IT Consulting Services on Track for Steady Growth

IT consulting services will increase at a compound annual growth rate (CAGR) of 5.2 percent from 2006 through 2010, with slightly rising growth rates each year, forecasts a new study from IDC.

Drivers behind this growth include the stabilization of prices, the entrance of new providers, and a changing attitude among buyers as to the value of IT consulting.

These trends — the stabilization of prices in particular — are a welcome reversal from the last five years, during which growth in the consulting industry contracted, and pricing dropped considerably.

Price Plummet

In 2000, the average consulting rate was US$320 per hour, Bo Di Muccio, Ph.D., IDC program manager for consulting services research, told CRM Buyer. By 2005, it had fallen to $201 per hour.

Di Muccio does not think rates will ever reach 2000’s level, but he does believe that pricing has stabilized.

“We are not seeing rising prices — but the drastic slowdown in the rate of decline has tapered off,” he pointed out.

Specialty consulting is the exception — providing a niche service or addressing specific pain points, such as compliance, that are not easily managed. “Those consultants can still charge a premium,” Di Muccio said. By contrast, for easily commoditized services, such as an upgrade to the latest SAP version, pricing is still competitive.

Changing Nature

As the IT consulting industry regains momentum, it is also changing shape, Di Muccio noted, with more players entering the space.

“In the past, you had the big systems integrators and large IT firms with consulting capabilities — that is where most of the activity was found. Fast forward to today; IT consulting has an amazingly diverse number of companies offering services.”

Management consultancies, for instance, are moving downstream by acquiring IT consulting firms in order to be able to offer services.

Meanwhile, Indian providers of outsourcing services are maturing and moving upstream to target the consulting industry because margins are higher, he said. However it is unlikely their inroads will place downward pressure on prices as they did five to ten years ago when they became a significant force in the IT outsourcing market.

“They are trying to build higher end practices so they can charge higher billable rates,” Di Muccio said. “The idea of offshore consulting firms as a downward driver of prices — that is changing. They themselves are developing onshore capabilities in order to deliver on-site services in Europe and America. It makes their overall billable blended rate higher.”

Changing Buyer Attitude

Finally, buyer attitudes towards IT consulting are shifting once more. After Enron and other corporate scandals, companies viewed consultancies and the value they delivered with some measure of skepticism.

What is different about today’s market, according to Di Muccio, is that buyers are more willing to spend money on consultants.

“Consulting projects are becoming more complex and there is more at stake with compliance, transparency issues and political risks,” he explained. “Buyers appreciate that they get what they pay for and that in the medium and long term, it doesn’t make sense to get consulting on the cheap when it is business critical.”