IT services companies are seeing strong growth in marked
contrast with others in the services industry, according to the
Confederation of British Industry (CBI).
A CBI survey of more than 140 UK professional services companies
in the past three months found that profitability fell at a record
rate for consumer services companies and was flat for business
services firms.
Neither consumer nor business services firms were positive about
business expansion in 2008 and were concerned about their ability
to raise external finance, unlike IT services companies that appear
to be riding the crest of a wave.
What has made technology services seemingly invulnerable to the
economic realities others in the service industry are having to
grapple with?
The CBI report attributes the relative success of IT services
companies to fast rises in volumes of business, but does not
explain what has driven those volumes.
Robert Morgan, director of supplier support company
Hamilton Bailey, said
the reason is simply that companies tend to outsource in a
difficult economic climate.
He said the outsourcing industry usually benefits from an
economic downturn as companies attempt to balance the books by
reducing capital expenditure by buying services and transferring
these costs into operation expenses.
"This financial re-engineering makes the balance sheet appear
healthier and can help boost the value of a company if it is sold
off," said Morgan. "This is a way of spreading costs almost
invisibly in order to get through a difficult trading period, and
the net effect is that the sector looks buoyant."
Sridhar Vedala, managing director of global sourcing at
outsourcing consultancy
EquaTerra Europe, said
companies under pressure to contain costs perceive IT outsourcing
as opportunity to bring about cost savings, reduce fixed cost
investments and improve overall effectiveness.
"The demand for outsourcing has, in many ways, amplified because
of the downturn. Also almost all IT services companies are now
leveraging global labor arbitrage through offshoring which enables
them to manage the impact of the downturn," Vedala said.
According to Morgan, IT services companies are the main
beneficiaries of companies' efforts to economise as they attempt to
cut overall costs by consolidating onto single ERP systems, contain
costs of renewing and servicing desktop computers, and invest in
networks to improve overall business performance.
Although IT services appears to be bucking the trend by doing
well while the rest of the services industry is being adversely
affected by the economic downturn, the trend turns out to be
typical during any economic downturn.