Hong Kong Looking Forward: IT Services Overview, (Executive Summary) Executive Summary

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1 Hong Kong Looking Forward: IT Services Overview, (Executive Summary) Executive Summary Publication Date: 11 December 2003

2 Author Jacqueline Heng This document has been published to the following Marketplace codes: ITSV-WW-EX-0392 For More Information... In North America and Latin America: In Europe, the Middle East and Africa: In Asia/Pacific: In Japan: Worldwide via gartner.com: Entire contents 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice

3 Hong Kong Looking Forward: IT Services Overview, (Executive Summary) In the first half of 2003, with the breakout of severe acute respiratory syndrome (SARS), a lack of business confidence in Hong Kong depressed the economy. However, in the third quarter, spending increased, and businesses began to see a slight recovery. For the past two years, the Hong Kong government has spent largesumsontechnologyupgradesforitsdepartmentsandhascommissioned the development of new application systems for its judiciary department. The government has also been "out-tasking" and subcontracting some of its maintenance and development projects to service providers rather than adopting an outsourcing approach. Government spending has focused on an array of IT services; however, it is generally agreed that many projects are not cost-effective. Expectations are that government spending on IT services will be reduced in 2004 from the spending levels of the past two years. In a depressed economy, opportunities exist for small, focused, low-risk, high-return, short projects to generate revenue. The small and midsize business (SMB) market remains untapped, and businesses are awaiting the implementation of the Digital Trade and Transportation Network (DTTN). The DTTN will be a partnership between the governments of Hong Kong and Southern China to move the SMB market into a shared-services platform. Historically, Hong Kong businesses have had links with Southern China. The buildup of transportation infrastructure between the two regions has increased the number of businesses expanding into Southern China. In examining the trends shaping the IT services marketplace in Hong Kong, Gartner Dataquest does the following: Provides a supply-side (vendor/service provider) research overview and analysis related to the IT services market in Hong Kong Discusses technological, cultural, political, economic and environmental factors affecting the IT services market Provides a convenient summary of top-line market size and forecast data for the major segments of the IT services market and forecasts its growth by service category Identifies the key market opportunities for IT services providers attempting to broaden and deepen their penetration of the market Examines the major challenges and opportunities of vendors trying to competeinthismarket Provides a listing of recent contracts won, in what areas, and the contract values Gartner Dataquest also provides both quantitative and qualitative analysis summarizing the size of these marketplaces and their growth forecast from 2002 through Gartner, Inc. and/or its Affiliates. All Rights Reserved. 1

4 2 Hong Kong Looking Forward: IT Services Overview, (Executive Summary) Methodology and Study Objectives Gartner Dataquest's analysis of the Hong Kong market for IT services is based on primary and secondary sources of data such as the following: Gartner Dataquest undergoes intensive face-to-face vendor research at the beginning of each year that includes more than 350 interviews across Asia/Pacific conducted from January through October In Hong Kong, Gartner Dataquest interviewed 20 vendors in all areas of IT services. The purpose of the research is to gain a better understanding of performance in 2002 and outlook for 2004, drivers, inhibitors, challenges, opportunities, service offerings, and revenue in Hong Kong. Gartner Dataquest designed a survey that was used across Asia/Pacific to ensure consistency in data gathering. Government data or trade association data Relevant economic data Articles in general and trade press Gartner Dataquest-developed information from various other IT-focused global, regional and local research programs Becausemarketsizeisanassessmentofthepreviousyear'sperformance, vendor/supply-side data is a key input including revenue information by service line and vendor prime/subcontracting activity. User/demand-side data is used to identify general spending patterns, current and future proportions of budgets allocated for IT services segments, and purchasing perceptions for service offerings. User/demand-side research includes user wants and needs customer surveys. Theestimatespresentedinthisdocumentarethemostaccurateand meaningful available. Despite the care taken in gathering, analyzing, and categorizing the data, careful attention must be paid to the definitions. Various companies, government agencies, and trade associations may use slightly different definitions of product categories, or they may include different companies in their summaries. These differences should be kept in mind when making comparisons between data and numbers provided by Gartner Dataquest and those provided by other research organizations. Vendors interviewed in Hong Kong include the following: AT&T Automated Systems Ltd. (ASL) Atos Origin Bamboo Networks BEA Systems BearingPoint Cap Gemini Ernst & Young (CGE&Y) Cascade Computer and Technologies Holdings Computer Sciences Corp. (CSC) Datacraft Asia EDS Fujitsu Getronics 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 11 December 2003

5 Hong Kong Looking Forward: IT Services Overview, (Executive Summary) 3 Hewlett-Packard IBM Misys NCR Pacific Century CyberWorks (PCCW) Unisys Vanda Systems Key Findings The following are key findings in this research: The Hong Kong economy is still depressed, with low business confidence and a high cost of living. As with most economies, a pickup usually occurs during the end-of-year holiday season. Over the past two years, the government has been driving IT spending; however, this budget is expected to shrink in the next two years. IT services penetration is relatively low and not expanding substantially. The IT services market is valued at $1.2 billion and is expected to grow to $1.3 billion in 2007, with a compound annual growth rate (CAGR) of 1.5 percent. Gartner Dataquest lowered its forecast at the beginning of 2003 with the eruption of SARS, which had a large impact on the economy. Opportunities in the market are small and selective. The banking, telecom and government sectors, along with the traditional conglomerates, are still the main spenders. Businesses look to service providers that have links or setups in China, so there will be business continuity when these companies move into China. At the moment, out-tasking/subcontracting projects are more prevalent than outsourcing projects. However, offshore outsourcing to China is increasingly popular because of the inexpensive labor but is experiencing the usual problems associated with using any new approach. Large conglomerates or corporations such Dairy Farm, Hutchinson or Jardine will find some advantages in consolidating their IT functions, implementing standard infrastructure and business application architectures, and moving toward a shared-services environment or internal service company approaches. Stronger links to the Pearl River Delta will be important to Hong Kong. In addition, the implementation of the DTTN will provide opportunities for SMBs. Gartner Dataquest Recommendations Following are recommendations as a result of the key findings: Service providers must carefully evaluate their cost of delivery to ensure they can achieve the desired margins through government engagements. Service providers facing near-shore competition from China should stress their advantages in project/service delivery management. Business process outsourcing (BPO) service providers should expect long salescyclesandshorterpilotengagementsbeforeanythingsubstantial comesfromthisservicesegment,becausebpoisimmatureinhongkong, except for the financial industry. To grow this segment, education needs to be a strong part of BPO service providers' pre-sales effort Gartner, Inc. and/or its Affiliates. All Rights Reserved. 11 December 2003

6 4 Hong Kong Looking Forward: IT Services Overview, (Executive Summary) Service providers should recognize that consolidation is inevitable in the saturated marketplace. Hence, service providers should either be in an acquisition mode or expect a joint-partnership situation or let market forces "clean up" the marketplace. Large service providers should develop and provide a shared-services environment for smaller players to take advantage of the latest technology to better compete against the bigger players; the Hong Kong market is primarily made up of SMBs. For the full report, see "Hong Kong Looking Forward: IT Services Overview, ," ITSC-AP-FR Gartner, Inc. and/or its Affiliates. All Rights Reserved. 11 December 2003