New IDC Report Analyzes Profitability Trends in the Worldwide Services Market, Assisting Service Vendors in Their Strategic Planning Process

A new study from International Data Corporation (IDC) analyzing profitability trends in the worldwide services market shows that revenue within the services industry increased from 2007 to 2008, decreased from 2008 to 2009, and then steadily increased from 2009 to 2011. In comparison, profitability peaked in 2009 as vendors slashed payrolls to account for the dip in revenue and has slowly declined as vendors retool their workforce to match the return to revenue growth.

"Given the constraints of limited capital, services vendors must choose where to invest, which is the purpose of this new research," said Chad Huston, senior analyst,Worldwide Services. "By helping service providers theorize about which segments of the services industry provide the greatest return per amount invested, the study assists in the pursuit of profit maximization."

Key findings from the study include the following:
-From a profitability percentage standpoint, deploy and support engagements are estimated to be the most profitable service, followed by business consulting, IT consulting/systems integration/custom application development in aggregate, IT outsourcing, and finally business process outsourcing (BPO).
-Over the past five years, consulting-oriented firms have had the only consistently positive profitability growth. Outsourcing-oriented firms had high profitability growth from 2007 to 2009, which turned negative from 2010 to 2011. Offshore-oriented firms were similar to the vendor group of outsourcing-oriented firms throughout the time period, though less volatile.

"Recently, buyers of IT services have sought to decrease the number of service providers they have contracts with, and a shift in the traditional service delivery model has introduced new entrants into the marketplace," added Huston. "At some point, the number of vendors must begin to decrease as the already converging traditional IT services vendor playing field has to compete with new entrants. But until that point, price competition will continue to drive down profitability."

IDC's report also examines seven factors that can influence profitability in any given service market, such as use of offshore labor or ownership of intellectual property. "These seven factors or differentiators help to explain why a given vendor or group of vendors can achieve significantly higher or significantly lower profitability than the average," said Rebecca Segal, vice president, Global Services Markets and Trends.

The IDC study, Profitability in the Worldwide Services Market (IDC #237764), analyzes recent trends in profitability in the worldwide services market. To achieve this, profitability is first shown at the overall services market level. Next, profitability is estimated by engagement type, with commentary provided around each engagement type's profitability. Finally, the vendors included in this analysis are segmented into three vendor groups – consulting oriented, outsourcing oriented, and offshore oriented – and their relative profitability is reported and analyzed.