IT Services Sector Risk Report

Digitalization and AI to support the sector

LOW RISK FOR ENTERPRISES

Last Update: July 2024

Strengths & Weaknesses

The digitalization of the economy is a strong long-term driver
Broad B2B customer base
High value added and strong margins in many segments
Recurring revenues

Low barriers to entry
Reliance on corporate IT spend
Regulation on data and privacy can be a hurdle for European firms
High concentration in certain services (cloud, cybersecurity etc.)
High fragmentation and competition in consulting, programming and managed services

Sector Overview

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What to watch ?

The adoption of AI will boost demand for IT services
Regulation around data and privacy
Evolution of cyber risk
Labor and skill shortages among IT workers

The global IT services grew by about +6% in 2023 and is expected to grow by close +10% in 2024. Global IT spend should increase, driven by the US and the UK, where it is expected to reach close to USD130,000 and USD80,000 per employee, respectively. As AI is being deployed among firms, a majority of IT managers are planning to invest in AI-powered software and services.

Although IT services is traditionally a high-margin industry with recurring cash flows, start-ups or companies operating in frontier markets have been facing pressure from rising interest rates and labor costs. The sector is labor-intensive and has seen an acceleration in wage growth amid fierce competition for talent and a shortage of skilled labor in emerging applications.

Computer services companies posted an EBIDTA margin close to 10% in 2023. Growth prospects are also quite strong for the sector, which is poised to grow earnings per share by +15% the next five years.

Subsectors

The industry can be divided into five main subsegments - companies generally operate across many segments. While IT consulting and programming is a fragmented activity , the managed services, software and data processing segments are far more concentrated with regional and global players.
- Consulting is about helping organisations make the best possible use of digital technologies to operate more efficiently.
- Programming is about developing custom digital tools to help organisations reach their business objectives.
- Managed services is about outsourcing the management of the IT infrastructure to a third-party company.
- Software are complex, generic programmes that can are made available to a variety of corporate customers.
- Data processing, including cloud computing, is about collecting and treating large quantities of data for corporate customers.

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