The services market (based on various estimates) – is expected to grow from 600 plus billion to a little less than a trillion dollars in the next five years). What are the trends that we see here?. We are seeing forms of different business models co-existing here. There are service players with 30X valuation and there are service players with less than 1X valuation.
The services industry is still a fragmented market where the top 20 global players account for approximately 35% of the market opportunity. Best illustration of fragmentation – An analysis of top 100 global consulting & outsourcing deals show that over a period of years the number of players competing for such deals have steadily increased! – from 26 to 45, tracked annually in the last three years. Today, the mix of outsourcing contracts service players are getting have a large quantity of smaller and medium sized outsourcing deals. Mega-deals are few and far between. This makes room for many service players to survive and some grow faster than others.
Be that as it may what are the threats to service players? The disruptive threats are SaaS & Utility computing. For all the success of SaaS players, the general feeling is that the service providers have not benefited proportionately. For most of the service players, attracting and retaining talent would be a key differentiator for success. The weaker entities would be eventually on a death march but it’s a long time to come and not a slam bang affair like what we typically see in product space. A typical due diligence of service firms for acquisition throw up lot more issues – people centric, unique & strange legal commitments extended to customers etc making acquisition a tougher process.
The whole service industry and enterprise software industry plays on the customer inertia and lack of a real alternative. Whats that disruptive model that would shake up the services industry – clearly offshoring played that role to an extent but the laggards seem to be catching up here/atleast make up an appearance of catching up. Seen from a service industry perspective, next technology breakthrough heralding new opportunity could help them rejig their model – like what BPR/ERP wave did earlier or the dot com era – SOA is still many years down the line. Seen from a customer perspective, how does one lock themselves out of this ? Seen from an investor perspective, how to value service companies where increasingly the differentiation factors seem to be just the scale and historical presence. These are definitely key concerns. Innovation inside consulting and service organization needs a different mindset to foster and manage - clerical approach towards managing growth/improving operating metrics shall have deleterious effects.
To answer Sharad Sharma’s question on convergence and competitive strategy of service players , the answer is – there is no doubt it would be very difficult for well established players to change their business models and their organizational DNA to come out with a winning competitive strategy. The offshore players /global players with significant offshore presence (Accenture, IBM) have in a way grown faster on this count. All indications are that the stronger players would continue to do so in the near future. Consolidation is a far away but tiering of service providers in terms of scale, expertise, geographical reach growth rates and capabilities would happen and this would happen faster than were seen in the past.