This year, the top consulting firms expect fee income from IT services to increase by some 25 percent, to a total of £1.4bn. If this happens, and there is little reason to doubt that it will, fee income from IT will have doubled in the space of three years. It also means that information technology will account for more than a third of total consultancy fee income this year. This is rapid change. There was a time, only a few years ago, when IT was regarded as one of the more important consultancy services on offer, but nobody went around saying that IT would dominate consultancy, and that the sale of other consultancy services would probably depend very much on how much IT practices would be able to sell. For many years the prevailing view has been that there is a very distinct difference between IT consultancy and other IT-related services. Many firms have in the past suggested that outsourcing and software development are not really consultancy at all and should not, in fact, be counted as such. Consulting firms have also argued that the “consultants” in the software and outsourcing companies are not really consultants at all and are little more than salesmen or functionaries. This perception has clearly changed. The large firms now argue that outsourcing and software and systems integration, as well as a variety of other IT-related services, are all part and parcel of consultancy. It is, they say, increasingly difficult to determine where one service ends and another begins and the distinctions have become blurred. Also, since these days a great many projects of all types have a large element of IT, it is difficult to separate out other services such as HR and BPR. To some extent what has happened is that the large firms are now so reliant on fee income from IT consultancy, as well as from outsourcing and systems integration projects, that they do not particularly want to break figures down into component parts. Put in simple terms, what they are saying is that everything they do should be counted as consultancy, and their fee income, as shown on Management Consultancy’s list of top firms, for example, should include these other services. Response to our survey this month showed just how difficult it actually is for firms to break IT figures down into component parts. Most firms had to take a view on how much was outsourcing and how much was consultancy, for example. The result, shown in Table 1, indicates little apparent change in the structure of IT fee income this year, compared to last. The majority of firms seemed to feel that there had been a little less software fee income and that IT consultancy had grown, but only slightly. Determining which market sectors IT had been sold to was somewhat easier. The financial services sector remains the largest market by far, and it is quite possible that, as demand continues to grow, within another year or two this sector could account for almost half of all IT fees. This would not be a great surprise to many people. Also, in line with growing demand for consultancy from manufacturing industry, the second largest market for consultancy, we see that currently almost a quarter of IT fee income is derived from this market. Taken together, the financial services sector and manufacturing industry currently account for just on two thirds of all IT revenue. This is a trend that started some time ago. The public sector contribution has been steadily declining, as indeed has the contribution from the utilities. The retail industry, contributing some seven percent of total IT fee income, is clearly the smallest market. Something else that Table 2 shows is that there has been a growing emphasis on major markets and many firms have effectively dropped out of the small markets for IT. In 1996 slightly less than one tenth of IT fee income came from what we call “other undefined” markets which, by definition, are very small markets. The share contributed by these markets has steadily declined, and the responses to our survey this month showed no IT sales in this sector at all. It is of course entirely possible that there have been some small IT projects in tiny markets, but clearly they have not been of a sufficient size that they would stand out in the accounts. What is surprising is that the firms have not succeeded in selling more IT to other markets in an effort to reduce reliance on the financial services sector. We have said it before and it is worth saying again: the financial sector is the most volatile market for consultancy. At the first whiff of economic downturn, it pulls the plug on spending. Fortunately, perhaps, there are few signs of a downturn as we approach the turn of the century, but with the financial services sector contributing well over 40 percent of IT fee income, the risk is that many firms are over-exposed and that they are far too reliant on this one market. While it is true that financial services is the most lucrative and most profitable market for consultancy, it is a very big surprise that so few firms have tackled other markets. If anything, the response this month showed that many firms have tended to concentrate their efforts on the financial sector and have moved out of other markets. The growth in IT fee income is expected to continue at an amazing rate. We asked the firms to project their growth for the current year and the result is shown in Table 3. Topping the list is outsourcing, with many firms suggesting that their fee income will increase by a third or more. This is followed by actual IT consultancy, with figures suggesting growth of more than a quarter over last year’s level. In fact, the average figure belies what will more than likely happen, which is that the consultancy element will grow by significantly more, judging by what the large firms say. It is also worth noting that some of the small firms, chiefly those selling almost exclusively to the two main markets for IT, reckon on seeing their 1999 fees double over 1998 levels. Had these firms been asked to project growth earlier in the year, one might have taken these figures with a large pinch of salt. However, considering that most of 1999 is already past, it would be safe to say that the firms probably have a very good idea of what they have done and are likely to do during the year. There is, however, one jarring note in all this. If firms find it so difficult to break their IT fee income down into constituent parts, then how on earth can they be so certain of individual growth rates? Here, the figures are really estimates based on a feel for what has happened during the year. The true picture will be difficult to uncover, but the over-riding point is that the expected growth will be much more than 20 percent, and this sort of rate looks likely to continue into next year. We also asked about the number of projects sold to different markets in an effort to see how average project values have changed. What came out of this (Table 4) is that there appear to have been fewer IT projects from the financial sector, but the average value has shot up by something like 26 percent. To some extent, this rise has been fuelled by small firms taking on much larger projects so that, rather than bringing the average down, they have contributed to the apparent increase. Much the same applies to manufacturing, although in this case there would appear to be more projects at a higher average value, which has brought the figure up. Figures for the public sector and utilities show a decline in average values which is perhaps to be expected. In these two sectors there also appear to have been fewer projects during the year. We also asked the firms to indicate what sort of growth they expected from different markets this year. As Table 5 shows, not unexpectedly, the greatest growth comes from the two main markets, with fee income growing at much, much slower rates in other sectors. Anything over ten percent a year is good anyway, but the projection for over 30 percent from the financial services sector merely serves to show how important this market is to the firms. Finally, we asked about the origin of outsourcing revenues, simply to try and see whether there had been any significant changes since last year. As Table 6 shows, once again it is all about emphasis on the two main markets, which together account for roughly two thirds of total outsourcing revenue. No real change there at all, really. Philip Abbott is a director at the Industry Research Group. The comparison of incomes from various IT-related services has changed little in the past year, though the share from outsourcing has declined slightly. Despite this, with the massive growth in overall fee income from IT, the actual value of outsourcing revenues has risen some 25 percent to around £480m in the last year. The financial sector remains the most significant market for IT services. In fee income terms it is worth almost twice as much as the next largest market, manufacturing industry. The share of total IT fee income from the public sector, once the second largest market for consultancy, has continued to decline, as has the share contributed by the utilities. Firms are often rather over optimistic about their prospects. However, with much of the year already gone, it is a pretty safe bet that actual figures will more or less match expectations once annual accounts are done. In any event, the growth rates shown here are much higher than those expected for other, more traditional consultancy services. There has been a big jump in average project value from the financial sector, but slightly fewer projects. This accounts for the fact that the share of total IT fees from this sector has not increased appreciably. The average value of public sector and utility projects shrink for the fourth year running.