IT Services Market Declines

Gartner attributes the revenue drop to more companies turning to foreign operations to run their computer systems.

Worldwide revenue from IT services fell last year to $536 billion as companies turned to cheaper foreign operations to run computer systems, market researcher Gartner said Tuesday. The 0.6% decline from 2001 was the first year-to-year revenue drop.

The biggest cause for the decline was outsourcing IT services to foreign operations where labor costs were lower. Because the costs were less, companies spent less, driving down total revenue for the industry. "That was a key driver," Gartner analyst Kathryn Hale says.

Companies turned to offshore outsourcing primarily for "commodity services," work related to routine computing tasks such as running a help desk. Because commodity work is done by many outsourcers, competition is stiff and prices tend to be lower.

In addition, companies shied away from costly new projects requiring high-priced consultants and a lot of application development and integration, preferring instead to focus on jobs that brought a quick return on investment.

Of course, the overall decline in IT spending, including hardware and software, meant less demand for consultants to help in deployments. "The IT market in general did not have a great year," Hale says.

Indeed, Gartner reported in March that IT spending on software in 2002 dropped 0.7% from the previous year to $73.5 billion. Other industry experts have reported that overall IT spending dropped 6.2% during the last two years combined.

However, spending in 2003 is expected to improve. High-tech researcher International expects companies worldwide to spend 2.3% more this year than last year, increasing to $871 billion. Aberdeen Group is projecting a spending increase of as much as 3.9% globally.

Higher spending overall is also expected to increase revenue for IT services companies, Hale says. In addition, the rate of companies outsourcing IT work overseas is expected to slow. "We see 2002 as the bottom across all of IT--hardware, software, and services," Hale says.

In the 2002 IT services market, IBM maintained its No. 1 position with 7.5% of the revenue, Gartner says. However, the poor performance of PricewaterhouseCoopers Consulting, which IBM acquired last year, contributed to IBM's 1.3% decline in revenue.

For the first time, Hewlett-Packard became one of the top five vendors in the market, because of its acquisition of Compaq. Nevertheless, the combined services revenue for both companies suffered during the merger, dropping 5.8%. HP was No. 4 with 2.3% market share.

Rounding out the top five were EDS, No. 2 with 3.9% market share; Fujitsu, No. 3 with 2.6%; and Accenture, No. 5 with 2.1%. EDS was the only company to show an increase in revenue, with a 2% jump.

Asia-Pacific and Japan were the only regions to show growth in IT services. However, at 3%, the increase was less than expected because of the global economic slowdown, Gartner says.

Political and economic instability made Latin America the weakest region for IT services with a 7.2% negative growth rate. North America dropped 1.1%, while Eastern Europe and Western Europe dipped 2.6% and 0.1%, respectively.

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