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IDC Report: services market booming as organisations prioritise digital transformation

16 May 2018

IDC has released a report detailing the performance of the IT services and business services market for the second half of 2017, with the analyst recording revenues of (USD) $502 billion, an increase of 3.6% year over year.

IDC has also released the results for the services market for the full year 2017, with revenues coming in just shy of the $1 trillion mark, with an expectation for 2018 to exceed these figures.

Year-over-year growth was around 4%, which slightly outpaced the worldwide GDP growth rate.

IDC says such healthy growth figures for services reflect stronger business confidence bolstered by a brighter economic outlook, a shared sense of urgency for large-scale digital transformation, and - at least in certain pockets and segments - new digital services beginning to offset the commodification of traditional services.

IDC program director for global services markets and trends Xiao-Fei Zhang says digital transformation growth was a particular driver.

"As customers look to digital transformation initiatives to stay relevant in the new economy, vendors face both opportunities and challenges.

"While automation and new cloud delivery models reduce overall price, new digital services will require clients to spend more time and resources to modernize their existing IT environment,"

Services segments

Looking at different services markets, IDC says project-oriented revenues continued to outpace outsourcing and support & training, mainly due to organisations freeing up pent-up discretionary spending from earlier years and feeling the need to "digitise" their organizations via large scale projects.

Specifically, project-oriented markets grew 4.6% year over year to $186 billion in 2H17 and 5% to $366 billion for the entire year.

Most of the above-the-market growth came from business consulting: its revenue grew by almost 7.8% in 2H17 and 8.2% for the entire year to $115 billion.

In large digital transformation projects, high-touch business consultants continue to extract more value than mere IT resources do, with most major management consulting firms posting strong earnings in 2017. IT-related project services, namely custom application development (CAD), IT consulting (ITC), and systems integration (SI), still make up the bulk (more than two thirds) of the overall project-oriented market.

While slower than business consulting, IDC says these three markets showed significant improvement over the previous year.

It says CAD, ITC, and SI combined grew by 3.7% year over year to $251 billion for the full year 2017.

IDC says it also believes that some 2015 and 2016 projects were either pushed out to or only started ramping up in 2017, which helped to drive up spending in 2H17, which coincides with the strong rebound on the software side as IT project-related services are largely application driven.

Because large digital projects not only drive up "new services" but also pull in "traditional services," IDC believes that the actual volume of IT project services grew even faster in 2017 but was offset somewhat by lower pricing.

Outsourcing

In outsourcing, revenues grew by only 3.3% year over year to $238 million in 2H17.

Application-related managed services revenues (hosted and on-premise application management) outpaced the general market significantly, growing more than 6% in 2H17 and 5.8% for the entire year.

IDC says buyers have leveraged automation and cloud delivery to dramatically reduce the cost to operate applications, for example, infusing artificial intelligence into application life-cycle activities to drive better predictive maintenance and application portfolio management.

However, in their continuing drive for digital transformation, IDC says organisations are increasingly relying on external services providers to navigate complex technical environments and supply talent with new skills (cloud, analytics, machine learning, etc.).

The analyst also forecasts that application outsourcing will continue to outpace other outsourcing markets in the coming years as digital transformation also requires organisations to standardise and modernise their existing application assets.

On the infrastructure side, while hosting infrastructure services revenue grew by 4.9% in 2H17, positively impacted by cloud adoption, IT Outsourcing (ITO), a larger market, declined by 2%.

Combined, the two markets were essentially flat, with IDC stating that while overall infrastructure demand remains robust, the ITO market is negatively impacted the most by "cloud cannibalisation" across all regions.

This refers to the reduction of cloud pricing - particularly public cloud - happening at a quicker pace than new demand can make up for.

Geographies

On a geographic basis, larger mature markets posted slower growth in 2H17.

The United States, the largest services market, grew by 3.5%, in line with the market rate, while Western Europe, the second largest market, only managed 1% growth.

This was offset partially by stronger growth in Japan. In the United States, overall economic prospects remain sanguine and corporate spending robust, especially in funding new projects to acquire new capabilities and tools.

In Asia/Pacific (excluding Japan) (APeJ), Australia's growth remained at 3.9% in 2H17 with some of the large IT initiatives in 2015 and 2016 ramping up revenues in 2017 and onward.

But Australia overall is a large and mature market (second largest in the region after China), dominated by large clients in traditional industries and the procurement focus is primarily on cost cutting and improving operational efficiency.

IDC forecasts Australian growth to be much slower than other APeJ markets (by less than half).

Both China and India grew by around 10% in 2H17 due to strong economic growth and large initiatives to invest in new technologies.

Research manager for IDC's Worldwide Semiannual Services Tracker Lisa Nagamine says, "The demand for a wide range of digital solutions continues to drive the steady growth in the services markets, but it is still cloud-related services that are having the biggest revenue impact."

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