IT Services Market: Still Growing In Tough Times

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Times are hard. New projects are evaporating, smaller and shorter projects are dominating, buyers are demanding measurable short-term ROI, and political conflict and economic uncertainty are dragging growth in the United States,the world's largest regional IT services market.

Despite the turbulent economic and political environment, Gartner Dataquest believes the worldwide IT services market, which includes five major sectors, will enjoy solid growth through 2005 and will grow from $517 billion in 2000 to $865 billion in 2005, a compound annual growth rate of nearly 11 percent.

2002: A Critical Year

In many IT services segments and regions, poor economic conditions and the impact of terrorism are expected to produce a continued state of fear, uncertainty and doubt for decision-makers, which will dampen growth to single digits through 2002. But Gartner Dataquest expects economic expansion to resume by the third quarter of 2002 and demand for IT services to bounce back to double digits from 2003 through 2005.

In the meantime, IT services vendors must rely on their "life-preserver" services: payment processing, applications and data-center outsourcing, and product support services. In the short term, security and disaster-recovery services will also be in high demand.

Service Sector Opportunities

Development and integration. Reduced spending on software and new solutions are forecast to cut into this market through 2002, with an expected recovery lagging the larger economic rebound by three to four quarters. The introduction of Windows XP will cause moderate demand for migration and integration services, according to Gartner Dataquest. Also, demand for collaborative CRM, SCM and e-commerce solutions,as well as maturation of Web services software and standards,should drive moderate growth in this largest sector.

Product support. The growing installed base of hardware and software ensures a steady demand for support services. Even in a downturn, when users forgo new IT investments, enterprises typically spend to support those assets that are currently installed. Growth rates, though, are expected to decline after 2003 as the installed base growth is affected by the current drop in IT product spending.

Outsourcing. Management services and business-process and transaction management should enjoy relatively healthy growth during the economic downturn, whenever external suppliers can reduce buyers' costs. In addition, industry consolidation continues to create opportunities for outsourcing as a means to reduce redundant back-office functions following a merger or an acquisition. The result is a strong market today for outsourcing services.

Consulting. Economic and political uncertainty is expected to hit consulting the hardest. Consulting's recovery will lag the larger economic recovery by three quarters, Gartner Dataquest says. As with the development and integration sectors, however, the introduction of Windows XP and demand for software services should begin to drive growth by 2003.

Education and training. In an economic downturn, this service is always hit hard. Despite short-term cuts through 2002, long-term demand is expected to be strong because of new services enabled by future technologies, and growth in "change management" and post-implementation training services from 2003 through 2005.

Planning For Profit

After 2002, confidence in the economy will return, according to Gartner Dataquest. This will give solution providers an opportunity to drive new demand for IT services that exploit critical technology innovations, particularly in mobile and wireless solutions, Web services, computer-interface technologies and communication convergence. If new services leveraging such technologies can be successful in 2002, demand for services can increase in 2003, when organizations will be more open to deploying newer technologies. Successful solution providers are those who will develop and put to the test those key future offerings that are capable of commanding high growth during good times.

Kathryn Hale is a principal analyst for the IT services group at Gartner Dataquest, focusing on market metrics. She has more than 15 years experience in market analysis.

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