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it-and-technology-services-industry-software-financing-spotlight

Industry Spotlight: IT Service Sector and Emerging Technologies

Industry Overview

The US information technology (IT) services industry includes about 100,000 companies with combined annual revenue of about $290 billion. Major companies include Computer Sciences Corporation (CSC), Unisys, and the technology consulting arms of IBM and Hewlett-Packard. The computer facilities management segment of the industry is highly concentrated: the 50 largest companies generate about 80 percent of revenue. The rest of the industry is concentrated: the 50 largest companies account for about 50 percent of revenue.

Worldwide IT services revenue is about $800 billion, according to Gartner. Leading exporters of computer and technology services include India, the US, Israel, and China, according to the World Trade Organization. Major companies based outside the US include Fujitsu (Japan), T-Systems International (a subsidiary of Germany’s Deutsche Telekom), and Cap Gemini (France).

Competitive Landscape

Demand for IT services is driven by rapid technological advances, but spending for these expensive products depends on the health of the US economy. The profitability of companies depends on offering technical expertise, innovative services, and effective marketing. Large companies have advantages in broad service offerings and global reach, which give them the ability to provide outsourcing services to big corporate customers. Small companies can compete effectively by specializing in market niches or by partnering with larger companies that want to broaden their mix of services.

Products, Operations & Technology

IT companies mainly provide consulting, systems integration, data processing, and technology outsourcing services to business customers. Computer systems design, development, and integration services account for about 35 percent of industry revenue; application design and development services, 25 percent; and technical support, 10 percent. These companies help clients use computers, software, and communications systems more efficiently. In addition to providing advice on using computer systems, they frequently recommend hardware and software systems to their customers. Firms provide a variety of associated services, including business function outsourcing, data warehousing, systems planning, enterprise resource planning, and training.

Companies may be pure consulting operations, or also operate outsourcing and data processing functions, such as IBM and Hewlett-Packard. The types of contracts firms have with customers depend on the service being rendered. Data processing and outsourcing contracts typically last for many years because of the substantial initial cost. In a typical outsourcing contract, the IT company operates (and may own) the computer systems of a client, either operating them at the customer’s location or at a centralized data center that serves multiple clients. Consulting contracts are shorter, usually lasting less than a year, and typically specify either a fixed project cost or services billed at hourly rates.

IT operations most often begin at a service provider’s website. Large companies like IBM’s Global Services division use the Internet to introduce prospective clients to their services. Once a contract is signed, an IT provider can assist customers with on-site staff, live teleconferencing or webcast tutorials, and longer-term online support (via email and instant messaging between IT staff and customers). Primary applications for IT include aligning IT initiatives with overall business goals, improving IT infrastructure efficiency, and creating a flexible service-oriented architecture that combines systems development with business processes.

Sales & Marketing

The customers of IT firms are often the IT departments of corporations and government agencies. Companies typically offer time-and-materials contracts or fixed-price contracts, or some combination of both. Major contracts are often secured after a bidding process. For contracts that also involve the purchase of hardware or software, consultants often partner with a specific hardware or software company to provide a comprehensive bid. Marketing is largely through personal selling by executives and senior managers, or through reputation within a particular industry.

Because the most effective use of computer technology is different for different industries, IT companies often specialize in a particular industry, such as health care or financial services, or in segments within an industry. Large companies have service groups for different industries and market their services to those groups specifically. Due to the complexity of their services, companies often customize their prices for each service, accounting for the required skills and the estimated cost of providing the service.

Competition comes in multiple forms, including offshore providers, service arms of large global technology firms, niche providers, and companies that rely on their own internal IT resources.

Pricing can be competitive, particularly among large IT providers. Competitors put significant investments in creating closed and proprietary IT platforms in order to lock customers into a specific IT system. That can drive up prices as a result. Firms also work to develop differentiated and premium IT products that allow them to charge more.

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