically been rated low.  PC companies have been dinged for years over poor telephone support, slow response times, and generally frustrating support delivery. Consumer needs run the gamut and are notoriously hard to predict, making this a very challenging and often expensive segment to service.  Services companies and product companies push automation heavily at this segment to try to solve problems before a live support person is needed.  Thus many of the cutting-edge services tools are first introduced for consumer support (including Web site content, live chat, social media, etc.).

Federal Governments and Agencies

Government agencies buy services much like large corporations although often purchases are made through large systems integrators that are specifically geared toward selling to the public sector generally and the federal government specifically. These specialized channels are typically set up as divisions of large tech companies (e.g. Unisys Federal Systems) or dedicated entities specializing in servicing the government (e.g. defense contractors).

ServicesAngle: The IT in our homes is now as good if not better than our IT at work. Small and mid-sized businesses now have the opportunity to access the same IT as large corporations and can increase their competitiveness as a result. Large companies must not sit idle.

Where can Someone Find Services-related News & Other Content?

Because the market is so fragmented and challenging to analyze, the leading IT news sources tend to cover it peripherally.  Here are some sources for services content:

Check services & product company press releases for:

  • Big outsourcing deals
  • New services programs, esp. professional services
  • Case studies (customers who benefited from XYZ Corp.’s services)
  • Partnerships (XYZ services company and ABC product company)
  • New services tools

Check earnings call transcripts for services quarterly results*:

  • IBM
  • HP
  • Dell
  • EMC
  • NetApp
  • Brocade
  • Accenture
  • CSC
  • Oracle

*SeekingAlpha.com has transcripts from almost every earnings call, including Q&A.

Online publication coverage of services industry:

  • CIO
  • InformationWeek
  • CRN
  • Computerworld
  • ZDnet
  • Outsource magazine (UK)

And of course, ServicesAngle.

What are the Top Services-Related Blogs?

Several blogs touch on services but these tend to be more dedicated to the sector

Services Industry Associations

Technology Services Industry Association (TSIA)

www.tsia.com

What are Some Examples of Key Services Technologies Being Deployed?

  • Live chat
  • Interactive voice response (IVR)
  • Self-healing software
  • Tracking/positioning technologies
  • Big Data analytics applied to customer information
  • RFID

What Tips are there for Tracking & Forecasting the Services Market?

This is challenging partly due to the market’s fragmentation. Also, some parts of the market such as Support & Maintenance are counter-cyclical, e.g., services spending has sometimes actually increased when the economy worsened because customers want to extend the life of their technology instead of buying new products—this was not the case in 2009 as many organizations re-negotiated existing contracts and most vendors responded favorably, helping their customers through the downturn and sharing the pain with the hopes of renewed growth down the road.

Outsourcing is also somewhat counter-cyclical; however it is going through a massive change as customers are spending less on large projects and chunking initiatives in to smaller sizes, somewhat reducing demand for outsourced IT services. As well, cloud computing is impacting services in a big way by lowering the cost of entry, making new services available to smaller businesses and generally disrupting the marketplace.

The bottom line ServicesAngle: Services is a huge and vital market segment touching virtually every aspect of IT. Look for those services organizations that can respond to the need for enterprise-class cloud computing, virtualization, big data analytics, security and mobile computing trends to provide strategic guidance and drive business performance over the next 2-3 years.

 

 

About Dave Vellante

Entrepreneur and co-founder of The Wikibon Project, a community of business technology practitioners solving problems through and open source sharing of advice and knowledge.