IT service start-ups set to struggle: Ovum

Start-ups in the IT industry have been put on notice after a new report revealed Australia’s IT services sector has been shrinking since 2011 and will continue to shrink this year.

Findings in the Asia-Pacific IT Services Quarterly Briefing 3Q11, by technology analyst firm Ovum, shows while the region fell by 25% year-on-year, Australia enjoyed a 6% rise.

“The Asia-Pacific market appears to have a hit a speed bump, with a year-on-year drop of 25% during the third quarter of 2011,” Ovum IT services analyst Jens Butler says.

“Many markets see the current economic conditions as an opportunity to take a breath.”

“Sixty-four percent of contracts signed in the Asia-Pacific services market emanated from the telecommunications sector in the quarter, with the cash-strapped industries taking a more conservative approach to any form of services investment in the near-term.”

While the Asia-Pacific market as a whole is in decline, Australia’s IT services sector grew from $331 million in 2010 to $353 million in 2011, the report said.

But Butler says data due to be released will show the increase was short-lived. He says the fourth quarter recorded an 8.5% drop from $215 million to $197 million over the same period.

“The beginning of Q4 started positively but then it slowed down, which was quite surprising because the end of the year is usually when it picks up,” he says.

“I think it was due to all the bad news in the market and… conservatism seems to have crept back into the market.”

Butler says it could be difficult for IT service providers to secure enough work as companies reign in their spending.

“There’s a lot more control over how money is being spent, and a lot of companies are getting their heads down and waiting for it to pass,” he says.

Butler predicts the market will continue to decline for at least the next six months, saying the global economic climate looks unlikely to improve anytime soon.

However, he says contract lengths are growing rather than shrinking, despite increasing demand for competitive prices and increased flexibility.

“Average contract lengths have actually grown from 42 months during the last two quarters of 2010 to almost 45 months during the same period in 2011,” he says.

“Customers want stability,” Butler says.

“However, they’re a lot more willing to engage local players given the relevance of their skills and the requirements.”

“A lot of the projects are becoming smaller, which is opening up opportunities for smaller players. We moved away from the whole mega contracts mindset.”

Butler says companies want to be able to pay for their IT services as they go, rather than as a set annual fee.