IT services grew 6.7% in Q1 2018 – mixed bag, slow, big changes

IT services in Q1 grew by 6.7% in Q1 to reach $453b, with net profits (enhanced by the reduction in US rates as a result of the Tax Cuts and Jobs Act) growing by 19.8% to $41.1b. In the year to the end of March total revenues grew by 5.8% to $1.9T and net profits by 11.9% to $183b.

My Figure shows the annual movements of each sub-market, of which Implementation was the largest. In it I’ plot annual revenues on the Y axis and revenue growth on the X axis, with the size of each bubble representing the comparative size of net profit for each area.

The two fastest growing (IaaS and PaaS cloud services) in the last year are still relatively small in comparison with all of the other ‘traditional’ services. outsourcing and managed services had the weakest revenue growth, although they remain large and profitable. As users look to increase their use of computing and the Internet through ‘digital transformation’, many are shifting from buying fixed-price (relatively inflexible) 3 to 5 year contracts to cloud services which are shorter term and closer to utilities in offering flexible pricing based on usage and capacities. This is a slow process with many potential mistakes to be made by vendors who are unprepared and ones who try to move too fast towards the new service businesses.

My Figure shows the success of the largest vendors. I wasn’t able to include DCX/CSC, as its 221% revenue growth was non-organic – the result of merging CSC with HP’s most of services activities (the remaining ones have been rebranded PointNext by HPE. There were some important differences. In particular:

• IBM was the market leader in terms of revenues ($49.4b in the year), as it has been for many years. Over the last few years it has reinvented itself by7 shifting its focus from hardware to cloud services. Perhaps its biggest challenge however has been to balance its cloud against its traditional service business – retaining its leading revenues while shifting its business model dramatically.
• Apple had the largest net profit ($6.7b), although it is a long way off being a traditional IT services company. Its proprietary approach has allowed it to add many subsidiary services contracts (iCloud, iTunes, etc.) to the users of its hardware devices.
• There are only 2 European vendors – SAP and Cap Gemini – in the top 12; it should be easier for European services suppliers such as Atos to improve their business regionally given the growing trends towards ‘new nationalism’, which should see governments and others favour local over global usuppliers in future.
• There were 2 Japanese vendors in the top 12 – NTT Data and Fujitsu; the latter is going through its own transformation with the costs of redundancies reducing its profitability

The IT services market is made even harder to measure due to the huge number (perhaps a quarter of a million) smaller suppliers operating at a country or regional level and generating small revenues and profits. I and the other market research companies focus on studying the largest suppliers of course… and they may or may not represent the direction of the market overall.

Clever vendors are automating some important services, although it will be a long time before we stop thinking of this as a ‘people business’. Even if it doesn’t make headline news, turning to specialist suppliers to help you introduce a new IT process remains at the heart of corporate computing worldwide.