Q3 2008 IT Services and BPO Market Overview

The IT Services/BPO sector was also quite active and, among the many deals, services operations strove to broaden skill bases and vertical expertise, extend geographic reach especially into emerging markets, and acquire customer relationships. We will see more M&A in the coming months and years as this sector gets simultaneously consolidated and global.

Despite a general slowdown in economic conditions, the IT services market has proven to be strong in the current year. At the end of July, experts at Gartner forecast a global market growth rate of 9.5% to $819 billion. The largest share of this, $256 billion, will be spent on consulting, development and integration projects. This is followed by IT management projects at $220 billion and process management at $121 billion. For the 2008 financial year in Europe, a growth rate of 5.3% to € 211 billion is expected in the IT services market.

Changes to customer requirements and the fact that companies increasingly prefer to work with as few IT partners as possible are creating ever tougher global competition for IT Services providers. This competition is particularly evident between IT consulting and service providers, but can also be seen between national and regional providers. The result is a clear consolidation of the market.

It is still a trend in the IT sector that Asian companies, most of them from Japan or India, are buying European and U.S.-based companies while U.S. companies buy U.S. companies and European companies buy European companies. This could indicate that customized software development services and IT consulting services more and more are delivered by Asian, or Asian owned companies. We also saw a couple of Eastern European transactions, which confirms the trend seen over the last year that companies in the former Soviet states, including Russia, are able to compete on the world market and are attractive for global companies. The Ness/Logos and Luxoft/ITC Networks are examples of this.

In the SAP solution and implementation space we continue to see a consolidation trend. The major players in this space are growing via acquisitions, either by expanding their market presence (Axiom/Consulting Principles, Infosys/Axon) or growing their business (Sumisho/B4).  Other examples of international expansion in the IT Services space include Cambridge’s acquisition of Protégé and NTT’s acquisition of Cirquent.

We think there will be an increase or at least a continued high level of transactions in this sector, and that Asian companies will continue to buy their way into the European and American markets. The turmoil in the financial markets may amplify this trend, as many of the Indian and Japanese companies are able to implement transactions without outside financing.

A note on virtualization services – IDC is forecasting rapid growth in this arena from $5.5 billion now to over $11 billion in 2011. “What we’re seeing, and what we’re forecasting is that systems integration and IT consulting are currently the two fastest growing segments. Our recommendation for the big systems integrators right now is, if you do not have these capabilities, partner with people who have them, or make an acquisition. If you don’t have these capabilities, the market will leave you behind.”