The computer services industry has been one of the few bright spots in the technology sector in 2001, powered along by long-term contracts and a growing trend toward outsourcing. But the industry itself has changed from a year ago.
So-called Internet consultants, which focused on Web site development and business-to-consumer e-commerce projects, were hit hard by the dot-com meltdown. Many have shut down, and the ones that remain have had to completely refocus on less sexy practices like back-end integration, Enterprise Resource Planning and customer relationship management projects.
The good news is spending by corporations on outside consultants, outsourcing firms and application service providers is expected to increase in the coming year, although perhaps not as fast as some earlier predictions.
Gartner, for one, estimates that as much as 40 percent of all external IT spending went to services in 2000 — as opposed to purchases of hardware or software — and IT services will account for 45 percent of all end-user spending by 2004. In dollar figures, Gartner says worldwide spending is valued at $363 billion today, and should reach $569 billion by 2004.
“IT services providers have begun to focus more of their capabilities on leveraging technology to help generate new business, open new markets and deliver measurable business results,” says Jennifer Beck, vice president of Gartner Dataquests IT services practice. As revised business models emerge, Beck says, companies will rely more on external service providers to ensure they can gain the benefits of new technologies faster.
In addition, the Sept. 11 terrorist attacks have created a boom in government spending, much of which will be directed to consultants and outside managed security service providers. Research firm IDC forecasts that the worldwide market for information security services will grow from $6.7 billion in 2000 to $21 billion by 2005.
Some of the companies benefiting most from the spending, such as Accenture, Computer Sciences Corp., Deloitte Consulting, PricewaterhouseCoopers and security firms like Internet Security Systems, do not show up on our survey because their offerings are not sold over the Internet. However, other service providers such as application service providers Corio, Salesforce.com and USinternetworking do qualify because they provide services online. Corio, with e-commerce revenue of $27.8 million, privately held Salesforce.com with estimated Web sales of $15 million and Usinternetworking, with online revenue of $134.2 million, are just three service providers that made it onto this years list.
Andrew Stern, CEO of USinternetworking, says its been a challenging year for ASPs, because while many companies are interested in moving toward hosted applications, theyre also concerned about the financial health of the providers. “The last thing a company wants to do is hand over mission-critical applications to an ASP that might go out of business,” he says.
The ASP industry was buoyed last month by an IDC report that showed a study of 50 ASP implementations produced an average rate of return of 404 percent. “Its a message were starting to get across,” says Gary Steele, CEO of Portera Systems, which also made it onto this years list.