The importance of IT to companies has moved beyond cost reduction to gaining competitive advantage. With the rate of technology change accelerating, the only real restriction on the growth of IT services is companies’ ability to invest.

Figure 1: Development of the UK market for IT services, 2010-14 actual and 2015-19 forecast

(£ billion)

Source: MBD and trade estimates and forecasts

IT services comprises two major strands: consultancy, including systems integration and strategy; and IT equipment outsourcing and maintenance. Consultancy activity advanced ahead of the full recovery in the UK economy, as pent up demand was released and companies sought to re-assess opportunities to benefit from growing end-use markets.

Figure 2: Development of the UK market for IT consultancy, 2010-14 actual and 2015-19 forecast

(£ billion)

Source: MBD and trade estimates

Some 70% of the consultancy market by value is accounted for by systems integration, with strategy responsible for the remainder:

Figure 3: Segmentation of the UK market for IT consultancy, 2014

(% by Value)

Source: MBD estimates

The outsourcing element of the IT services market is even more strongly affected by company investments, while maintenance continues to grow marginally as the asset base of IT equipment expands:

Figure 4: Development of the UK market for IT outsourcing and maintenance, 2010-14 actual and 2015-19 forecast

(£ billion)

Source: MBD and trade estimates

Outsourcing and maintenance has a more complex segmentation:

Figure 5: Segmentation of the UK market for IT outsourcing and maintenance, 2014

(£ billion)

Source: MBD estimates

The fragmentation of the IT services market by end-use industry is high, reflecting the almost universal use of computer technology and software. The market is, however, headed by information and communications, retail and manufacturing:

The rate of technological development and the much slower development of the economy have fundamental bearings on IT services demand. The major driving forces in technology in recent years have included mobility, big data and the cloud, and these features will continue to have a major influence on the market over the next few years. However, as we approach the ‘internet of things’, and the increasingly widespread adoption of 3D printers, the driving forces of the market will gain impetus in real terms.

Two of the key driving forces for growth in IT services are the capital stocks of ICT equipment and software. The dynamic nature of technology is illustrated by the fact that the total capital stock of assets expands strongly each year. Economic improvements have also contributed to an increase in the stock of assets, reaching 1.23% for commerce and industry in 2013. Financial institutions built their gross capital stock of ICT equipment more prolifically than the non-financial sector in the period to 2013, with growth of 0.85% recorded in both 2011 and 2012. However, growth then slowed to 0.59% in 2013.

Growth in gross capital equipment stock also increased far more strongly in central government than industry and commerce, though this fluctuated from 3.5% in 2011 to just 1.01% in 2012 and then back up to 2.21% in 2013. These remain strong growth rates given restrictions on public spending, though there have been even stronger levels recorded in local government. Moreover, such growth is rising, with gross capital equipment stock increasing from 3.89% in 2011 to 4.78% in 2012 and 5.97% in 2013. This indicates a shift in local government focus to technology rather than manpower as spending restrictions have been imposed on the sector.

Figure 7: Gross capital stock of ICT and other equipment, by sector, 2009-13

(£ billion)

Source: MBD and trade estimates

The growth of capital stocks of software and databases in the non-financial industry and commerce has been much stronger than for ICT equipment. Growth has fluctuated at around 3.4% per annum over the review period, although there was less investment in 2011, before an increase of 3.36% in 2013. Gross stocks of software and databases by financial institutions have also increased throughout the review period, though growth rates have declined. Growth of 4.73% was achieved in 2010, but this slowed in both 2011 and 2012, falling to 3.11% in the latter year. Growth then dropped further to just 1.81% in 2013.

The growth of gross capital equipment stock in central government has been stronger than in industry, though this contrasts markedly with gross capital stocks of software and databases, which have been held constant in central government in recent years. While this partly reflects spending restrictions, the absence of growth is surprising as efficiency initiatives should form part of spending restrictions. Local government growth in gross capital stock of equipment was marked, but the sector has strongly rationalised gross stocks of software and databases. Between 2009 and 2013, gross stocks have been reduced by almost 41%.

The IT services sector includes a mix of very large international IT-related companies, a similar spectrum of international management consultants with activities in IT, and a wide range of smaller specialist operators. Micro companies are very active in the sector as is typical in consultancy markets, where low capital investments are required to start a business and contracts can come down to personal relationships. This has led to a very high level of industry fragmentation.

The industry comprises both large international specialists in IT (often with an equipment involvement), and specialist consultants. Most of the main management consultants also operate in the industry, accounting for an estimated 9% of the IT consultancy market, with IT representing 18.5% of their turnover.

There are two types of companies active in the sector. The consultancy side, which is growing in number and where growth levels are increasing; and other services primarily involved in outsourcing and maintenance, which is declining as these functions are increasingly absorbed alongside consultancy activity. There is also an emerging, but currently small, group of companies that specifically address the IT needs of facilities management operations.

Figure 9: Changes in the structure of the IT services sector, 2010-14

(Number of businesses)

Source: MBD analysis of government data

IT services have evolved from largely introspective use for cost and efficiency purposes to the gathering, handling and analysis of vast volumes of data, which is then directed to the appropriate people within an organisation in a meaningful way. The B2C market is effectively evolving relationships that have traditionally been the province of the B2B market. The rate of information generation is increasing exponentially and if the challenges of analysing vast quantities of structured data gave birth to big data, the successful analysis of unstructured data will also lead to new IT and procedures, offering a competitive advantage to those utilising new technology. This will evolve from a marketing advantage to a competitive necessity rapidly as capabilities become more widespread. The industry can also be expected to increasingly adopt 3D printers, which will have profound effects on manufacturing practices in some sectors. When these developments are placed alongside the long-term move towards the ‘internet of things’, demand for IT services will clearly continue to grow.