The IT services sector may not be the ‘darling’ of the tech media, but it’s a very valuable industry and one that is changing and growing. Adrian Mullett, head of technology at Bank of Ireland Business Banking, looks at the forces driving the innovation and the reasons why it’s an attractive sector to fund.
Innovation is a word that’s often associated with achingly cool start-ups. However, all businesses (in all sectors) must innovate to survive and grow.
Technology services providers in Ireland, and internationally, traditionally earned most of their revenues from commoditised services such as infrastructure management and maintenance. However, the ability to grow revenue and margins, and to scale with labour-intensive delivery models, is limited, and this is the challenge.
To grow, even to survive, IT services companies must innovate and transform their offerings.
So, how are they innovating? What are the threats and opportunities? Also, is there funding available for IT services firms to drive growth?
The dynamic forces of change
Four dynamic and interconnected forces have converged to define the opportunities for IT service providers in the future. These are: cloud, digital business, automation and security.
Irish businesses are adopting cloud hosting faster than their EU counterparts. 36pc of Irish businesses with 10 employees pay for cloud computing versus a 20pc EU average. Research by Equinix suggests an average Irish mid-size business will spend €190,000 a year on cloud services in 2017.
Global CEOs, across all sectors, expect 41pc of their business revenue to be derived from digital by 2019. ‘Digital’ can be understood as moving sales online, having back-office automation, increasing revenues from data analytics and making savings from the supply chain connectivity (or the internet of things, as it is called).
Intelligent automation means the skills, tools and techniques deployed in conjunction with artificial intelligence (AI) technologies that IT service providers use to reduce internal costs. Gartner estimates that, by 2021, IT service providers will be able to lower the cost of commodity services by 15 to 20pc annually through intelligent automation.
An example of intelligent automation is the use of virtual agents or chatbots in call centres that, through natural language processing, can perform the same tasks as human agents.
61pc of Irish companies suffered a data breach in 2016, according to the Irish Computer Society. Recent high profile security breaches such as the WannaCry ransomware cyberattack infected more than 230,000 computers in 150 countries.
The EU-led General Data Protection Regulation (GDPR) has made data security a key business priority. Data is precious; it needs to be protected. According to Deloitte, the spending on information security will grow from its current level of around $75bn to more than $150bn by 2020.
Managed IT service providers are often de facto ‘trusted advisers’ to businesses on IT so they have strong security credentials and are well positioned for growth.
The competition is fierce
A challenge for all IT service providers is the increasing pace of new technological developments.
“Providers have had to embrace new technology such as cloud platforms and mobile technology, but also new revenue and cash flow models that have come into effect with SaaS (software-as-a-service) pricing,” said Morgan Browne, MD of Milner Browne.
Browne said there is now fierce competition from new entrants into the market with applications that have a lower price point.
“Companies that haven’t pivoted to new tech and moved to the cloud may continue to grow in the short term but will [in a shorter period than they expect] become redundant,” says Browne.
IT service providers are also innovating by building specific platforms for niche business models.
“Micro-verticalisation is the key with cloud offering. This is where the opportunities lie,” suggested Browne.
“Picking a particular business model like a platform for gym companies or garden centres will drive exponential growth if it solves their problem. Building solutions that try to address all businesses’ requirements won’t be adopted in the same way.”
Be proactive rather than reactive
Another way of innovating is by staying informed, by watching for signals of marketplace changes that require a response and other opportunities that open new doors.
Edel Creely, group managing director at Trilogy Technologies, says that managing IT as a service has moved from what was once a reactive model – doing something when something breaks – to a proactive model, where IT services firms are now proactively engaging with their customers on solutions.
“The biggest area where we see growth is in the field of security. A lot of people talk about the cloud and the various cloud apps, but cloud is just a part of the IT-as-a-service marketplace.”
‘The old-style reactive model is redundant today and companies should expect their IT service providers to be proactive’
– EDEL CREELY
Being agile is now critical. In all aspects of the IT services sector, strategy, market demand and client relationships must become more responsive.
Creely said that one of the biggest opportunities in the market is the area of security and disaster recovery. “Our job is to make sure our clients understand not only the risk but the proactive solutions,” she said.
“I think the old-style reactive model is redundant today and companies should expect their IT service providers to be proactive. We are seeing an increase in demand for ‘security as a service’ as well as ‘disaster recovery as a service’ and we are using new technology to offer these to our clients.
“With GDPR coming down the line, companies must also ensure that they are compliant, so this is changing the landscape around data security.”
The massive shift to the cloud
Philip Maguire, CEO of IT Alliance, set up a business – Auxilion – in 2011, to focus specifically on the cloud.
“Businesses have moved to the cloud faster than we anticipated,” he said. “The shift – from owning, maintaining and storing standard hardware and software – to the cloud makes sense on so many levels, and, while we saw this coming, the rate at which firms have adapted has been impressive.”
The cloud brings costs benefits but more than that it means chief technology officers (CTOs) don’t have to worry about ‘the back-end’ and can instead concentrate on what matters – the data that’s generated at the front-end; data that can add real value to the business.
“The services we provide are based on people, process and technology. It’s always on, and we can implement changes at speed. What excites me about the near future is the rise of artificial intelligence in conjunction with the cloud. AI will automate predictive solutions. CTOs will be on the front foot, being able to spot any issues before they arise, specifically security issues,” said Maguire.
Significant opportunities around GDPR and PSD2
GDPR means all organisations in Ireland must be more ‘data secure’. Non-compliant firms will face hefty fines.
However, GDPR brings an opportunity for IT services providers, as does the revised Payment Services Directive (PSD2), an EU directive to be implemented by 2018.
The PSD2 is set to revolutionise banking services by allowing bank customers to use third-party providers such as Google or Facebook to manage their transactions. This presents an opportunity for IT service providers to build services specifically designed to facilitate these changes in the banking and financial sector.
Russell Moore, director of Aspira, the consulting and enterprise IT services company, says his firm’s new fintech offering will contribute to a predicted growth for Aspira of 128pc over the next three years.
“Our new centre of excellence in the [Dublin] docklands area will offer tailored services to the financial services and banking sector, delivering solutions and technical expertise to address the regulatory changes imposed by the PSD2,” he said.
The future is bright, so long as service providers remain agile, open-minded and innovative. The technology is there. Finding the opportunities that emerge within the market is the key to success.
In the near term, opportunities lie in areas such as managed security services, artificial intelligence, cloud, the internet of things and mobile.
Growth and lending
Regarding lending, the IT services industry is very amenable to both invoice discounting and loans. Banks actively fund technology service providers to drive their growth strategies. This can include funding for firms to make acquisitions to gain scale and expertise, expand in overseas markets and to invest in proprietary solutions that sit on top of established tech stacks.
Banks can also be a source of funding for companies adopting a ‘focused IT services’ approach. This is when firms develop particular domain or sector expertise such as mobile security or healthcare. Focused IT services is one of the top 10 tech growth areas for 2017, according to industry analysts Corum.
At Bank of Ireland, we estimate that the revenues of the indigenous IT services industry were more than €1bn in 2016 while software and telecoms accounted for €2bn. This represents a 15pc increase on 2015. So far, in 2017, the bank has delivered an increase of more than 50pc in debt funding to the technology sector. This is a testament to the ability of Irish tech companies to execute on growth and profitability.
If you are innovating to grow, you can attract support.
Adrian Mullett joined Bank of Ireland in 2013 as head of the technology sector. Previously, he worked with Daon, a global security software company, as senior research analyst focused on market strategy and technology trends. Mullett holds an MBA from Trinity College Dublin, postgraduate qualifications in financial management (ACCA), SME credit analysis and information technology (both from University College Dublin). He is a former chair of Information Security Ireland.