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Services boom creates room for small firms

Small firms are finding big opportunities in the expanding services and consulting market.

Small firms are finding big opportunities in the expanding services and consulting market.

Many analysts have noted that the computer services market overall is rapidly expanding. According to International Data Corporation, spending on outside service contracts grew to nearly $100 billion in 1998 and is projected to exceed $151 billion by 2003. For the first half of this year alone, according to Merrill Lynch, five deals worth more than $1 billion have been signed by EDS, CSC, and IBM.

What has been less obvious is that the rising tide in services is lifting all boats and opening up new opportunities for smaller, more specialized companies, including Bigstep, Viant, Zefer, and Scient. The newest player to join the arena is CommerceKey, a start-up launching tomorrow.

Right now, the market is flooded with small services providers touching, especially, Internet-related areas, like e-commerce, Web hosting, shopping online, said Katherine Jones, an analyst at the Aberdeen Group.

Just last week, Bigstep, formerly known as the Springfield Project, had entered the field of providing Web sites to small and medium-sized businesses. At the time, Bigstep had announced a free offering to include Web hosting, an address at Businessname.bigstep.com, use of site-building and maintenance tools, use of a Web-based customer database for contacting customers, marketing capabilities, and visitor analysis reports.

Like Bigstep, CommerceKey will target the small to medium-sized market, providing those firms everything needed to create a store online--including shipping and distribution network, global warehouses, trackable targeted advertising, site hosting, secure online payment systems, and 24-hour customer service. Other similar market players include Yahoo and Internet Communications (ICOM).

As services giants like EDS and CSC are landing larger accounts in the high-end market, analysts say the services and consulting market is making room for smaller players.

Stan Lepeak, an analyst with the Meta Group, said he expects the industry to spawn more smaller, specialized firms in the coming months.

For smaller companies, seeking out a computer services firm makes sense economically, because it can insulate them from the turbulent--and expensive--nature of changing technology and evolving software needs. Also, start-up companies can spend more time focusing on their business plan and less time recruiting increasingly scarce development talent if they contract with a service provider.

As previously reported, IDC found that large companies have grown most comfortable with outsourcing, but in the United States, growth will be driven greatly by smaller businesses. There has been a "trickle-down effect" with outsourcing that began with larger companies who have accepted it, persuading small and medium-sized firms to do so as well, IDC analyst Cynthia Murphy said at the time.

And, for the most part, these start-up services differ from the large consulting companies by focusing solely on Web applications, helping clients to build systems that let them buy and sell online.

One cloud, however, does loom in the otherwise sunny outlook: Merrill Lynch expects that hardware and software makers, including Compaq Computer and Computer Associates, will become even more involved in the services business in the future. For small services firms, a bundled offering of hardware, software, and services from a household name like Compaq could be difficult to compete against.

Lepeak said smaller firms will face a struggle in establishing themselves.

"It's a difficult market to crack because the market is very fragmented," he said. Lepeak added that smaller organizations tend to "keep their heads down" because they're focused on establishing their companies, so they don't have the visibility of larger companies which drives new business. They'll need to work harder and do a good job networking and marketing themselves, he said.

Aberdeen's Jones added that while some businesses may feel more comfortable going with a name brand, start-ups will get attention for their services because they have the ability to pay more attention to the consumers and "frankly, smaller firms wouldn't be able to afford an EDS."

"They [smaller firms] have as good a chance as anybody else, and size isn't the key point," she said.