Global Outlook for Software and IT Services

Software and IT-related services have recovered from their collapse in 2000-01, and they are expected to post a 3.9% compound annual sales growth in 2008–10. The double-digit growth of the late 1990s will not return for a few years. Robust world economic growth, however, has triggered a sustained rebound of sales.

This rebound is mainly due to the economic expansion in China and India, which has had two main effects on demand: first, it has opened a new IT consumption market; secondly, outsourcing and increased sales in developing countries have helped multinationals regain stronger profitability and create more space for IT-related spending. Economic development has also benefited financial institutions—a key client industry for software and IT-related services—which has led to an increase in their expenditures on data processing services.

Software programming and services has been the brightest spot, as firms expand their IT infrastructure to better use the Internet, new wireless communication products, and their own data. In particular, the implementation of ERP applications like SAP or Oracle, CRM and supply-chain applications, or data security and back-up software have led corporate demand.

Furthermore, private consumption of entertainment-related software, such as video games, is now booming, in line with the rising penetration of broadband connections. In addition, database activities and online distribution of electronic content are expected to grow rapidly, especially Internet service providers and Web search portals.

Consumer technologies, like Google’s e-mail application Gmail, are also invading corporate computing, threatening traditional desktop applications like Lotus or MS office. In nominal sales, however, they should remain marginal within the industry, as pricing power for these services remains low.

In contrast to other segments, more fluctuating investment in computer equipment—far more costly—has hampered growth in systems programming and hardware consultancy. Indeed, more sedate ideas such as return on investment and six-month horizons are in vogue in these domains.

On the supply side, the massive cycle of consolidation initiated after 2000–01 has largely run its course and the pace of bankruptcies and layoffs has slowed. Nevertheless, new entrants originating mainly from India have led to an increase in international competition and more-than-adequate supply, bringing new pressures for consolidation.

Moreover, the increasing success of open-source and Web-based applications should significantly affect revenue models for developers, fostering innovation and cost-saving on the one hand but reducing pricing power on the other hand. Software should increasingly be seen as a non-proprietary service accessible via the Web rather than large up-front license purchases. As a consequence, and despite strong sales prospects, we do not expect any surge in the prices of software and IT-related services, which in turn should mitigate any increase in profit margins. This could nurture further outsourcing or integration of the market, as illustrated by the recent acquisition of MySQL and BEA Systems by competitors.