Without gov't contracts, Israel's IT industry would have collapsed

Zuri Dar

An IDC Israel study of Israel's IT services market in 2002 found that it was worth $1.214 billion in 2002. It shrank 9.3% compared with 2002, IDC Israel – the local branch of IDC International – found.

However, the result was in line with forecast trends for this market through 2007, it said.

This was IDC Israel's seventh survey of the Israeli IT services market.

It concluded that without government spending, Israel's IT industry would have collapsed. The government and local authorities are the biggest spenders, keeping the entire sector if not in clover, then at least afloat.

The third-quarter decline was due to corporations scaling down expenditure on IT, Israel's shrinking gross domestic product, declining levels of investment in Israel and the continuing hostilities in the region, IDC Israel wrote.

Fierce competition between IT service providers caused prices to drop. The year 2002 was the third in a row that the Israel IT services market has contracted, IDC Israel wrote.

Outsourcing is the largest segment in the Israeli IT services market, totaling $322 million in 2002 and accounting for 26.5% of the total market value.

Economic conditions combined with stringent management of expenditure have led company managers to adopt outsourcing as an efficient method of controlling expenses, saving on manpower and reducing risk exposure.

The IDC study found that Tel Aviv-based Ness Technologies led both the primary outsourcing market and the information systems outsourcing sub-sector with activities totaling $46.59 million, accounting for 24.8% of this market sector.

According to IDC Israel, IT service vendors that focus on outsourcing, have the greatest chance of benefiting from revenue growth in the coming years.

On the other hand, IDC does not expect any significant immediate short-term growth in consulting, integrated systems and client application development activities.

Top ten players

The wave of acquisitions and takeovers in 2002 left the top ten players in the IT services market with a 60.8% market share.

That is a worrisome trend for the middle-sized business sector. Less vendors would want to accept small and middle-sized projects, as there are fat contracts available from the government and defense sectors.

The central and local authority sectors in Israel are the largest vertical market. They spent $308.52 million on IT services in 2002, accounting for 25.4% of the value of the primary market and manufacturing market, which grew 27.8% on the previous year.

Without major government intervention and the initiation by the office of the Accountant General at the Finance Ministry of a considerable number of projects, the IT services market would have imploded. As things stand at present, the government sector sets the pace in terms of market size, pricing of services and in many cases, also the choice of preferred software applications.

"The effect of the recession on the Israel IT services market is not limited to the short and medium term. The change we are seeing in this market is irreversible," said Eran Himmel, senior analyst with IDC Israel. "The pressure exerted on IT service vendors to provide low cost services has become a commonly accepted practice in Israeli industry and will also continue to be the norm after the recession has bottomed out. Economic expansion and technological innovation will impact directly on future growth in the IT services market."

IDC Israel expects a moderate growth rate of 2.7% for the overall growth in the IT services market during the next five years, with market value expected to reach $1.386 billion by 2007.

The Marker.com