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1997 IS Archive
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Beware of all enterprises that require new clothes.-- Thoreau

This Week, Industry Snapshot Looks at
IT Consultants

ALEXANDRIA, VA (June 20, 1997) -- The following is an abbreviated version of the Motley Fool's "Industry Snapshot," an educational subscription product available for delivery via e-mail or fax. We feel that it is the best tool available for learning how to invest in stocks.

A sample of the full length subscription product is available for download, as well as details surounding its genesis. To the right subscribers and non-subscribers alike are invited to peruse the companies that are featured in this week's Industry Snapshot.

In addition, we urge existing subscribers to take advantage of "Subscribers Online," it's chock full of helpful research and follow-up information on the industries and companies featured in previous Snapshots.  Every week we will offer up a taste of what is available to Industry Snapshot subscribers by providing a short summation of the industry and the companies that appear in the most curent issue.

Cambridge Technology Partners, Inc.

Complete Business Solutions, Inc.

Diamond Technology Partners

Metro Information Services

Renaissance Solutions, Inc.

Technology Solutions Company

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This Week's Industry Snapshot

Increasingly, the role of information technology (IT) is shifting from its former status as an "enabling" function, where business strategies could be more quickly and effectively realized, to that of a true "driver," where strategic positioning is propelled by considerations concerning information technology. This simple truth is born out in the statistics. Ten years ago "technology" related industries accounted for a mere 2% of Gross Domestic Product, today the figure has increased to 12%, profoundly altering the dynamics of the business world. In fact, business and consumer spending on high-tech equipment accounts for 38% of the economic growth experienced in the U.S. since 1990.

Ultimately, the objective of most information technology projects is to improve the competitive position of the client. This can be accomplished by satisfying a number of intermediate objectives along the way, which include improving employee productivity and ramping up customer service. The bottom line for corporations is that it takes less capital to improve business productivity through investments made in IT than it does through investing in plants and heavy equipment. Coupled with a 42% drop in the price of information technology equipment over the past five years, this has created a compelling case for the capital productivity benefits that IT bestows. MIT's Sloan School of Management conducted a study of 367 Fortune 500 companies between 1987 and 1994. The study found that after depreciation, companies on average receive a 67% return on their investment in IT. Over the last three years, investments in information technology have become even more crucial to business success.

IT Outsourcing

Corporate America has been bitten by the outsourcing bug over the last ten years. Virtually any function that can be performed more cheaply with demonstrated effectiveness has been outsourced. Due to the ever-increasing complexity of technology as well as tight labor markets for IT personnel, corporations are finding that they need to invoke that old black magic again -- the miracle of outsourcing. IT service vendors can offer their employees a more varied and challenging work environment than the typical duties of the "in-house" techie. Hence the technology labor pool exhibits a preference for professional IT vendors.

IT vendors can also offer clients the services of specialists to advise on particular technologies, a service that corporations usually cannot cost-effectively provide for themselves. Roughly 80% of technology costs center around the servicing of the installed technology, the actual hardware and software costs account for the remaining 20%. The ability to effectively control these costs via fixed service contracts with vendors is another positive for IT outsourcing. Finally, the common beneficial thread that runs through all outsourcing activities is that management can focus on their core business and not obsess about the role that technology may play in their respective environments. The most important number that has IT vendors salivating is that only 25% of the addressable market has been outsourced to date. This leaves a wide-open playing field for aggressive IT consulting firms.

IT services has been one of the fastest growing segments in the temporary staffing industry. According to the Staffing Industry Report, revenue from technical/computer temporary staffing is estimated to have grown from $5.7 billion in 1993 to $9.5 billion in 1996. This represents a compound average growth rate of close to 30%. DataQuest estimates the size of the overall third party component of the IT services market at $48.6 billion, similar to the U.S. Department of Commerce's assessment of $45 billion. The IT staffing services industry is highly fragmented with players that run the gamut with regard to size and scope of operations. These include the "Big 6" accounting and management consulting firms that generate billions in revenues, as well as companies that provide in-house staffing, which may provide services on retainer.

Industry consolidation has increased in recent years primarily due to customers desire to minimize the number of IT vendors that they deal with. For large organizations, this can mean a reduction from well over a hundred vendors to just ten. Invariably clients will conduct a selection process in which "preferred" or "prime" vendors are chosen. The factors involved in the decision making process include: geographic and technical breadth of operations, quality assurance programs, reliability, and cost effectiveness. It is typical for vendors to gain some predictability in demand as a result of being named a preferred vendor, boosting their earnings visibility and their valuation multiples as well. Continuing consolidation of client vendor lists will drive consolidation within the industry as large broadly diversified vendors compete for name recognition.

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