Market Trends: the outlook for software and IT services to 2010

Phil Codling, Senior Analyst and Service Manager

This month sees the publication of Market Trends 2006 from the Holway@Ovum service. Market Trends is Ovum's annual, definitive analysis of the state and future of the £26 billion UK software and IT services (S/ITS) market. Despite the decidedly mature status of the overall market, there's lots of change and opportunity to highlight. For while our topline expectations haven't shifted much (we see total growth around the 6% mark this year and next, and closer to 5% by the end of the decade) there's plenty of change afoot in the key service lines and vertical subsegments that make up S/ITS.

Outsourcing under pressure

Outsourcing, the key driver of IT services growth in the UK in the past few years, is under more pressure than we've seen for some time. Our analysis shows a drop in new deal value in the market and many contract renewals/restructurings are seeing values trimmed. Overall, we have reduced our forecasts for outsourcing market growth by up to 2% per annum in the coming years, with growth now dipping to 5% by 2010.

Software steps up a gear

We have revised upwards our forecasts for software products. This market frankly surprised us with growth of 8% in 2005. This wasn't a short-term blip, and we believe that rates in the 8-10% range order can now be sustained in the coming years, especially as software-as-a-service enters the mainstream. We've talked before about the buoyancy in business intelligence, but the increasing dependence of organisations on software more broadly will continue to drive the market. So, for the foreseeable future, areas like ERP and even system software are set for growth above wider S/ITS market rates.

Consulting and SI: a welcome return

Sadly the big rises in software spend aren't fully reflected in our project services forecasts. On the whole, software is becoming increasingly easy to integrate and operate. Moreover, the disruptive, deflationary impact of offshoring is helping to keep market growth trimmed. Nonetheless, the return of the CIO's 'growth agenda' is helping to sustain the generally high levels of work volume and utilisation in the industry this year and we've seen enough positive signs to edge our growth forecasts up a little, albeit to nowhere near pre-2000 levels.

Don't forget the private sector

Government S/ITS spending continues to outpace the private sector, and now accounts for 30% of the total UK market. That said, we see public sector growth rates dropping off towards the end of this decade, despite the impact of shared services. Meanwhile, some areas of the commercial sector are seeing the return of more robust market conditions than we have seen for some time, as CIOs put a renewed 'growth agenda' for IT into action. Banking in particular is faring well, with regulatory change in both the retail and wholesale markets helping to push growth above 6% this year and next.

Source: Ovum

As well as market analysis and forecasts, Market Trends 2006 updates Ovum's view on the ranking players in UK S/ITS. This year we've seen a change at the top, with IBM reclaiming the No.1 spot from EDS. Revenues at both firms underperformed the market last year, but IBM's 1% growth was enough to inch it ahead of its rivals. Meanwhile, the offshore players continue to take market share - we now find three India-based firms in our UK top 40.

Phil Codling is a senior analyst and service manager for the Holway@Ovum advisory service. He leads Ovum's research into the UK software and IT services (S/ITS) market and also contributes to the work of Ovum's Outsourcing practice.

Market trends 2006: UK software and IT services to 2010 is available now. For more information on this report or the Holway@Ovum advisory Service please contact Suzana Murshid, sum@ovum.com.