Observers Say Consolidation Coming in Services Market

If there's one thing that HP's just-announced intent to purchase EDS indicates, it's that the IT services market is thriving -- in spite of, or perhaps because of, the slowing economy.

Citing Gartner statistics, the Management Consultancy reports the global services market grew a healthy 10.5 percent in 2007, to $748 billion. In addition, market leaders like IBM notched strong results in 2008's first quarter. Says Gartner's Kathryn Hale:

Many providers are successfully selling buyer value propositions that external spending on IT services and solutions can help customers save money and be more productive, even in a profoundly uncertain economic climate.

IBM still commands the largest market share in services, at 7.2 percent. Big Blue's services business grew 12.2 percent in 2008's Q1. Both HP and EDS saw declines in market share, despite revenue growth in their service businesses during the quarter.

According to Reuters, observers believe the HP/EDS deal will prompt other companies to seek acquisitions, perhaps Indian service providers like Infosys Technologies, Wipro Ltd. and Tata Consultancy Services. Says Avinash Vashistha, CEO of outsourcing consultancy Tholons:

... it has become imperative for (Indian companies) to make acquisitions to fill the gap in their services portfolio and get a global footprint. If they don't go for inorganic growth at this stage, they will clearly be at a competitive disadvantage.

Indian companies may resist buyouts, however, as many of them continue to be owned by family members or original founders.

HP will gain an Indian presence through its purchase. EDS grew its Indian workforce more than eight times over -- from 3,000 employees to 27,000 employees -- when it bought a 62 percent ownership stake in India's MphasiS in 2006. Services rivals IBM and Accenture have both been adding staff at a rapid clip in India. More recently, EDS has stepped up its hiring in China.

As I wrote last summer, several Indian companies are reportedly considering acquisitions in Europe, where demand for outsourcing is growing strongly. A Yankee Group analyst interviewed by Reuters speculates that network operators like AT&T, BT Group, France Telecom and Verizon Communications may enter the services market by purchasing a company like Accenture.