IT Consulting in the US

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1 IT Consulting in the US August All systems go: Rising corporate profit will lead to increased use of industry services This report was provided to University of Nevada, Reno ( ) by IBISWorld on 01 September 2017 in accordance with their license agreement with IBISWorld IBISWorld Industry Report IT Consulting in the US August 2017 Dylan Miller 2 About this Industry 2 Industry Definition 2 Main Activities 2 Similar Industries 3 Additional Resources 4 Industry at a Glance 5 Industry Performance 5 Executive Summary 5 Key External Drivers 7 Current Performance 9 Industry Outlook 11 Industry Life Cycle 13 Products & Markets 13 Supply Chain 13 Products & Services 15 Demand Determinants 16 Major Markets 18 International Trade 19 Business Locations 21 Competitive Landscape 21 Market Share Concentration 21 Key Success Factors 22 Cost Structure Benchmarks 24 Basis of Competition 25 Barriers to Entry 25 Industry Globalization 27 Major Companies 30 Operating Conditions 30 Capital Intensity 31 Technology & Systems 32 Revenue Volatility 32 Regulation & Policy 33 Industry Assistance 34 Key Statistics 34 Industry Data 34 Annual Change 34 Key Ratios 35 Industry Financial Ratios 36 Jargon & Glossary info@ibisworld.com

2 IT Consulting in the US August About this Industry Industry Definition The IT Consulting industry includes firms that provide the following services to client companies: writing, testing and supporting custom software; planning and designing integrated hardware, software and communication infrastructure; and on-site management of computer systems and data processing facilities. This industry excludes packaged software publishers and off-site data processing and hosting services. Main Activities The primary activities of this industry are Providing information technology expertise for consumers Writing, modifying, testing and supporting software to meet the specific needs of one client Planning, design and integration of computer or network systems On-site management and operation of IT functions The major products and services in this industry are Computer systems development Custom services IT infrastructure Technical support Technical consulting Other services Similar Industries Computer & Packaged Software Wholesaling in the US This industry wholesales IT goods that consultants use or operate on Computer Stores in the US This industry sells computer hardware or software products and provides support services, such as customized assemblies Software Publishing in the US This industry produces and distributes computer software, including designing, providing documentation, assisting in installation and providing support services to software purchasers Data Processing & Hosting Services in the US This industry is often a small part of the broader consulting process, and there is a great deal of outsourcing to this industry.

3 IT Consulting in the US August About this Industry Additional Resources For additional information on this industry Association of Information Technology Professionals Information Technology Industry Council (ITI) IT Consulting Software & Information Industry Association The Open Group IBISWorld writes over 1000 US industry reports, which are updated up to four times a year. To see all reports, go to

4 IT Consulting in the US August Industry at a Glance IT Consulting in 2017 Key Statistics Snapshot Revenue $408.2bn Profit $29.8bn Annual Growth % Annual Growth % Wages $191.3bn Businesses 317,837 Market Share There are no major players in this industry % change Revenue vs. employment growth % change Private investment in computers and software Year Year Revenue Employment p. 27 Products and services segmentation (2017) SOURCE: Key External Drivers Private investment in computers and software Corporate profit Government consumption and investment Number of mobile internet connections Consumer price index 10.7% Technical support 12.4% Computer systems development 10.0% Technical consulting 25.1% Custom services p % IT infrastructure 22.8% Other services SOURCE: SOURCE: Industry Structure Life Cycle Stage Growth Revenue Volatility Medium Capital Intensity Low Industry Assistance Low Concentration Level Low Regulation Level Technology Change Barriers to Entry Industry Globalization Competition Level Light High Low High High FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 34

5 IT Consulting in the US August Industry Performance Executive Summary Key External Drivers Current Performance Industry Outlook Life Cycle Stage Executive Summary The IT Consulting industry is composed of companies that help businesses design and implement information technology (IT) systems and infrastructure. Due to the low capital requirements of the industry, a modest number of operators are small nonemployers or independent contractors. Over the five years to 2017, shifting technological trends toward cloud computing and data analytics have caused larger operators to acquire smaller companies and develop new products to stay relevant. For example, Shifting technology trends boosted demand for new services and encouraged companies to replace older, more traditional technology Accenture PLC purchased more than 15 companies in 2017, as of August. Likewise, International Business Machines Corp. (IBM) spent $1.0 billion on Watson, a computing system that IBM built to apply advanced natural language processing, information retrieval and machine learning, among other skills. Shifting technology trends boosted demand for new services and encouraged companies to replace older, more traditional technology. Additionally, strong corporate profit for most of the five-year period and constantly rising investment in computers and software has helped drive industry revenue growth. Overall, industry revenue is projected to grow an annualized 2.1% to $408.2 billion over the five years to 2017, including a projected increase of 4.1% in Financial service companies, such as banks, insurance and credit card companies, are some of the largest customers of industry services, generating 19.6% of industry revenue. With rising revenue and low barriers to entry, industry competition is also expected to rise as new players enter the market to provide new technologies to customers. As the economy strengthens, corporate profit will continue to rise and support investment in computers and software. Growth in demand from finance and insurance, which are two of the largest markets for industry operators, is anticipated to accelerate and further benefit the IT Consulting industry. Additionally, the continued shift to cloud computing and the use of data analytics will intensify security concerns. Consequently, IBISWorld expects industry revenue to rise at an annualized rate of 2.9% to $471.3 billion over the five years to As companies increasingly use new technology, profit will increase to take up an estimated 7.3% of revenue. Key External Drivers Private investment in computers and software Private investment in computers and software represents the total annual expenditure by businesses on all information processing equipment and software. Investment by private entities in computer hardware and software generates demand for implementation assistance and technical support from the IT Consulting industry. As innovations in product offerings stimulate private investment in computer systems, demand for industry services rises. Private investment in computers and software is expected to increase in 2017, presenting a potential opportunity to the industry. Corporate profit Corporate profit measures total profit earned across all industries in the United States and is positively correlated with demand for IT consulting services. As corporate profit rises, companies become more confident about making large, long-term investments, encouraging

6 IT Consulting in the US August Industry Performance Key External Drivers continued them to hire IT consultants. Corporate profit is expected to increase in Government consumption and investment Federal and state governments constitute a significant portion of demand for industry services. Therefore, the industry is sensitive to changes in government investment. Concerns over the federal budget deficit have resulted in slower growth for government investment, thereby constraining spending on IT consulting by government agencies in recent years. Government consumption and investment is expected to increase, albeit slowly, in Number of mobile internet connections The number of mobile internet connections represents the total the number of consumers that have a broadband internet-capable device in addition to a subscription that includes a data plan. As more consumers become connected to the internet, they will require more assistance with IT systems. This will lead to a surge in demand for the industry, driving up revenue. The number of mobile internet connections is expected to rise in Consumer price index The Consumer Price Index (CPI) is used as a measure of inflation from year to year. The CPI contains a basket of goods ranging from things like transportation to food. When the CPI rises, consumers must use up more of their disposable income on everyday goods. Since they must use a higher proportion of their income on these goods, they will have less disposable income to spend on IT systems and the services behind these products. The CPI is expected to rise in 2017, representing a potential threat to the industry. Private investment in computers and software 10 5 Corporate profit % change 0 % change Year Year SOURCE:

7 IT Consulting in the US August Industry Performance Current Performance In a technology-driven environment, businesses across all industries rely on external IT support to operate more efficiently. Operators in the IT Consulting industry implement and deploy systems that manage data on behalf of their business clients. Moreover, IT consultants design and modify supporting software to enhance online and telecommunications security systems. The industry also includes a wide range of other IT companies, including IT outsourcing and computer equipment and specialist companies that design and build the technology infrastructures used by other industry operators. Due to the wide range of IT-related services it provides, this industry is one of the largest and most resilient in the US economy, encompassing over 300,000 businesses and boasting annual sales of more than $400.0 billion. In line with favorable economic conditions and business trends, the IT Consulting industry is expected to grow at an annualized rate of 2.1% to $408.2 billion over the five years to During this period, profit margins are expected to reach 7.3% of industry revenue. The industry started the current five-year period with strong growth, as businesses that performed poorly during the economic downturn sought IT services to boost efficiency and productivity. Stronger corporate profit and increasing investment in computers and software have driven growth as businesses have increased their ITrelated budgets. Revenue declined slightly in 2013 with the rapid development and mainstream adoption of new technologies, such as cloud computing and big data analytics. These services severely disrupted the performance of established service segments, such as server and software % change Industry revenue Year solutions on the premises, which had traditionally dominated the industry prior to the current five-year period. Nonetheless, as companies continue to shift to cloud computing and increasingly use big data analytics, larger companies that historically provided traditional server and software solutions, such as IBM and Hewlett-Packard Enterprise (HPE), have shifted their focus to try to adapt to the changing market. Revenue also decreased in 2015 due to a 3.0% decline in corporate profit. As corporate profit decreases, downstream companies are less willing to hire IT consulting companies; however, revenue growth will rebound in 2017, rising 4.1% over the year. As new technology gained popularity over the period, more operators entered the industry. Low barriers to entry make it easy for new companies to enter the industry. Many operators just need relevant education and experience, along with the ability to attract clients. The number of establishments rose over the past five years, leading to intensifying internal competition and incentivizing greater expenditures on research and new product development as companies tried to stay up-to-date with shifts in the market. 23 SOURCE:

8 IT Consulting in the US August Industry Performance Continued innovation The trend toward cloud computing, a model in which computer applications are hosted in outside servers that are accessible via the internet and managed by third-party companies, has benefited industry operators that have used their expertise in converged infrastructure solutions to secure projects developing cloud-computing systems. In response to these rapid shifts in technological trends, the industry s largest players, including IBM and HPE, have increasingly switched their focuses toward offering third-platform solutions, such as cloudbased computing and data analytics. For example, IBM divested its entire microelectronics business, while spending $1.0 billion to develop its The trend toward cloud computing has benefited industry operators flagship cloud platform-as-a-service offering, and over $1.2 billion to expand its cloud centers for its recent acquisition company SoftLayer. In 2016 alone, acquisitions and research and development expenditures reached nearly $12.0 billion. Similarly, Hewlett- Packard split into the two companies Hewlett-Packard Enterprises (HPE) and Hewlett-Packard Inc. (HP Inc.). HPE now focuses on providing industryrelevant enterprise IT services. Industry structure While there are still plenty of opportunities for small-scale IT consultants, industry employment growth over the past five years has been concentrated in larger firms. Over the five years to 2017, employment is expected to grow at an annualized rate of 3.5% to 2.1 million workers. In contrast, the number of industry enterprises, which measures the total number of independent IT companies, is expected to fall at an annualized rate of 5.4% to 317,837 operators over the same period. Growth in the number of employees outpaced growth in the number of enterprises and establishments, indicating that companies are increasing their number of employees, enabling them to serve a larger client base or provide attention to existing clients. Additionally, the five-year period has been characterized by extensive merger and acquisition activity. For example, Accenture PLC purchased more than 20 companies over the past five years. Additionally, Dell Inc. purchased EMC Corp. late in the period, creating a new company, Dell Technologies Inc. Much of the merger and acquisition activity has involved niche companies operating within the third-platform IT segment. Larger companies often acquired smaller niche players to better position themselves in the changing market as new technologies decrease demand for traditional software and hardware solutions. Despite significant merger and acquisition activity, overall market share concentration in this industry remains low, with the four largest operators expected to account for less than 20.0% of industry revenue in 2017.

9 IT Consulting in the US August Industry Performance Industry Outlook The IT Consulting industry is forecast to experience consistent growth over the next five years. In terms of technological trends, demand for industry services will be primarily driven by mainstream adoption of third-platform services, which encompasses cloud-based computing, big data analytics and mobile-based solutions. In terms of economic factors, industry revenue will be driven by continued growth in corporate profit, which is expected to boost private investment in computers and software, as well as increasing demand from the finance and insurance industry. Overall, the industry is projected to grow at an annualized rate of 2.9% to $471.3 billion over the five years to Business confidence and investment Over the next five years, corporate profit is forecast to increase while the total number of US businesses is projected to rise. Growing businesses will seek the assistance of IT consultants to improve operational efficiency through system upgrades and integration. Furthermore, increasing technology integration and product development will surge private investment in computers and software at an annualized rate of 3.7% over the five years to Additionally, demand from finance and insurance, which are part of the industry s largest downstream market, will accelerate its growth. This will stimulate demand from Both corporate profit and the total number of US businesses are forecast to increase the financial services segment. Finally, the percentage of services conducted online is expected to rise at an annualized rate of 8.0% over the five years to As more business operations are conducted online or through the cloud, demand for industry services will likely remain high. Innovation and shifting technological trends Big data will continue to drive the industry over the next five years. A key driver of industry performance moving forward is simply the vast growth of the world s data. According to EMC Corp. s 2015 annual report, the world s data will double every two years. This data must be organized, managed and combed through to find trends and insights for businesses and government institutions alike. Larger operators, such as IBM, HPE and Dell Technologies Inc., have the necessary human capital, infrastructure and research resources to provide the most effective and competitive solutions to these problems. Conversely, the rapidly changing nature of the IT sector as a whole will continue to create an influx of new entrants that specialize in new technology. Similar to the current five-year period, larger operators are expected to continue acquiring smaller businesses and incorporating their solutions into their expansive product portfolios to stay relevant over the outlook period. Furthermore, consumers are increasingly using smartphones and tablet devices to access the internet. Over the next five years, the number of mobile internet connections is projected to rise at an annualized rate of 6.3% to million connections in Consumers are using these devices more often as

10 IT Consulting in the US August Industry Performance Innovation and shifting technological trends continued smartphone penetration increases and telecommunication providers offer faster speeds through Long Term Evolution (LTE) network coverage. Faster networks enable users to access data-heavy content, including streaming video, through their devices. As a result, industry operators are expected to experience stronger demand for application and system design, as businesses continue to invest in mobile platforms to reach a younger and more technologically savvy demographic that has already incorporated smartphone use into everyday life. Over the next five years, security issues will remain a top priority. As data breaches increase in frequency and intensity, businesses may remain skeptical of big data analytics and cloudcomputing solutions. However, data security companies will continue to develop intuitive solutions to these issues, which will help boost industry revenue. Overall, favorable shifts in technological innovation and consumer and business preferences will continue to propel the industry forward. Industry structure Due to strong revenue growth and increasing profit over the five years to 2022, new companies are expected to enter the industry at an accelerated rate. Consequently, over the five years to 2022, the number of enterprises will increase at an annualized rate of 2.1% to an estimated 352,714 companies, even with the continued acquisition of smaller operators by larger Big data will continue to drive the industry over the next five years ones like IBM. Additionally, employment growth will continue rising at an annualized rate of 2.8% to 2.4 million workers.

11 IT Consulting in the US August Industry Performance Life Cycle Stage Growth in the industry exceeds that of the overall economy The industry is constantly developing new products and services There is a high level of technological growth % Growth in share of economy Maturity Company consolidation; level of economic importance stable Quality Growth High growth in economic importance; weaker companies close down; developed technology and markets Key Features of a Growth Industry Revenue grows faster than the economy Many new companies enter the market Rapid technology & process change Growing customer acceptance of product Rapid introduction of products & brands 10 5 IT Consulting Quantity Growth Many new companies; minor growth in economic importance; substantial technology change 0 Software Publishing Computer Stores -5 Computer & Packaged Software Wholesaling Computer Manufacturing Computer Peripheral Manufacturing Decline Shrinking economic importance % Growth in number of establishments SOURCE:

12 IT Consulting in the US August Industry Performance Industry Life Cycle This industry is Growing The IT Consulting industry is in the growth stage of its economic life cycle. The industry is characterized by revenue growth higher than the overall economy, increasing market acceptance of industry products and a high level of technological change. Over the 10 years to 2022, as corporate profit rebounded after recessionary declines, investment in computers and software remained a priority for businesses looking to improve efficiency and sales. Additionally, the continued introduction of new products and services has significantly boosted demand for industry services. Industry value added (IVA), used to measure an industry s contribution to the overall economy, is forecast to grow at an annualized rate of 4.3% over the 10 years to This exceeds growth in the overall economy, which is projected to grow by 2.1% over the same 10-year period. Growth in IVA can be attributed to strong and stable revenue growth and wages increasing as a proportion of revenue. Additionally, the average industry profit margin increased slightly over the five years to 2017, and are expected to grow further in the latter half of the 10-year period as companies increasingly focus on offering newer technologies such as cloud computing and data analytics. A very high degree of technological and product innovation characterizes the industry, and rapid changes in computing technology has created significant winners and losers during the past five years. By definition, operators in this industry compete on the basis of offering the most efficient and modern technological solutions to their clients. Therefore, operators that stay abreast of rapidly changing IT trends and quickly bring the latest technology to the market have a considerable competitive advantage over others. Cloud computing and data analytics have proved high growth areas over the five years to 2017 and are expected to continue driving industry performance over the five years to Additionally, strong increases in the number of mobile internet connections and greater focus on security will also contribute to the industry s strong growth over the five years to 2022.

13 IT Consulting in the US August Products & Markets Supply Chain Products & Services Demand Determinants Major Markets International Trade Business Locations Supply Chain KEY BUYING INDUSTRIES 42 Wholesale Trade in the US Logistics support is provided to wholesalers to limit costs. Logistics is increasingly automated and computerized. 51 Information in the US The merging of IT and telecommunications systems is becoming increasingly common, requiring the services of IT consultants. 52 Finance and Insurance in the US Systems and software support and outsourcing are vital in modern financial markets. 62 Healthcare and Social Assistance in the US Health and community services are becoming more reliant on automation for many services, and so IT consultants are becoming more commonly used. 92 Public Administration in the US Government agencies across the United States are increasingly outsourcing IT work, rather than paying for permanent IT staff. KEY SELLING INDUSTRIES 33411a 33411b Computer Manufacturing in the US Essential equipment, such as computers, is supplied by this industry. Computer Peripheral Manufacturing in the US Essential equipment, such as computer monitors and accessories, is supplied by this industry Communication Equipment Manufacturing in the US Equipment from this industry, such as telephones, is equally important for IT consultants day-to-day operations. 51 Information in the US Advances in the quality and quantity of information in the economy provide IT consultants with the resources to transform client businesses Software Publishing in the US This industry publishes computer software that IT consultants write, test and support. Products & Services Custom services Accounting for an estimated 25.1% of industry revenue in 2017, custom application design, development and integration services represent the largest group of service provided by operators. Application software enables companies to retrieve, organize, manage and manipulate data and databases to meet their individual needs. Small and medium-sized companies are increasingly relying on experts to create custom software or to adapt existing applications to their needs. Over the past five years, a software licensing and integration method known as software as a service (SaaS) has quickly become the model of choice for many clients. Unlike traditional software packages, SaaS products are sold on a subscription basis via the cloud, which ensures industry operators a steady stream of revenue from software users. Similarly, SaaS benefits businesses by minimizing initial setup, hardware and technical support costs. Over the five years to 2017, this segment has remained steady as a percentage of revenue. IT infrastructure Network infrastructure design and management services will generate an

14 IT Consulting in the US August Products & Markets Products & Services continued Products and services segmentation (2017) 10.0 % Technical consulting 10.7% Technical support 25.1% Custom services 12.4% Computer systems development Total $408.2bn 19.0% IT infrastructure 22.8% Other services SOURCE: estimated 19.0% of revenue in This segment includes managing and monitoring client IT infrastructure performance, data routing and security on a regular basis. Complex network infrastructures require manual routing of the paths data is sent on, making this an important network management service. Security management protects a network from unauthorized access, and includes sub-functions such as authorizing subscriber access and controlling the distribution of cryptographic keying material (See IBISWorld report 51121f). Over the past five years, this service segment s share of revenue has declined slightly due to widespread adoption of infrastructureas-a-service platforms and hybrid cloud systems, which shifts the responsibility of network management from businesses to the cloud system designer. Computer systems development Systems design, development and integration services are expected to account for 12.4% of industry revenue in Typical services within this segment include building on-premise servers and storage devices to help a company more effectively manage information. In addition, operators develop on-premise data security systems to prevent data theft and security breaches. System integration includes the process of amalgamating different system components so that they act as one coordinated whole. Consultants aid companies by providing advice and implementing processes that permit different computer systems to function collectively. Businesses that sell software, hardware or data hosting as individual licenses are not included in this product segment; however, a company that sells a portfolio of integrated software and hardware solutions is included as part of this segment. Over the past five years, technological innovation has drastically altered this segment s portfolio of services. In particular, rapidly growing demand for public and hybrid cloud systems, infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS) services have significantly reduced demand for traditional (e.g. on-premise servers) services. Using these technologies, industry operators can design a centrally located megaserver that simultaneously manages the computing needs of multiple businesses, instead of placing a separate computer system within each client s building. Rapid improvements in

15 IT Consulting in the US August Products & Markets Products & Services continued hardware capability and virtualization software (see Technology and Systems section) have enabled operators to expand these services significantly during the past five years at the expense of traditional computer systems services. Overall, these disruptive technological developments have hampered demand for traditional services, leading to this category declining as a percentage of total revenue. Technical support Technical support services are estimated to generate 10.7% of industry revenue in This service area includes providing technical expertise to solve problems related to software, hardware or entire computer systems. Technical support bundled with maintenance and repair service for computer hardware is excluded from this category. Although a large amount of technical support services has been moved offshore over the past decade, this trend has primarily affected bundled support services. Over the past five years, this segment has decreased as a percentage of revenue due to improvements in the ease with which nonexperts can use new technologies. Technical consulting Technical consulting services account for 10.0% of the industry s revenue. This segment includes strategic management consulting and advice related to the use of IT, including hardware and software requirements as well as procurement systems, systems integration and security. This enables clients to troubleshoot problems by using software or computer hardware; however, this does not include technical support bundled with maintenance and repair services for computer hardware. Technical consulting has increased as a share revenue over the past five years due to strong demand for IT outsourcing and integration services. Other services All other IT services account for the remaining 22.8% of the industry. This miscellaneous category includes domain name registration, custom database design and development, website design and development, temporary technical staffing, disaster data recovery, licensing rights and resale of computer hardware and software. Demand Determinants Demand for industry services is based on a variety of factors, including the development of new IT products, demand for in-house IT support, business profit and merger and acquisition activity. Cyclical factors play a large role in industry demand, influencing business profit and cash flow and the resources companies are able to devote toward upgrading their IT systems. Business profit and confidence Demand for IT consulting services benefits from higher business profit and confidence. Businesses are more likely to invest in new computing infrastructure when profit is high and businesses maintain a positive outlook. In periods of declining profit and poor business confidence, companies reduce new purchases and outgoing expenses. This includes payments to external consultants such as IT consultants. Business profit is expected to improve over the next five years, which will likely increase demand for industry services. However, the IT Consulting industry also demonstrates countercyclical trends. Although companies may reduce expenditure on new IT and associated consultants in times of financial duress, businesses are also likely to focus on improving efficiency to increase profitability. This includes improvements

16 IT Consulting in the US August Products & Markets Demand Determinants continued to systems and processes such as computer databases, network infrastructure and office software. New IT products Demand for industry services is highly sensitive to continued development of new hardware and software products. An increase in the speed and development of technology requires businesses to establish and upgrade their IT systems. As a result, companies will need the help of IT consultants to recommend the best strategies to improve their systems. Industry operators must rapidly assess the relevance of innovations or they will not remain as competitive as more technologically savvy companies. Over the past five years, rapid adoption of third-platform IT solutions, which include big data analytics and cloud computing, has increased the need for IT consulting in these areas. Over the next five years, demand for industry services will likely remain strong as digital technology continues to drive the global economy forward. In-house IT support versus outside consultants Demand for industry services is negatively correlated with the use of in-house IT support teams. For example, a company with an internal technical support or procurement team is unlikely to seek the services of external IT companies. In this case, a company may prefer to assemble IT systems internally, rather than purchase services from an IT consultant. However, because technology evolves rapidly, many companies view the outsourcing of IT consulting services as a necessary and more efficient alternative. In particular, small to medium-sized companies often turn to outside consultants for IT consulting services. Smaller companies do not require constant system upgrades and find it more practical to pay a one-time consulting fee. Conversely, larger companies often have the ability and the need to establish their own internal services, which reduces their demand for IT support services from consultants. Major Markets The private business sector accounts for more than three-fourths of IT consulting revenue, with the largest client bases in the financial services, manufacturing and retail, communications, technical and healthcare industries as well as federal, state and local governments and nonprofit organizations. The remaining 22.1% of revenue comes from a variety of other industries. Financial services Financial service providers are the largest consumers of IT consulting services by revenue, contributing 19.6% to industry sales in Major client groups within this sector include commercial banks, investment banks, insurance companies and credit card issuing companies. Since operators in the financial services industry are responsible for protecting sensitive client information, they depend on IT consultants to protect the privacy of this information. Furthermore, because an increasing proportion of financial transactions are automated through algorithmic trading systems, operators in this industry require advanced data processing capabilities and fast, reliable network connections. For example, banks rely on IT consultants to reduce identity theft through more secure client verification systems. This segment s share of industry revenue has remained steady over the past five years.

17 IT Consulting in the US August Products & Markets Major Markets continued Major market segmentation (2017) 10.9% Healthcare sector 11.2% Communications and other 22.2% Other sectors 17.3% Manufacturing and retail 19.6% Financial services Total $408.2bn 18.8% Public sector and nonprofits SOURCE: Public sector and nonprofits The public sector and nonprofit organizations account for an estimated 18.8% of industry revenue. The public sector includes, federal, state and local governments. The federal governments accounts for the majority of revenue from this segment. The federal government requires IT consultants in areas including defense systems, social security, benefits administration and Medicare. Major government clients include the Department of Energy, Department of Defense, the Army and the Department of Homeland Security. Additionally, IT consulting services are required to maintain the information systems of state-run agencies including schools, colleges and universities. As a result, industry revenue is closely linked to government consumption and investment via public sector consulting demand. During the past five years, government consumption and investment decreased. This, coupled with concerns over state budgets has reduced demand from the public sector and led to a decrease of this segment as a percentage of revenue. Manufacturing and retail Manufacturing and retail customers collectively generate 17.3% of industry revenue. Retailers and manufacturers depend on the IT Consulting industry s products and services for the installation and maintenance of their point of sale systems, logistics, and inventory management systems. Innovations in the efficiency and security of these systems help manufacturers and retailers reduce costs, enabling them to be more competitive. Retailers use industry services to notify them when their inventory is low so they can order new products. In addition, retailers are increasingly seeking the help of industry operators to design and integrate online retail channels. Similarly, manufacturers use industry services to gain insight from retail data, develop just-in-time inventory systems and reduce logistical costs associated with global supply chains. This market s ability to spend on IT is highly cyclical and demand is closely linked to the levels of consumer disposable income and spending. As disposable income has rebounded over the past five years, this segment has increased as a percentage of revenue.

18 IT Consulting in the US August Products & Markets Major Markets continued Communications and other technical sectors Telecommunications is a rapidly changing field, which is strongly influenced by technological change. Similarly, high technology industries (e.g. consumer electronics manufacturers, aerospace and defense) rely on IT consultants to facilitate their research and development activities. Overall, communications and high technology make up 11.2% of industry revenue. Technology is constantly evolving and the need for faster systems is always a priority. For example, an IT consultant can help a mobile phone company implement more reliable cell phone internet service by analyzing coverage area maps and consumer usage trends. Communications and high technology industries are expected to grow steadily as a proportion of industry revenue over the next five years. However, despite rising revenue from this segment, growth was slower than other segments, which decreased this segment s percentage of revenue. Healthcare sector The healthcare sector is expected to account for 10.9% of industry revenue in Demand from this segment is driven primarily by increased healthcare expenditure, rising regulatory compliance costs and increased outsourcing of electronic medical records management to outside providers. In particular, compliance costs associated with the Affordable Care Act and state-level health insurance exchanges have been a primary driver of rising demand during the past five years. Additionally, increased total health expenditure has increased demand for healthcare services, which has subsequently boosted demand for computer systems design, network management and IT support services from this sector. International Trade International trade does not occur in this industry due to the service-based nature of its activities. However, globalization has helped large consulting firms that service multinational corporations maintain an international presence. Additionally, many US-based IT companies offshore some portion of their labor, particularly in the areas of software programming and technical support, to India, the Philippines and other countries where labor costs are relatively lower. Although these services are effectively imported to the United States, they are not recorded by the US International Trade Commission.

19 IT Consulting in the US August Products & Markets Business Locations 2017 West AK 0.1 New England West CA 14.3 WA 2.5 MT 0.3 OR 1.1 NV 0.9 Rocky Mountains ID 0.3 UT 1.0 AZ 1.6 WY 0.1 CO 3.2 NM 0.4 ND Plains NE 0.5 MN WI SD 0.1 KS 0.7 Southwest TX 7.8 OK 0.6 IA OH IL IN VA WV KY 0.6 MO 1.3 Great Lakes 1.2 MI 2.0 PA 3.3 AR 0.3 MS 0.3 LA 0.6 TN 0.9 Southeast AL 0.8 Mid- Atlantic GA 4.0 NY NC 2.6 SC 0.8 FL ME West HI 0.3 Additional States (as marked on map) 1VT 2 NH 3MA 4 RI CT 6 NJ 7DE MD DC Establishments (%) Less than 3% 3% to less than 10% 10% to less than 20% 20% or more SOURCE:

20 IT Consulting in the US August Products & Markets Business Locations The distribution of IT consulting establishments generally reflects the US population distribution with increased consulting density near technological centers and key demand markets, including financial service companies, large corporations and government clients. Most IT consulting companies are located in the Southeast, closely followed by the Mid-Atlantic and the West. Southeast The Southeast contains the largest number of IT consulting firms, with 23.9% of industry establishments. Many IT consulting firms are in this region because 25.7% of the US population resides in this region. The financial services companies are the largest downstream market for the IT Consulting industry. It includes banks, capital markets and insurance companies The Southeast regions contains the largest number of commercial banks with 28.4% (IBISWorld report 52211) as well as insurance agencies and brokers with 24.9% (IBISWorld report 52421). By positioning themselves in the Southeast, IT consulting firms improve their ability to capitalize on these key downstream markets. Mid-Atlantic The Mid-Atlantic has the second-largest share of industry establishments. In 2017, 19.3% of industry establishments are estimated to be located in the Mid- Atlantic region. A large number of IT consultants are located in this region due to the large number of financial services companies located in New York, which accounts for 6.1% of total establishments. New York also contains 5.3% of wireless telecommunication carriers (IBISWorld report 51721), such as Verizon Wireless and AT&T Communications. Communications, media and technology companies are the fourth largest downstream market for industry operators. % Distribution of establishments vs. population West Great Lakes Establishments Population Mid-Atlantic New England Plains Rocky Mountains Southeast Southwest SOURCE: West The West is a prominent location for IT consulting companies, tying the Mid- Atlantic with 19.3% of industry establishments in California is home to the Silicon Valley, which is one of the largest centers of high technology companies. Accordingly, California represents 14.3% of industry establishments. The region is also home to 17.3% of the US population, which provides operators to access to a large supply of skilled labor. Other Regions with a disproportionately small number of industry establishments on a per capita basis include the Great Lakes and Southwest regions. This is due to the low level of business penetration in the Great Lakes with 11.8% of establishments and the Southwest containing 10.4% of establishments. A crucial exception in the Southwest region is Texas, which ranks second in establishments with 7.8%. Texas contains large cities such as Dallas and Houston, both of which have offices of many consulting firms.

21 IT Consulting in the US August Competitive Landscape Market Share Concentration Key Success Factors Cost Structure Benchmarks Basis of Competition Barriers to Entry Industry Globalization Market Share Concentration Level Concentration in this industry is Low Despite the presence of numerous high-profile global corporations, the industry s sheer size and vast portfolio of disparate services prevents any one company from dominating the industry as a whole. In fact, the industry includes: network infrastructure companies, IT outsourcing companies, traditional large consulting firms, specialized software development organizations and a wide range of other companies that do not necessarily compete directly with one another but offer some type of service related to IT. The largest of these companies is International Business Machines Corporation (IBM), which is expected to generate $10.5 billion in industry-relevant revenue in 2017, despite accounting for just 2.6% of market share in the same year. Similarly, global conglomerate Hewlett-Packard Enterprise (HPE) will account for less than a 5.0% share of industry revenue in 2017, despite generating $9.6 billion in industry-relevant revenue. Overall, the four largest companies in the industry are estimated to generate just 8.4% of industry revenue in Rapid technological developments, particularly within cloud infrastructure and mobile computing, have significantly disrupted the industry over the past five years. In particular, these developments have encouraged dozens of specialty companies to enter the industry and quickly create a niche market for their services. The industry is becoming increasingly fragmented due to the ever-growing number of products and services offered by the industry. Furthermore, the nature of services provided permits up-and-coming firms that specialize in a recently introduced technology to quickly capture a chunk of the IT market at the expense of more established competitors. Accordingly, IBM s market share has decreased during the past five years, as its revenue growth has lagged behind that of the overall industry despite several acquisitions and continued investment in new products. Conversely, relatively smaller companies, such as Dell Technologies, Inc., which was formed from the merger of EMC Corp and Dell, Inc. have grown over the past five years as a result of favorable shifts in technology trends that have boosted demand for their product or service lines. Some consolidation has occurred over the past five years, driven primarily by major players acquiring smaller competitors. However, the industry is still primarily composed of small business. Industry structure is expected to change steadily over the next five years, as rapidly evolving technology will continue to encourage new businesses with specialization in specific fields to enter the market. At the same time, companies that rely on obsolete technologies will likely have to merge with competitors or exit the industry altogether. Major players will continue to acquire successful small players, but the nature of IT services will ensure that the industry remains fragmented. Key Success Factors IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are: Adoption of a commercial focus Highly technical and service-based industries, such as IT consulting, need to tailor their expertise to the clients Access to efficient technology & techniques Access to and an understanding of the latest hardware and software systems can be crucial to attracting clients in a dynamic technological environment. Clients expect state-of-the-art service and equipment. Access to highly skilled workforce The industry is reliant on skilled labor, since computing power alone is insufficient to develop solutions for clients IT needs.

22 IT Consulting in the US August Competitive Landscape Key Success Factors continued Effective cost controls Ensuring that a project is within budget greatly contributes to a firm s reputation for performance. Clients tend to enter into a project on a budget and not meeting that standard can be deemed a failure. Effective and efficient project management skills The client s project needs to be managed well and with good, clear and open lines of communication between the industry operator and the client. Cost Structure Benchmarks Cost structures in the IT Consulting industry can vary greatly depending on the type of products and services offered and the markets the firm caters to. In addition, there is a large disparity between the industry s largest and smallest firms. For example, global companies such as IBM and Accenture PLC, which provide a wide range of IT consulting, system design and integration services across all market sectors, have a considerably different cost breakdown than small tech support companies that operate locally. The following cost structure benchmarks illustrate the average costs across all industry operators. Profit Average industry profit, as measured by earnings before interest and taxes, is expected to account for 7.3% of industry revenue in Over the past five years, profit has increased from 7.1% in Moving forward, as clients continue to rely on data management and other digital technology solutions to drive business, increased demand for IT consulting services will permit operators to increase fees while sustaining a growing number of clients. Additionally, major companies are expected to continue to shift the balance of their services toward higher value-added offerings, such as infrastructure-as-aservice (IaaS) and other cloud-based services. These services are generally more profitable for operators than their traditional counterparts. However, intensifying competition among major players will likely pressure operators to maintain low prices for services, which may constrain profit margins. Overall, IBISWorld estimates that average profit margins will increase slightly over the next five years, with strong demand for higher-margin IT services partially offset by increased price-based competition among larger companies. Wages As with most service-oriented industries, wages represent the largest cost incurred by industry operators. Wages are expected account for 46.9% of industry revenue in 2017, up from 39.3% in Over the past five years, wages have increased as a share of revenue due to strong demand for IT services, which has boosted new hiring across the industry. As companies invested in new technology over the period, operators have increasingly sought highly skilled computer and software engineers with terminal degrees, experienced consultants and other well-trained employees to remain competitive despite rapid technological change. Additionally, operators have also had to increasingly experience demand for skilled labor from other industries. The growing trend of entrepreneurship in the country has increased demand for skilled labor, such as software engineers, that the IT Consulting industry uses. Consequently, operators have had to compete more heavily with external companies for the same employees. These trends have boosted the average wage per worker to $91,203, which has subsequently driven up wages share of industry revenue over the five-year period.