IT services firms buck the trend during downturn, CBI finds

IT services companies are seeing strong growth in marked contrast with others in the services industry, according to the Confederation...

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.

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