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DX demand triggers increased services spend

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Image: Stockfresh

16 May 2018

Worldwide revenues for IT and business services surpassed $500 billion during the second half of 2017, driven by increased adoption of large-scale digital transformation (DX) projects.

According to IDC research, total six month spend of $502 billion (€424 billion) represents an increase of 3.6% year-over-year, with worldwide services coming to just shy of $1 trillion (€845 billion) for the full year. Specifically, year-over-year growth was around 4%, which slightly outpaced the worldwide GDP growth rate.

As explained by IDC, the above-GDP-growth reflects stronger business confidence bolstered by a brighter economic outlook, a shared sense of urgency for large-scale digital transformation, and, at least in certain pockets and segments, new digital services beginning to offset the commoditisation of traditional services.

“As customers look to digital transformation initiatives to stay relevant in the new economy, vendors face both opportunities and challenges,” IDC programme director, Xiao-Fei Zhang, said. “While automation and new cloud delivery models reduce overall price, new digital services will require clients to spend more time and resources to modernise their existing IT environment.”

Services
In examining different services markets, Zhang said project-oriented revenues continued to outpace outsourcing, support and training, mainly due to organisations “freeing up pent-up discretionary spending” from earlier years and feeling the need to “digitise” organisations via large scale projects.

Specifically, project-oriented markets grew 4.6% year over year to $186 billion (€157 billion) in 2H17 and 5% to $366 billion (€309 billion) for the entire year.

“Most of the above-the-market growth came from business consulting,” Zhang explained. “its revenue grew by almost 7.8% in 2H17 and 8.2% for the entire year to $115 billion (€97 billion).

“In large digital transformation projects, high-touch business consultants continue to extract more value than mere IT resources do. Most major management consulting firms posted strong earnings in 2017.”

Meanwhile, IT-related project services, namely custom application development (CAD), IT consulting (ITC), and systems integration (SI), still make up the bulk (more than two thirds) of the overall project-oriented market.

While slower than business consulting, Zhang said these three markets showed “significant improvement” over the previous year: CAD, ITC, and SI combined grew by 3.7% year over year to $251 billion (€212 billion) for the full year 2017.

“IDC believes that some 2015 and 2016 projects were either pushed out to or only started ramping up in 2017, which helped to drive up spending in 2H17,” Zhang added.

“This coincides with the strong rebound on the software side as IT project-related services are largely application driven.

“Because large digital projects not only drive up “new services” but also pull in “traditional services,” IDC believes that the actual volume of IT project services grew even faster in 2017 but was offset somewhat by lower pricing.”

Outsourcing
In outsourcing, revenues grew by only 3.3% year over year to $238 million (€201 billion) in 2H17.

Furthermore, application-related managed services revenues (hosted and on-premise application management) outpaced the general market significantly — growing more than 6% in 2H17 and 5.8% for the entire year.

“Buyers have leveraged automation and cloud delivery to dramatically reduce the cost to operate applications, for example, infusing artificial intelligence into application life-cycle activities to drive better predictive maintenance and application portfolio management,” Zhang added.

“However, in their continuing drive for digital transformation, organisations are increasingly relying on external services providers to navigate complex technical environments and supply talent with new skills (cloud, analytics, machine learning, etc.).

“Digital transformation also requires organisations to standardise and modernise their existing application assets.”

Consequently, IDC forecasts application outsourcing markets to continue outpacing other outsourcing markets in the coming years.

Infrastructure
On the infrastructure side, while hosting infrastructure services revenue grew by 4.9% in 2H17, positively impacted by cloud adoption, IT outsourcing (ITO), a larger market, declined by 2%.

Combined, Zhang said the two markets were “essentially flat”.

“IDC believes that while overall infrastructure demand remains robust, the ITO market is negatively impacted the most by “cloud cannibalisation” across all regions: cloud, particularly public cloud, reduces price far greater than new demand can make up for,” Zhang explained.

“For example, IDC estimates that, by 2021, almost one third of ITO services revenue will be cloud related.”

 

IDG News Service

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