Anti-Cyclical Component of IT Services Will Help Protect Market From Turmoil, Says IDC

MADRID, SPAIN — NOVEMBER 18, 2008 – IDC forecasts that the IT services market will only grow by 2.6% in 2009 and by 4.1% on average over the next five years. This is a downward revision of 2 percentage points for 2009 and 0.7 percentage points for the next five years from our forecast published in late August. This major revision is due to the unprecedented turmoil in credit and capital markets, which is already spilling over into the real economy.

During the first half of 2008 we hardly noticed the effects of the downturn on the IT services market, whereas the third quarter saw the beginning of a period of huge uncertainty across the globe. IDC believes the last quarter of the year will show the first real sign of the crisis, but the full impact will only come in 2009. We expect the market will continue to show only slow growth until the middle of 2010, and that it will then start to grow faster, by around 4% to 5%, until the end of the forecast period.

''We expect demand for IT services to suffer for at least the next 18 months and that project services – consulting, implementation, training – will be hit strongly, while some outsourcing and managed services may even benefit. In our view, IT consulting will suffer a major blow almost immediately, followed by IT training, and finally implementation projects,'' said Laura Converso, research manager, IDC European Software and Services.

The U.K., Spain, and Ireland will be the most affected, as these economies are not only expected to contract in real terms but have also suffered the most drastic falls in terms of forecast GDP growth in relation to the previously released projections. Despite this decline, Spain will continue to be the fastest growing services market in Western Europe, as the country still needs to catch up with the rest of Europe in terms of IT adoption.

Project services and support/training will, at least initially, bear the brunt of the slowdown, given these segments' greater exposure to "discretionary" budgets. However, many companies are not only delaying discretionary purchases but are also looking for ways to reduce essential day-to-day spending. We expect IT consulting and development of custom applications to contract during 2009, leading to an overall 0.7% growth for project-oriented services in 2009. In the support/training segment, we expect hardware deploy and support and IT training activities to suffer a major blow and be among the first areas for cost cutting. As a result of this, the overall support/training segment will shrink by -1.3% during next year.

Outsourcing will be relatively protected from the turmoil, but we expect slightly lower growth due to strong price pressure and a fast move to lower-cost locations. We expect the overall IT outsourcing segment to grow by 6.8% in 2009. IDC does not expect companies to re-insource their IT activities, but the customer base will be reduced and customers will, when possible, ask to renegotiate contractual conditions.

Fierce competition and price pressure will be the name of the game in the next 12 months, and vendors will do their best to keep the business with their key clients ongoing and, when possible, to increase share of wallet by offering aggressive price cuts. India-based vendors are expected to be particularly aggressive, as they have been strongly hit by the crisis in the U.S. and are exposed to the financial sector, and will therefore focus on the European market to compensate for other declines.

This IDC study, Western European IT Services Market 2007-2012, a 4Q Forecast Update (IDC #Q87Q, November 2008), provides an update of the Western European IT services forecast published in September 2008 and includes a quantitative analysis of IT services spending by 12 foundation markets and 16 countries.

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