Revenue within the worldwide services market increased from 2007 to 2008, decreased from 2008 to 2009, and then steadily increased from 2009 to 2011, according to a new study from International Data Corporation.
The report found that profitability increased in 2009 as vendors slashed payrolls to account for the dip in revenue and has slowly declined as vendors reorganised their workforce to match the return to revenue growth.
IDC senior analyst of worldwide services Chad Huston said that given the constraints of limited capital, services vendors must choose where to invest, which is the purpose of this new research.
"By helping service providers theorize about which segments of the services industry provide the greatest return per amount invested, the study assists in the pursuit of profit maximization," Huston said.
The study found that from a profitability percentage standpoint, deploy and support engagements are expected to be the most profitable service, followed by business consulting, IT consulting/systems integration/custom application development in aggregate, IT outsourcing, and finally business process outsourcing (BPO).
According to the report, over the past five years, consulting-oriented firms have had the only consistently positive profitability growth.
From 2007 to 2009, outsourcing-oriented companies had high profitability growth but turned negative from 2010 to 2011.
The report said offshore-oriented companies were similar to the vendor group of outsourcing-oriented firms throughout the time period, though less volatile.
"Recently, buyers of IT services have sought to decrease the number of service providers they have contracts with, and a shift in the traditional service delivery model has introduced new entrants into the marketplace," added Huston.
"At some point, the number of vendors must begin to decrease as the already converging traditional IT services vendor playing field has to compete with new entrants. But until that point, price competition will continue to drive down profitability."