Global ICT 50 Study: IT Services and System Integration are Losing Strategic Importance in the Fight for Digital Markets
A Booz & Company analysis of the world’s 50 biggest ICT companies reveals a significant market shift in favour of software, hardware and internet companies. Global ICT 50 Study published for the first time / IT Services and Telcos experiencing a crisis in growth and revenues / Growth opportunities primarily in digitising value-added chains and in emerging markets.
The effects of increasing digitisation are leading to dramatic shifts in business models globally and in the ICT (Information and Communications Technology) industry’s provider structure. Telecommunications, IT, hardware and technology companies, along with IT service-providers, are competing with software and internet groups for market share and to maintain their business models in frequently overlapping service areas. In the merciless drive to eradicate the competition, sectoral boundaries are becoming increasingly blurred. A limited number of ICT business models are achieving good growth rates and profits in this environment.: It is only software providers such as Microsoft, Oracle and SAP, along with internet companies like Google - combining an innovative technology core with ICT services - who are realising annual turnover growth of over 10% per annum, with comfortable earnings margins of over 25%. The only other companies achieving comparable growth and sales are offshore IT service-providers such as TCS, Infosys and Wipro, along with a few global hardware and infrastructure providers like HP and Cisco. The flip-side is that classical, more regionally-oriented IT service-providers and telcos are competing for market share and are frequently mired in a structural growth, innovation and revenue crisis. Growth and earnings have been stagnating in both sectors for five years.
Key findings from the “Global ICT 50” study published by Booz & Company
For the study, the global management consultancy investigated key trends, capabilities critical for success and the performance of the 50 biggest providers in the global ICT market.
Four dimensions were investigated for the ranking and put together in an aggregated score. This reflects relative strength in the face of market requirements, together with in-house resources and capabilities: (1) Financial health (revenue and strength of investment), (2) Portfolio offering and structure, from conventional basic IT services through to integrated solutions for the next generation of the “Digital Economy”, (3) Innovation (scope and positioning in growth markets), and (4) Quantitative and qualitative analysis of sales orientation. “In the current ICT environment, everything is up for grabs. Particularly aggressive competition is coming from Over-The-Top (OTT) providers such as Apple and Google. They are generating value-add across and beyond conventional sectoral boundaries, chipping away at the hold of the established players on market positions and market shares via new business models and offers such as Cloud Services, Tablet PCs and digital content and services,” says Olaf Acker, Partner and ICT expert at Booz & Company.
Given this changing landscape of the ICT industry and its potential for growth, many software and hardware players are aggressively entering new markets, such as those in the Middle East. This is being achieved through local subsidiaries that are linked to global heavy hitters such as HP and Huawei. While there is great promise there are also challenges specific to the Middle East. In contrast to western markets, the Middle East region often faces strict regulation, limited Internet penetration, and bandwidth issues, which must be overcome by technology players who are striving to provide global delivery out of their clouds. On the other hand, such hurdles may create opportunities for more local islands of growth through local delivery especially where governments invest locally.
IT services and system integration losing sales shares and importance
The highest ranking players in the ICT 50 are the software giants Microsoft and Oracle (aggregated ranking score 2.9 on a scale from 0-4), followed by IBM (2.8). HP (2.6), Cisco (2.5) and Apple (2.4) see hardware- or infrastructure-focussed providers filling places 4 to 6. SAP ranks 7 with a score rating of 2.4, making it the highest-placed German ICT company. This leading group is therefore comparatively very well-aligned strategically to face the competition. The study also found that the sectoral mantra of recent years - that of gearing the corporate strategy to IT services and system integration and thus dismissing own hardware offerings - is losing its legitimacy in the age of digitisation. “Instead, in our view, providers have particularly good prospects where they are able to provide an integrated solutions eco-system around a strong hardware or software core offering that comes with tailored services and content," says Ramez Shehadi, Partner with Booz & Company. When it comes to earning power, innovation for the digital future and market coverage, eco-system players like Microsoft, with its integrated Cloud offering, and Oracle, with its extensive enterprise app portfolio and database applications specially tailored to its own hardware, are winning over the IT service-providers, who are far more heavily rooted in a classical, less integrated service and legacy solution portfolio. It is especially the regionally-oriented IT service players where the Global ICT 50 analysis reveals significant need for strategic catch-up.
BRIC countries providing dreams of growth for the ICT industry
The Booz & Company study also highlights those regions where future ICT growth can be generated. While today’s sales volumes in BRIC ICT markets are just 10% of the current top 5 markets (the USA, UK, Japan, Germany, and France), with sustained growth the BRIC share is set to double within ten years to around 20%. Already today, these markets are being serviced aggressively by software, OTT and hardware players. IT service-providers and telecommunications companies are currently still lagging behind, with telecoms being additionally constrained by the high investment hurdles inherent to their business model – for instance, mobile phone licences or developing their own network infrastructure.
When it comes to innovation strategy and the associated investments in integrated or digitised sectoral or functional ICT solutions, the divide between the provider groups is extremely wide. Thus the Top 10 globally-leading software and hardware companies investigated for the study are collectively investing over EUR 50 billion per annum in research and development (R&D). By comparison, the Top 20 classical IT service-providers looked at for the study have only a seventh of this sum available in their R&D budgets in total. The consequence is that they are becoming dependent and are not in a position to actively drive forward developments. “If regional IT service-providers and telcos don’t want to be dependent on the innovation trickling down from hardware and software providers in the digital future, they now need to develop the critical capabilities within a short period to expand their offerings into eco-systems and to participate in this via partnerships or acquisitions. In turn, that requires expanding their capabilities for strategic partner or M&A management, and a clear inorganic innovation and growth strategy, for example for combined Cloud and internet solutions, security management or end-device management,” sums up Danny Karam, Principal with Booz & Company.
About the methodology used for the study
For the Global ICT 50 Study, Booz & Company investigated the four part sectors in the digital provider market – Hardware, Software, Telcos and IT Services – for the first time in a joint study. The results of the study and the Global ICT 50 Ranking is therefore based on an analysis of publicly-available data sources particularly in relation to financial parameters, portfolio offering and structure, innovation and sales orientation. These core areas were evaluated using quantitative and qualitative criteria, producing a consolidated score rating for the respective company, also used to derive the sectoral and Top 10 ranking.