Europe’s IT services market won’t revive until 2003, and a return to the boom years of the ’90s will never happen, according to a new report by Forrester Research B.V. (Nasdaq: FORR). Moderate growth will take spending to €120 billion by 2006, up 35 percent from 2000, and will force providers to exploit an outsourcing boom and embrace new pricing models for services networks.

“Europe’s IT services market changed course during 2001 as growth evaporated,” said Forrester Senior Analyst Andrew Parker. “Lingering aftershocks from the dot-com collapse blended into an economic downturn that caused many companies to slash IT services spending. And as their clients revised plans in 2001, services firms struggled to realign offerings, and eCommerce integrators fell like flies as their niche Web implementation market dried up and traditional players scrambled to maintain margins. Both groups hastened to patch together a new mix of service lines, skills, and pricing models to meet clients¿ expectations.

“Smaller players simply can’t compete in new disciplines at the drop of a hat, and larger firms like Deloitte Consulting can’t sustain their operations just by tactically switching focus month by month. Giant organizations like PriceWaterhouseCoopers, Cap Gemini Ernst & Young, and KPMG Consulting stood by their matrix approach as market change accelerated, but evaporating margins in previously profitable service lines and unprofitable operations in specific geographies represent a drain on resources that they can’t support. Finally, in areas like eBusiness consulting, where the mismatch between staff numbers and business opportunity will simply be too great to continue, larger firms face further layoffs, while smaller players will take their cue from Razorfish and shut up shop in Europe.”

But Europe’s IT services market won’t stay in today’s recessionary cycle. Pressure on businesses to extract value from years of extravagant software investments — and accelerating competition as the economy turns round — will force services investment back onto the agenda. Forrester calculates that Europe’s overall IT services market won’t return to double-digit growth until 2003, and beyond 2004, the market will revert to slower growth, with implementation and management consulting stagnant or declining. But successful systems integrators will beat a static market by extracting value from costly but underexploited IT investments made by clients in the late ’90s. By delivering a light dose of new technologies like Web services into tightly controlled process-change projects, firms should exploit their market-leading capabilities in implementation to grow share in this field.

“Crucially, as more infrastructure and processes fall under outsourcers’ wings, the standardization and consolidation of operation that results will carve away huge chunks of other IT services business,” Parker added. “Help firms with no outsourcing capability must link up with best-of-breed outsourcers in services networks that add collaborative value to client deliverables. With fewer companies looking for top-down business reinvention, management consulting opportunities in Europe will be near-stagnant until 2004. To keep business as buoyant as possible, consulting firms must tie their offerings to the technology-driven change that clients will embrace — interenterprise process integration and collaboration. Conversely, outsourcing’s acceleration from 2001 to 2003 marks a fundamental shift in attitude among Europe’s large companies — one that will endure to the end of the decade. Only legal constraints on staff redeployment in countries like France and Germany or a lack of service-provider capacity in Southern Europe will limit outsourcing potential. Finally, innovators will focus on shared BPO and managed services.”

For the report “Europe’s IT Services Retrench,” Forrester spoke with IT and eBusiness executives in 57 Pan-European organizations with average annual revenues of €13 billion.