The good news for IT vendors is that IT directors have budget – albeit highly selective – to spend. Industry analyst IDC predicts worldwide IT spending will grow by 6.3 per cent this year, with software expanding seven per cent and hardware and services exhibiting six per cent growth.

But that does not mean that IT vendors have an easy ride. IDC also predicts their marketing budgets will increase by seven per cent this year, the biggest year on year increase for five years. As the average marketing budget actually outpaces the average revenue increase, it suggests that vendors are having to work harder for every pound of revenue.

Outsourcing shows no sign of slowing down. Despite some high-profile companies moving their operations back in-house, this is simply a sign that customers are more knowledgeable about what can and should be outsourced. Mega-deals are on the wane, but in their place smaller deals and smaller players – typically Indian companies – are eroding the dominance of the big services players.

Selective outsourcing

“A lot of companies are being more selective about what they outsource and are looking for services they require rather than a job lot,” says Butler Group analyst Mark Blowers. “In the last year, a lot of companies have brought IT back in-house, which shows a maturity in the market.”

As Indian service providers are winning more business they are setting up operations in eastern Europe to provide near-shore services to customers. Tony Cooper, telecommunications partner at Deloitte, also points out: “Where a lot of offshore providers also provide systems integration, before they would partner with a company in the UK to do local integration. Now they are bringing over high quality technical people to do that high level stuff from the start.”

The telecoms market is in a state of flux with voice revenues under increasing threat. For consumer-focused telecoms providers, the last year has been about where to squeeze extra revenue and differentiation. “They need to be able to offer a growth story and it’s proving very difficult,” says Cooper. They are investing in systems relating to content provision, such as analytics and content management, as well as product and service innovation to build this growth.

"“In the last year, a lot of companies have brought IT back in-house, which shows a maturity in the market”"

Mark Blowers, analyst, Butler Group

On the business side of the market BT still dominates and is selling complex managed IP-based solutions. The merger of Cable & Wireless and Energis is keeping the management busy. This uncertainty gives competition such as Colt the opportunity to make hay while the sun shines.

All telcos are trying to cut costs out of their operations. “As they need to operate at a lower cost base, we’ll see them looking at a technology refresh with lower total cost of ownership,” says Cooper.

Growth rates are small – just two to three per cent – and if you strip out broadband, revenues are declining, contends Cooper. So he anticipates further outsourcing of ERP or CRM systems to India and elsewhere to save costs. While they take cost out of running the business, they will be phasing in new capacity for end-to-end IP services.

On the cable side, ntl had barely drawn breath from its Telewest purchase before it started talking about buying Virgin Mobile. This acquisition will ensure its entry into the ‘quad play’ market, adding mobile to the existing triple play of internet, voice (fixed line) and television over the same connection.

As the number of mobile phones exceeds the UK population as a whole, it is clear that mobile operators are focusing hard on finding new revenue streams, while still smarting from their massive investment in 3G technology. Their attention has turned to content such as mobile TV and video-related applications.

Market saturation of mobile devices means there is very little to distinguish between the top four in terms of customers numbers. They are turning their attention to customer loyalty and retention to keep and add to their customer base.

Given that customer churn is 30 per cent a year and acquisition costs are high, it is hardly surprising they are beefing up their loyalty muscle.
“So we are going to see more focus on the customer service, loyalty programmes and because of that investment in CRM-related systems, data warehousing and analytics of phone usage to try and tease out new offers,” says Cooper.