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Internet: The Next Wave In IT Services

What does Internet mania mean for IT services companies? As start-ups begin to use the Internet to shake up established industries, established competitors will look to IT to fight back.

Everyone seems to be focused on Internet stocks these days, and it's not hard to understand why as shares surge skyward. When it comes to the Net's impact on business models worldwide, we are likely only seeing the tip of the iceberg. Companies such as utilities, steel manufacturers, and car dealers are just now understanding how the Internet will impact their businesses.

What does this mean for IT services companies? As start-ups begin to use the Internet to shake up established industries, established competitors will look to IT to fight back. Change benefits the IT services industry since IT is often seen as the key tool to help companies adapt to changes in their respective industries.

IT services companies benefit even further from changes created by the Internet. IT companies are already working on Net application projects, and are much more familiar with the fast-pace technologies associated with the Internet. They are also very familiar with corporations' existing technology, and know the best steps to take to maximize and integrate that technology with Internet applications.

Application development cycles have dropped precipitously as technology has progressed. The development cycle for Internet-related applications is now some three to six months, compared to three to five years for most mainframe applications. Such short development cycles make it more difficult for internal IT departments to keep up with available technologies. IT services companies, however, have the advantage when it comes to staffing Internet-related projects.

There are a couple of weaknesses that many IT services companies need to work on to become a leader in Internet applications development: domain knowledge and creativity skills. Most IT services companies are very strong in understanding and applying fast-changing technology. Yet the Internet has not only made existing business models more efficient, it has often turned business models upside-down!

Deep knowledge of a client's industry will help the IT services company develop better solutions. Also, the Internet is proving that knowledge of technology is only one piece of the puzzle, and that other skills--such as creativity--are important. We will likely see IT services companies make acquisitions of consulting firms specializing in non-technical development skills in the near future.

So which IT services companies are well-positioned to take advantage of the Internet wave? Well, most will benefit, as this will likely be a "tide that lifts all boats." Some of the early leaders in this area are Cambridge Technology Partners, Sapient, and US Web.

The largest IT services companies, such as IBM and Electronic Data Systems, are also putting emphasis on this space, though Net application services will likely remain a relatively small percentage of revenue for some time. We are also seeing companies that traditionally have focused on other areas in IT jumping into Internet application development.

Complete Business Solutions will soon start a large electronic commerce project at one of its three offshore development centers, which are currently used for Year 2000 remediation work and application maintenance and development. Maximus, an outsourcer for state and local governments, recently acquired an electronic commerce applications developer because it sees governments moving more and more to the Net to serve citizens.

We are likely early in this next wave of IT spending, and IT services companies will likely be big beneficiaries!

Legg Mason Wood Walker makes a market in Cambridge Technology Partners and Complete Business Solutions. During the last three years, Legg Mason Wood Walker acted as manager or comanager of an underwriting of Complete Business Solutions and Maximus.