U.S. Service Vendors Target--and Profit From--the Midmarket

U.S. organizations will spend approximately $268.7 billion on external services in 2005, representing a 6.6 percent increase from 2004, according to a new study by IDC. "U.S. Services Market 2005-2009 Forecast and Analysis: Opportunities by Company Size," analyzes reported and observed trends and events in 2004, and their predicted impact for the 2005-2009 forecast period. The U.S. services market is expected to grow at a compound annual rate of 7.1 percent through 2009 to an estimated $355 billion, and the SMB market is expected to grow along with it. Increased competition in the services market has resulted in lowered prices, and affordability and packaged offerings are now enabling midmarket businesses to acquire more enterprisewide solutions. "The U.S. services market will continue to challenge vendors in 2005 with expectations for lower prices, faster execution, and deeper process expertise," says Rebecca Segal, vice president of worldwide services research at IDC. "Vendors are going to continue to respond with improved business process applications, global sourcing strategies, and a willingness to build relationships." The study focuses on company size and investigates growth opportunities in three services markets: long-term outsourcing deals, project-based services, including consulting and systems integration, and support and training. "When we compared these three, and you look at the growth rate, the growth rate was highest in the outsourcing bucket," Segal says. "That told us a lot about where the services market is going and why." SMBs accounted for 23 percent of overall services spending in 2004. As the costs of IT and associated services become more affordable to the SMB market, Segal maintains their share of the market will continue to grow and reach 27 percent by 2009. Adding to the momentum is a growing acceptance of outsourcing both IT and business process by SMB companies and an increased targeting of the SMB market by service vendors offering more affordable enterprisewide applications. Segal cites the development of the economy and the impact of global sourcing as the main reasons for this trend. "During the early part of the decade there was an economic trend that companies weren't going to pay for these expensive IT consulting projects anymore," she says. "Now you can get consulting and development assistance for a lot less than what you paid in 1999. The IT consulting firms suffered a lot before developing a global sourcing strategy and have made better use of technology to deliver services. By doing so, they can now offer more affordable solutions to SMBs and still make money." Related articles: SMBs Are Slow to Adopt SaaS SMBs Are Adopting Right-Size CRM EMEA: The Next Hosted IP Hot Spot?