Larger service vendors falling short?

New report adds weight to the belief of many industry watchers that some of the sector's larger players are losing out to smaller, more focused vendors.

New research by independent market analyst Datamonitor has found that the world's 50 largest IT services vendors booked combined revenue of $262 billion last year, but grew at a slower rate than the overall market. Conducted annually, results from Datamonitor’s research Global IT Services Top 50 Rankings, add weight to the belief of many industry watchers that some of the sector’s larger players are losing out to smaller, more focused vendors.

The vendors, which ranged from IBM Global Services with sales of 47 billion to Patni Computer Systems with $450 million, increased their combined sales by 1.9 percent over the previous year. But this is well below the 8 percent growth in the overall market for external IT services expenditure recorded by Datamonitor.

Datamonitor ranked the top 50 suppliers based on their revenue figures reported in their most recent fiscal years. The numbers used are the "as reported" figures in annual results statements, and are not adjusted for foreign exchange movements, disposals or acquisitions. The list excludes companies that make the bulk of their revenues from reselling products, and captive IT operations that make the majority of their revenue from their parent organizations.

There was little change at the top of the rankings, with IBM, EDS, Fujitsu and Accenture again placed one to four, although BT Global Services overtook its German peer T-Systems to take eighth spot. However, India’s five largest players all made significant moves up the league table, growing their combined sales by 35 percent to $9.3 billion.

Datamonitor estimates the size of the global IT services market at $513 billion in 2005, meaning that the 50 largest vendors claimed a share of 51 percent. The largest player, IBM Global Services accounted for a 9 percent share, highlighting the relatively fragmented state of the marketplace.

The ten fastest-growing IT services vendors in the top 50 rankings last year were either specialists in low-cost offshore delivery (Cognizant, Satyam, Patni, TCS, Infosys, HCL and Wipro), or focused on the lucrative US central government and defense sector (SRA, CACI and SAIC).

India’s big IT services companies also ranked as the most profitable suppliers in the top 50 rankings in terms of both net and operating profit margin. This is due to the lower salary costs in India, which can be as much as 50 percent lower for some skills over comparable rates in the US. Infosys was the most profitable supplier in terms of net profit margin with a 26 percent in its most recent fiscal year.

The combined headcount of the top 50 vendors grew 18 percent to 1.58 million last year, driven by aggressive recruitment in low-cost countries such as India. That country’s biggest player, Tata Consultancy Services, added more than 27,000 new staff last year to take its total workforce to 66,480, while EDS Corp plans to increase its offshore headcount from 14,500 in 2005 to 21,100 this year.

Nick Mayes, Principal Analyst for Global Computing Services at Datamonitor, noted: “The game has changed for many of the traditional powerhouses in the IT services market. Pricing pressure is sweeping through infrastructure and applications services, and clients are opting for smaller outsourcing engagements rather than mega-deals. Bigger suppliers are becoming increasingly reliant on M&A activity to improve their top line growth.”

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