The major trends transforming French IT services companies

Alexandre MenardWhat are the major trends that will transform the digital services (ITS) sector, and what competitive advantages will make a difference? Alexandre Ménard, Partner at McKinsey & Company, explains.

ITS: A rapidly-evolving sector

“In a few years, the IT services sector will have radically changed” begins Alexandre. Large and small companies are working overtime to prepare for the market’s new tools and offerings. “The IT services market will reach €1,100 billion by 2020, an average annual growth rate (CAGR) of 5%.” The software market, expected to reach €600 billion by 2020 (CAGR of 8%), will not be left behind. This is a global dynamic driven by a fundamental trend: enterprises plan to devote 75% of their investments to digital by 2025. In this rapidly-growing sector, Alexandre predicts the arrival of new, game-changing players: “digital specialists with state-of-the-art technologies and tech giants moving into B2B services.”

As France follows these major trends, it is especially exposed to changes in some key sectors. Open banking and fintech are expanding in the banking and insurance areas. In the public sector, it’s the age of smart cities and e-health. And e-commerce and new online marketplaces are redesigning distribution and services.

“Today, the French IT services market represents €28 billion, and is expected to grow 4% annually through 2020.” This increase will be mainly driven by growth of the Cloud (+11% p.a.), consulting (+8% p.a.) and application implementation (+2% p.a.). The software market (€9 billion) also has solid prospects, with growth of 8% p.a. expected through 2020. The drivers will be specialized domain applications, a €4.7 billion market with growth projected at 9% p.a., and Enterprise Resource Planning (ERP) software.

SMEs and large companies: different needs, both growing fast

“SMEs and large enterprises have very specific needs, which require differentiated go-to-market strategies and distinct products and services.” SMEs want tools that are easy to use, reliable and standardized. Unlike large companies, most do not have specialized IT organisations. “Large enterprises seek customised IT products and services, and have dedicated, highly-skilled resources to pursue more complex projects.” The ITS company’s mission is to find the right approach to hit these two targets, or risk falling behind.

The €3.7 billion SME market is still much smaller than the large enterprise market (€22.4 billion). But SMEs are quicker to adopt innovations such as the Cloud; 42% of small and 21% of medium-sized enterprises will take the leap by 2020, vs. 17% of large enterprises.

SMEs are especially fond of software. “The smaller the enterprise, the more it relies on software,” says Alexandre. Consequently, software is expected to outpace IT services in the SME market. Few ITS companies succeed in “cracking the SME code”.  Among the key success factors cited by the McKinsey & Company expert are: a dedicated marketing strategy, a local approach, specific products, and automated and scalable processes.”

The major players

For Alexandre, the French competitive landscape is organised around major categories of players that have in common a strong international presence – or at least in Europe. The first category includes the generalists, with leaders in various verticals (CapGemini, Atos, Accenture) and top-tier players like Gfi Informatique, Econocom and Orange. In the second category, enterprises like Thales focus their expertise on a more specific vertical.

While uncontested leaders exist, the IT services market is nevertheless characterised by its fragmentation. “The three largest players hold less than 30% of the market.” In the software market, international players like Salesforce and SAP are setting the pace. “But French ITS companies have found their niche”; Cegid is now one of the top three ERP providers. “The degree of market consolidation varies depending on the segment.” While the top three (Sage, SAP and Cegid) represent 53% of the market, the Analytics and Business Intelligence (BI) segment, dominated by SAP, is more fragmented. It remains to be seen whether today’s leaders will be the leaders of tomorrow.

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