Changing IT Services Landscape Poses Challenges

BARCELONA (03/27/2000) - The influence of the Internet is about to fundamentally change Europe's rapidly growing IT services industry, resulting in profound changes to both the quantity and quality of the services businesses will demand from them.

In short, specialized IT services will soon be a thing of the past, as the Net is driving a transformation of the industry into an end-to-end business, rather than a technology services industry, International Data Corp. (IDC) analysts said at the market researcher's European IT Management Forum, which kicked off here in Barcelona today.

While the Internet already has forced the European IT services industry to become more efficient in delivering its services, the industry now is poised to face the challenge of transforming itself into an integral part of the electronic business community as well as the economic infrastructure.

The trend will accelerate consolidation in the industry, first within the traditional services and support providers and next with the emerging Internet pure play companies, said Martin Canning, expertise center manager at IDC's European business infrastructure and technology services team in Amsterdam.

To be sure, there will be plenty of business to be fought over as IT services revenue in western Europe is expected to grow from US$96 billion in 1999 to around $145 billion by 2004, as compared to worldwide revenue, which according to IDC's estimates will reach $472 billion by 2003.

Nevertheless, even service providers with several billion dollars of revenue may see themselves become acquisition targets, noted Canning. "It is difficult to see how the services businesses of companies such as NCR Corp. and Unisys Corp. can go much further on their own," he added. "But the good news is that there will be no losers since there will be enough business for everyone."

For more technology-oriented service providers, such as the services unit of Compaq Computer Corp., the drive towards more integrated business services will require new partnerships.

"Since we are mainly a technology service provider, we will likely seek partners for the business management skills," said Tom Iannotti, vice president and general manager of Compaq's customer services for Europe, Middle East and Africa.

IDC's European services research team used the conference to unveil its top ten predictions for how, and why, the services landscape will change, and the challenges and opportunities this will bring to the players in the IT services industry.

In summary, IDC's top ten predictions for the European IT services industry in 2000 were:

1. Leveraging their current high market evaluations, dot-coms will swallow up traditional businesses. Brick-and-mortar companies in turn also can increasingly be expected to merge with dot-coms, as their high evaluations cannot last forever. This will have a deep impact on the IT services market, which needs to provide services focused on helping such combined bricks-and-clicks businesses to integrate their operations.

2. Creating a strong brand name and corporate image is becoming an important, albeit intangible, asset for survival in the Net economy. As a result, corporate executive ranks will soon see the addition of a new breed of corporate branding officers, or CBOs. IT service providers are becoming more closely involved in adding real value to businesses, and they will soon also be asked to reinvent their images. Companies that already have rekindled their own brands and images will naturally be better positioned to convince customers that they are able to successfully reinvent theirs as well.

3. The financial markets will come to their senses, and a major market correction downgrading the value of many dot-coms later this year will bring to end the era of overnight dot-com millionaires. Separating the winners from the losers will become increasingly difficult, and many of the service providers that currently are accepting equity as compensation for their services will have to wake up to the fact that they cannot effectively predict who the survivors will be.

4. In the new economy, competition will come from everywhere, and in some sectors, such as banking and retail, incumbents will face challenges from companies that they have never even considered as competitors. In the IT services arena, new business models include ASPs (application service providers) and pure Net players that approach the market from an entirely different perspective than the established service providers. The real threat, however, may well be coming from elsewhere, such as the advertising, logistics, finance or human resource sectors.

5. The impact of the Net will extend its reach to ancillary industry sectors, which also will see dramatic increases to their businesses, a phenomenon that already is affecting the information and communications technology (ICT) industry. This will present golden opportunities for IT and business service providers in Europe, which, compared to the U.S., still is at the beginning of the Net and electronic business revolution, although it also poses a threat to those who are not able to adapt quickly enough to the new wired economy.

6. Europe's leadership in wireless communications, meanwhile, will allow businesses here to take the lead over their U.S. counterparts in the global race to mobile business. As a result, the emerging trend toward partnerships between communications companies and content providers in Europe are effectively mirroring what happened in the wired Net marketplace, where dot-coms have been merging and partnering with content owners. The rapid growth in mobile commerce is also leaving an almost untapped opportunity for service providers to catch up with network equipment and mobile phone service operators who, to date, have been leading players in the wireless arena.

7. The drive towards e-business will fuel increasing demand for CRM (customer relationship management) and data warehousing offerings. More customer-centric e-business models will need the implementation of CRM systems, data warehousing and online analytic tools to enhance real-time understanding of the changing customer needs. With the advent of e-marketing, companies will face a choice between developing the necessary expertise in-house or using an outside partner. What remains to be seen, however, is who will emerge as the industry's leading e-marketeer.

8. User demand for privacy protection will fuel the need for providing security services. Corporate espionage cases, such as the recent brouhaha over the U.S.-backed Echelon surveillance network, will serve to heighten users' awareness of the value of information in the new economy, which in turn will further fuel privacy concerns on the Net. As a result, the issue of information security will grow in importance and lead to vendors with leading-edge security services increasingly to become a vital part of services contracts.

9. Communications will hold center stage in the wired economy, and bandwidth owners may well become the oil barons of tomorrow. Although free Net access and flat-rate telephone charges currently are in high demand, a consolidation process in the European telecommunications markets has already started. The trend, which will continue, will once again lead to a marketplace dominated by a few major players. For services providers, this means that they need to build strategic partnerships with the companies that control the bandwidth, designed at providing real value-add to end users.

10. Within five years, by 2004, most service deliveries will no longer be done by humans. The ability to deliver automated services over the Web will force commoditization as well as lower prices. As services become more virtual, IT service vendors will face the critical task of making sure that they can find the right balance between services delivered over the Web and those delivered through human channels. Finding the right mix will not only help customers to protect their profit margins, but also to optimize the use of human resources in an increasingly skills-constrained environment.

IDC is owned by International Data Group Inc., the parent company of IDG News Service.

IDC, in Framingham, Massachusetts, can be reached via the Web at http://www.idc.com. IDC's European services team can be reached at in London at +44-181-987-7100 or in Amsterdam +31-20-617-5566.

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