META sun sets on system integration

System integrators and professional services firms are in a declining market that could wipe out pure-play companies, a new report has predicted.

A US report by industry analyst META Group's Stan Lepeak has suggested that system integration has struck a major inflection point that could eventually kill off most companies reliant on either consulting or outsourcing.

The report said that the market had passed its boom phase and was entering its bust. It argued that pure-play system integrators and consultancies were suffering declining revenues, exacerbated by high numbers of demanding buyers and relatively low-cost offshore competition.

For example, BearingPoint had recently lost 25 percent of its market capitalisation in one day after missing its quarterly revenue and earnings estimate. Yet business process outsourcing and selective sourcing were growing, according to the report.

The process was not cyclical but marked a continuing decline, driven by many factors including IT services price deflation, globalisation, a more competitive market, standardisation, chronic oversupply and increased regulation, it said.

Wissam Raffoul, vice-president of operations, outsourcing and service provider strategies at META Group, said the report held true for Australian system integrators and professional services firms.

He said the same forces were brought to bear on the Australian market as in the US and Europe, so the same effect, in proportion to the smaller size of the economy, could be expected. 'It is exactly the same,' Raffoul said. 'We have the same issues.'

No 'big events' were on the horizon that were likely to alter the situation, he said.
'They can't live on e-business any longer and they can't live on new security business,' Raffoul said.

The META Group report claimed that system integrators and other service providers had failed to prove to users that their work had genuine business value. Also, users increasingly favoured ISV-based professional services organisations and process outsourcing targeting specific problems.

Improved buyer sourcing and supplier relationship management had also raised the bar in terms of the accountability demanded by users, the report stated.

Already, in the US 'nearly all' smaller or pure-play system integrators had ceased to exist, with many large pure-play consultancies and system integrators to follow. Survival would require a shift in approach to greater diversity and customisation as systems became easier to manage in-house, it said.

The report said that system integrators that wanted to survive should focus on cutting costs and learn more about business processes and specific verticals. Offerings should be built around ERP, procurement analytics, content and collaboration, web services infrastructure and business process operations.

'To enable more tailored deployments, this involves tighter integration with consulting-based domain experts,' Lepeak wrote. 'Ultimately, current IT system integrators must evolve into tomorrow's process integrators.'

Larger companies should also look at developing offshore capability, according to the Lepeak report.