Gartner: Western Europe heats up to IT services

The IT services market is finally making a moderate comeback in Western Europe, but the growth still doesn’t mean easy money for providers, Gartner analysts said Monday.

After several years of stasis, IT services are set to grow 3.5 percent in 2005 to €163 billion ($213 billion), the research firm predicted. The market will continue to grow at a compound annual growth rate (CAGR) of 3.9 percent between 2004 and 2008 to reach €185 billion, Gartner said.

“We’ve finally turned a corner,” said Gartner principal analyst Nicole France, addressing journalists at the company’s Outsourcing and IT Services Summit in London.

Outsourcing will outperform the overall IT services market in 2005, growing by 4.6 percent, Gartner said. Business process outsourcing (BPO), which has “held up the market” in recent years, will lead the new growth, France said. The BPO market is expected to grow by 6.6 percent in 2005, with financial services and the public sector presenting two key areas of opportunity, she added. Payroll and call centers are also hot areas, according to Gartner.

Through 2008, the BPO market is expected to continue to bloom, growing at a CAGR of 9.2 percent, Gartner said.

But the researcher also predicted a small resurgence in project outsourcing, which Gartner calls discrete IT services. Discrete IT services, which have been curtailed in recent years by cash-strapped companies, are expected to grow by a CAGR of 1.6 percent by 2008, Gartner said.

“Project outsourcing has been the hardest hit during the downturn but that’s beginning to change,” France said. However, these contracts won’t be easily won, she warned. For project deals to proceed a business case has to be made internally to invest, and the plans need to align with the company’s strategy, she said.

Security, regulatory compliance and business intelligence are the areas companies are most willing to invest in, France said. Business intelligence is closely linked with compliance because companies need to have tools to evaluate their performance, she said.

Service-oriented architecture is another key growth spot, France said.

“You only have to look at SAP’s NetWeaver to see how big it is,” France said, referring to the German company’s integration and application platform.

Applications in general are making a comeback, both in terms of companies buying new ones and managing existing ones, Gartner said. And in tandem with an application surge is an increase in offshoring, France said.

Application offshoring is becoming more common as companies become more comfortable with offshore providers, and as Indian outsourcers in particular push these services, she said.

In terms of countries engaged in outsourcing and IT services, the U.K. and Ireland by far out spend their European neighbors. Together, they are expected to represent 38 percent of the outsourcing market in Western Europe in 2005. The U.K. leads the region and is expected to spend €50.3 million on outsourcing this year.

Germany, Switzerland, and Austria are the next group of regional big spenders, together representing 22 percent of the market. France comes in third, with 12 percent, followed the Benelux countries with 8.4 percent. The Nordic countries and Italy tie with 7 percent and Spain and Portugal pick up the rear with a combined 5 percent of the 2005 market.

The U.K. will continue to dominate, according to Gartner. And the Netherlands, which is already the second-largest market for offshore services, is expected to remain strong since it closely follows the U.S and U.K. and benefits from its English language skills, France said.

While IT services are on the upswing in Western Europe, they certainly won’t be a soft sell for providers as companies look more than ever to target their investments at specific business needs, France predicted.

“It’s not an easy game because you have to link what you do and what you charge for to how it helps the customer’s business model,” France said.

The Gartner Outsourcing and IT Services Summit runs through Tuesday.