The UK computer services market was worth £18.57bn at the end of 2003, a 3.2% rise on 2002. After rapid growth until 2001, the industry has seen a sharp fall since 2001, reflecting a decrease in IT budgets, with major clients becoming much more cost-conscious and difficult to penetrate. Today, major clients are only investing in new projects after careful evaluation of the return on investment.
The market consists of four sectors: systems building; support services; operational services; and planning and design. As IT budgets have been cut back, organisations have postponed new projects, which has led to reduced interest in ad hoc, single-project contracts. This has hit demand for systems building and planning and design services. Operational services and support services, which tend to be based on long-term contracts, have fared better, although support services tends to be a mature sector of the market.
Operational services have been the main growth segment of the market since 2001 and, over 2003/2004, some very large outsourcing contracts have been awarded. The nature of many of the largest contracts has changed. Large organisations, especially in the public sector, now use consortia on major IT contracts rather than a single supplier. Lead contractors build consortia using a range of companies, with companies chosen on the basis of their skills and reputation rather than size.
As market growth has slowed, since 2001, so there has been an intense scramble for market share. Competition has been aggressive in all areas of the market, which has led to consolidation as larger firms have acquired smaller players and as the largest players have merged to improve scale and margins. Recent mergers include IBM and PricewaterhouseCoopers (PwC), Logica and CMG, Capgemini and Ernst & Young, Schlumberger and Sema, and the subsequent takeover by Atos Origin of the merged SchlumbergerSema.
Among major organisational buyers, the Government has become an increasingly important client for the services, given large-scale plans to adopt e-Government and increased investment in the IT infrastructure for public bodies like the National Health Service (NHS).
The computer services market has experienced a change in its fortunes. High annual growth rates have given way to more modest annual increases in revenue. The market is now set on a mature phase of growth. Even after 2004, when Key Note predicts the fortunes of the industry will improve, annual market growth will be less than 10% in value terms. Key Note expects further consolidation in the industry and a growing convergence between computer telecommunications service providers. In the next 5 years, clients will be gaining the upper hand in the market and will be less willing to tolerate under-performance on contracts or projects.
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