While 2010 saw the beginning of the recovery in the software and IT services market, current trends suggest that 2011 will show a confirmation of the upswing. Leading research and consultancy firm Pierre Audoin Consultants (PAC) says innovation will also be a key driver this year.
Building on 2010 Recovery
Following a significant market contraction in 2009, 2010 was the year of the recovery of the software and IT services market. Most countries returned to growth, resulting in a global average growth of 4%* in software spending (to €203bn) and an average of 1.5% for worldwide IT services spending (to €502bn). The software market benefited from a clear rebound in licence sales, but the services market remained challenging, with a substantial increase in the number of new engagements offset by continued pricing pressure.
In the software market, the three major segments (systems infrastructure software, tools, applications software products) grew at similar rates (between 3.5% and 4.5%). In IT services, while hardware maintenance and project services remained more or less flat, outsourcing grew at 3.5%.
However, IT buying behaviour varied by region. The highest growth rates were in Middle East and Africa (over 7% for both software and services), Latin America (6% and 5%) and Asia-Pacific (6% and 3%). Growth in North America was more limited (4.5% for software, 1.5% for services). Eastern Europe, the worst-hit region in 2009, recovered slightly with growth of 4% and 3%. Western Europe produced the worst results, with a meagre 1.5% growth in software and a 0.5% contraction in services, and, worryingly, Italy, Portugal, Spain, the Netherlands and the UK were still contracting.
The situation was much better in the BRIC countries, with India leading the way (15% growth in software and 14% in services) ahead of China (15%, 11%), Brazil (the most mature of the BRIC markets) registered 6% growth in both software and services and Russia (7%, 4%) following a dramatic slump in 2009.
*All the growth rates mentioned above are in local currency, ie, exclude the impact of currency fluctuations. In “real” €, the worldwide software market grew +10%, the worldwide services market +7%. In “real” US$, growth was much lower (+5.5% resp. +2%).
2011: Consolidating the Recovery
In 2011 PAC expects a consolidation of the recovery, with a slight acceleration in software spending (5.5% growth in local currency) and a more noticeable bounce in IT services spending (4% expected in 2011 against 1.5% in 2010).
By region we expect the Middle East and Africa to lead the way with 10 % growth for software and 9% for services, followed by Latin America (8% in both segments), Eastern Europe (7% in both segments), APAC (7%, 5%), North America (5.5%, 4%) and finally Western Europe with 3.5% in software and 2.5% in services.
Why a Gradual Recovery?
First of all, the challenge of consolidating and standardizing both the infrastructure and application landscapes still offers substantial growth opportunities for IT suppliers. However transformation aspects are also gaining momentum, with technology drivers such as virtualization, cloud computing, SOA and mobility often being deployed in combination. Integration, networking, flexibility, cost efficiency, ubiquity and process orientation are key criteria in most transformation projects.
There are several other process areas and technology areas generating substantial dedicated investment. For example: embedded systems, the ‘internet of things’, collaboration, CRM, information management, social networks, compliance and sustainability. And not forgetting industry-specific topics like PLM, multichannel integration, post merger integration, e-government, e-health, tele-health, and smart grid or smart metering.
“Although both the economic and the political environments remain unstable in the PIIGS countries, Tunisia and Egypt, most SITS companies are back on track for growth in 2011,” says Christophe Châlons, Chief Analyst of PAC. “Cost saving and improving operational efficiency remain key objectives, however growing the business is back on the top of the priority list. This means developing business with both existing and new customers, in new geographies, bundling all sales channels. It also implies reducing time-to-market and fostering innovation.”
… But it’s Not Yet Time for Celebration!
PAC cautions that this short term improvement of the market environment is not yet a cause for celebration. A substantial part of the current investment is aimed at decreasing the total cost of IT operation in the medium term, taking advantage of the new Cloud delivery models – like SaaS or IaaS. This leads most traditional IT-suppliers, consultancies, systems integrators, outsourcers, software vendors, hardware manufacturers and VARs to reconsider their business models. Meanwhile, the growing maturity of the market is making the IT supplier community increasingly concentrated, with vendors accelerating their M&A activity to achieve greater scale, geographical expansion, portfolio diversification and build new business models.
Additionally, the convergence of the IT and telecom and the growing importance of IT in most products and services enable new types of suppliers to enter the market, such as telecom operators, equipment manufacturers and engineering companies.
Innovation is the Key
The good news is the growing readiness of the users to pay for real added value and meaningful innovation. However the related “innovation” budgets are expected to be generated by costs savings in “commodity” products and services.
“Users and decision makers are increasingly ready to implement standards with limited customization. They are also looking to implement consumer standards in the business IT – both pre-requisites for most cloud models. The reduction in the number of IT suppliers is gathering momentum, with users looking for a smaller number of preferred suppliers to support them across multiple regions”, says Eric Isabey, CEO of PAC Group.
About Pierre Audoin Consultants (PAC): PAC is a global market research and strategic consulting firm for the Software and IT Services Industry. PAC helps IT vendors, CIOs, consultancies and investment firms by delivering analysis and advice to address a range of growth, technology, financial and operational issues.
For more information, please visit PAC website at www.pac-online.com.