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Wednesday - May 31, 2000

Service Companies in Need of More Value and Customer Service

As spending on worldwide IT services continues to increase, the industry is going through some major changes, including a significant change to the traditional business model. According to IDC, the model is moving from a highly customized process linked to IT results to a more standardized process tied to business results. In addition, service firms are playing an increasing role in helping organizations reinvent themselves using IT as a vital tool and helping create entirely new businesses.

"Now that the Y2K bug is behind us, and because we do not expect major repercussions on the economy, companies are faced with decisions that will impact the future of their business: rejuvenating if not reinventing their business models, benefiting from the Internet beyond having a marketing presence, tying their front offices with their back offices, executing on their Internet strategies, streamlining their supply chains, meeting customers needs, and so on," said Sophie Mayo, program manager for IDC's Worldwide Services research. "Increasingly, services companies will be asked to take more responsibility for the business strategies of their customers and to deliver value."

Another major trend in the services market is systems integrators' transition to Internet services players. This trend is impacting service firms' fee structure. At first, IT services firms were swapping services for equity, but now they are going beyond that and moving closer to what traditional venture capitalist firms do. "Internet service firms are looking for the next goose that will lay the golden egg. They're investing cash, intellectual capital, and expertise, and they expect a significant return," Mayo said. "At the same time, they are using their association with the start-ups, often dot-coms, as a means to heighten their Internet profile and to gain exposure to cutting-edge business plans and technology."

While all this change is going on, the worldwide IT services market will sustain annual double-digit growth through at least 2004. IDC forecasts spending in this market will jump 11% compounded annually from almost $349 billion in 1999 to over $584.5 billion in 2004. The fastest-growing segment will be application outsourcing, which will grow twice as fast as the overall market. By 2004, the worldwide application outsourcing market will be well over $22 billion. In 1999, it wasn't even $9 billion. Infrastructure services aimed at supporting systems will also be among the hottest growth areas. Network infrastructure management, network consulting and integration, IS outsourcing, and systems integration will all grow faster than the overall market.

IDC expects the United States to remain the largest regional market for services. In 2004, it will account for 46% of worldwide services spending. Asia/Pacific (excluding Japan) and a region that IDC calls rest of the world, including Eastern Europe, the Middle East, and Africa, will be the fastest-growing areas. Spending in both these regions will increase at compound annual growth rates of 17%. IDC also believes the Western European market has strong potential.

"Europe is on the verge of becoming a driver of global Internet trading and a leader in implementing Web technology," Mayo said. "Although Americans have long thought that Europeans are falling behind, many signs indicate that European Internet activity is picking up. In addition, Europeans understand the hurdles of having to deal with multiple cultures, multiple languages, and multiple currencies -- something American companies are struggling with."


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