The European e-Business Report The European e ... - empirica

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The European E-Business Report 2005 Negotiation power of customers The plunge in IT expenditures after the end of the dot.com hype has certainly increased the competitive pressure in the IT services sector. Consequently, the negotiation power of customers has steadily increased during the past years as is indicated, for example, by the continuing price pressure in this sector. As further consequence of the increased negotiation power of IT services customers, their demands on quality, pricing and the consideration of process-specific needs have increased. Current e-business developments are likely to further improve the negotiation power of IT services customers. The increasing relevance of OSS, for example, may affect the relationships between customers and providers. Firstly, the existence of OSS has increased competition in the software supplier market. In fact, various open source products, e.g. the operating system Linux or the database software MySQL, have become serious alternatives to conventional software. Customers can, thus, choose from a larger variety of alternatives. Secondly, the OS model also impacts the IT consulting and software integration market. Since the source code is open, almost all skilled IT services providers may offer integration services around the software. This further contributes to the independence of customers from specific software vendors and their integration partners. Rivalry in the market Triggered by the long-lasting economic downturn after the end of the dotcom boom, rivalry in the IT services market has significantly increased during the past years. The recent consolidation process in the software market, for example, has driven the merger & acquisition dynamics and led to headlines like “In the flat enterprise software market the message is clear: It’s time to hunt or to be hunted” 95 . A prominent example of this development was the hostile takeover of PeopleSoft by Oracle (both active in the ERP market). As a consequence, IT services companies have to deal with a continuously changing industry structure. Key e-business developments discussed in the sector report of July 2005 are likely to intensify competition in the IT services market. Case studies show how even small IT services companies try to compete with "IT giants" by making use of the open source model. Likewise, an emerging IT offshore market in Eastern Europe is likely to lead to more competition in established IT services markets. In addition, the delivery of SaaS – in the past often discussed as application service providing and currently getting again more attention – offers new opportunities for software companies to differentiate from their competitors. However, results of the e-Business Survey 2005 indicate that these developments are still at an early stage. While open source software (OSS) is already much used by IT services companies themselves, it is much less widespread in other sectors surveyed. At the same time, the percentages of companies outsourcing IT services to Eastern European providers or using specific software applications offered by ASPs are negligible (across all sectors studied in 2005). 95 As “Takeaway” of an article in TechRepublic (2004): “Survival of software’s fittest”, Article, 16.08.2004 (www.techrepublic.com). 161
The European E-Business Report 2005 Exhibit 2.10-4: Anticipated impact of e-business on the IT services industry Five forces shaping industry structure New entrants Substitution of products / services Negotiation power of suppliers Negotiation power of customers General importance in the sector High: Entry barriers are low since the establishment of businesses in the IT services sector only needs few resources. Medium: Threat of substitutes is of importance for alternatives within single market segments. Low: Main inputs are produced by companies active in the IT services sector itself. High: Strong price pressure and demanding customers are indicating an increased negotiation power of customers. Rivalry in the market High: The rough economic environment has intensified rivalry in the IT services market during the past years. Impact of e-business Main arguments •••• • Supply of outputs via the internet facilitates the establishment of new firms – independent of size and origin. • New technological developments are likely to accelerate the market entry of new players. •• • Alternatives to the conventional software supply have emerged, triggered by the OS and ASP developments. • Use of ICT and e-business technologies plays an important role for the establishment of OSS or ASP businesses. • • The internet has increased prices’ transparency and so further lowered the negotiation power of suppliers. Actually a large share of IT services companies purchase online. • However, online negotiation tools are only of marginal importance in this sector. ••• • The open source development is likely to increase the independence of customers from software vendors and integrators. •••• Impact of ICT and e-business: • = low; •••• = high Three e-business issues discussed in the July 2005 full report are likely to intensify rivalry in the IT services market: • Open source opportunities, enabling small IT services companies to compete with large players. • Establishment of offshore businesses in Eastern Europe may increase the division of labour within the IT services market in the EU. • ASP/ SaaS offer opportunities for differentiation. However, according to survey results of 2005, developments are still at an early stage. 162
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