Analyzing Profitability in the IT Service Space: The Haves and the Have-Nots

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Analyzing Profitability in the IT Service Space: The Haves and the Have-Nots

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Research Abstract

The information technology (IT) services industry continues to grow at double-digit rates. Business is booming. Demand exceeds supply. The digital economy is here; however, its benefits remain elusive without the facilitation of IT services. There are few better places to be right now than IT services, especially e-business professional services. The present looks bright and rosy; the future looks even better. But why aren’t we basking in the glory of our success? It boils down to one word: profits. Many IT consultants and professional services providers struggle with profitability. Profits are either too low or, in many cases, nonexistent.
ITSMA reviewed the financial data of a selection of public IT consulting and e-business professional services companies to analyze recent financial performance and uncover the trends in profitability. Through this analysis, data from our benchmarking research, and informal discussions with representatives of member companies, ITSMA has attempted to answer the question, “Where is the margin leverage in the IT professional services business?”
It used to be that IT services managers, who primarily worked for the services arms of product companies, didn’t have to worry about profits. If the products were selling and the customers weren’t screaming, all was well. Those were the “good old days,” before third-party services companies, open systems, and e-business. Today, most services provider organizations are structured as profit centers rather than cost centers. They are either pure services companies chartered to return profits and improve stakeholder value or services arms of product companies with explicit annual revenue and profit targets. With the exception of a few holdouts, over the next two to three years virtually all IT services providers will be profit centers. As such, they face the daunting task of improving profitability. Even the tides have turned for the emerging “new economy” e-business professional services firms. They too need to worry about profitability.