When talking to investors and other analysts, I often hear that emerging IT service companies focusing on Web solutions will dominate the IT service market and steal market share from more mature IT service firms. While there is certainly some truth to this, older IT service firms haven't thrown in the towel just yet. Considering that the Internet will be the major driver of IT spending in the near future, most companies in the industry will benefit directly or indirectly.
IDC values the overall domestic IT services market in 1999 at an estimated $154 billion, growing at an annual 11 percent--while the Internet services segment is valued at $7 billion, and is growing annually at 58 percent. Emerging Web Solutions companies (and their investors) will certainly benefit from this stellar growth, but the combined Internet service revenue of a dozen emerging companies such as Scient, Viant, AppNet, and others still falls under $500 million. As it stands, these firms could still grow more than 100 percent a year and leave plenty of business for their older rivals.
Larger IT services firms recognize Internet-related services as the fastest growing segment of the market, and are positioning themselves appropriately. EDS recently reorganized its C2O Internet services unit with some of its other Net-related units to form a $2 billion E-Business Solutions unit (Total revenue for EDS is $17 billion). IBM has long recognized the market opportunity for Internet services, and to the delight of Web Solutions companies, has heavily advertised the benefits of moving businesses to the Web.
The mid-sized integrators are also moving into this area. American Management Systems, with $1 billion in revenue, is marketing its Web solutions aggressively and expects its Internet-related business to be 30 percent to 40 percent of revenues this year--nearly double year-ago levels.
Keane, also with $1 billion in revenue, is entering the space through acquisitions and working with existing clients. Firms like Complete Business Solutions and IMR Global are working with hundreds of offshore developers to move them from legacy-oriented development specialties to Internet-related skills. By 2000, these firms should be able to offer significant programming resources for large e-business development projects.
While the mature integrators can be perceived by some clients as likely to take an old approach to a new way of doing business, they do bring considerable strengths to the party. The emerging Web Solutions companies do tend to think "out of the box" more, bringing unique creative skills to a project. However, as e-business grows from small development work to multimillion-dollar global development projects, there will be a need for extensive back-office integration, field rollouts, and support across cities or countries--a role that large integrators with extensive resources and experience can easily fill.
Cambridge Technology Partners, Sapient, and others recognized the sharp growth in custom client/server development in the early 1990s and grew rapidly as a result, but that did not keep Computer Sciences Corporation, American Management Systems, or other larger integrators from benefiting as well.
To be sure, selected emerging Web Solutions companies will make great (though likely volatile) investments as they benefit from the fastest growing segment of the IT services market. As successful Web Solutions companies edge toward $400 million to $600 million in revenue, they will begin to take on the look of some of the larger integrators, with slower growth rates (25 percent to 40 percent vs. more than 100 percent), more field offices, and more diversified IT services.
These companies will also have to focus each year on generating revenue with existing clients. Many of the larger integrators generate about 80 percent to 90 percent of their revenues from companies that were previous clients, generally on different projects. But while Web Solutions companies are still relatively small and their markets are growing, they can get away with what Cambridge Technology Partners calls "drive-by marketing"--where a Web Solutions company comes in, completes a project, and leaves.
While the emerging Web Solutions companies will likely take the spotlight among investors and media, the larger IT service companies are far from dead and will continue to strongly benefit from e-business trends.