As the role of information technology in our world continues to increase, so too does the importance of the companies that help us manage it. And that's where the IT services industry comes into play. Businesses offering IT services often operate behind the scenes, quietly helping other consumer-facing clients ensure that their networks, technology infrastructure, and products work as desired. And for those that can do so in a profitable, efficient manner, the financial rewards can be great.
What is the IT services Industry?
IT services is a subcategory of the broader information technology industry, and Gartner breaks it down into the following five general segments:
- Consulting: Services to advise businesses on how to best use information technology to meet their objectives.
- Integration: Linking disparate computing systems or software applications to function as a whole.
- Network services: Planning, implementation, and management of computing networks, such as local area networks, wide area networks, storage area networks, network-attached storage, and public networks.
- Product/infrastructure support: Helping businesses manage and improve operational efficiency for information technology infrastructure, such as planning for equipment upgrades, and quickly identifying and resolving infrastructure issues for data centers, storage services, and enterprise connectivity.
- Outsourcing: Designing, developing, and delivering all or part of an IT-related solution or customized application on behalf of a client.
How big is the IT services industry?
Gartner estimates that IT services will generate roughly $967 billion in global sales in 2014, or a 3.8% increase over 2013. That makes IT services the second-largest segment within the broader IT industry, well ahead of the $685 billion estimated to come from the IT devices segment (which includes PCs, mobile phones, tablets, and printers), and trailing only the $1.635 trillion expected in 2014 from the long-established telecom services industry.
Going forward, Gartner also expects the IT services industry to experience longer-term compound annual growth of around 4.3% in U.S. dollars. That modest growth may not raise too many investors' eyebrows, but keep in mind that the outsourcing category is currently being hurt by sharply reduced pricing from the largest vendors in the space -- primarily as costs for cloud storage services continue to fall. In addition, Gartner says, public cloud services are currently eating into more traditional data center outsourcing services. Nonetheless, IT services is still an enormous industry that continues to grow.
How does the IT services industry work?
Companies operating in the IT services industry create value by offering a high level of technical expertise to customers who might not otherwise possess it. In short, through either consulting or the outsourcing of complicated tasks such as systems integration, network services, and infrastructure support, IT services clients are able to more effectively manage resources and increase focus on their own core competencies.
Meanwhile, thousands of small, specialized IT services firms have emerged in recent years to fulfill a growing need as connected technology becomes more ubiquitous. However, larger IT services companies often boast an advantage in size, scale, and uniformity of their own respective offerings, which can make it difficult for smaller firms to succeed on a broad basis.
Still, as I noted, the transition to more cloud IT services has narrowed that gap in recent years and pressured top-line growth for larger firms fighting for market share as relative costs -- and therefore prices -- for their services continue to fall. In the absence of this revenue growth, many IT services companies instead focus on creating shareholder value by improving margins through operational efficiencies.
What drives the IT services industry?
The primary driver of the IT services industry is continuous change in technology itself. Cloud computing is obviously one of the more pronounced changes in recent years, but many IT services companies are also looking for growth in other areas like specialized cybersecurity consulting, mobile-centric IT services, and custom "big data" services -- the last of which specifically deals with finding ways to process data sets too large and complex to manipulate with standard methods.
In addition, growth in the IT services industry is largely dependent on robust corporate and government spending, which is responsible for the bulk of IT services revenue. If the budgets of businesses and governments run tight, the IT services industry will probably feel pinched as well.
Given the seemingly endless cycle of technological advancements, however, it's hard to imagine a world in which IT services becomes any less important over the long term. As a result, the IT services industry should be able to continue offering compelling investment options for the foreseeable future.
Steve Symington has no position in any stocks mentioned. The Motley Fool recommends Gartner. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.