Computer Related Services, NEC

SIC 7379

Industry report:

This category covers establishments primarily engaged in supplying computer related services, not elsewhere classified. Computer consultants operating on a contract or fee basis are also classified in this industry. Establishments primarily engaged in producing prepackaged software are classified under SIC 7372: Prepackaged Software; and those engaged in offering data processing courses or training in computer programming and in computer and computer peripheral equipment operation, repair, and maintenance are classified under SIC 8243: Data Processing Schools.

Industry Snapshot

The miscellaneous computer related services segment was heavily dominated in the early twenty-first century by consulting services, accounting for about 90 percent of industry revenues. Yet this sector was only a small part of the computer professional services industry, which remained the dominion of computer specialists. Within this computer services category, the single biggest component was computer system design services, followed by computer facilities management services. Computer consulting grew throughout much of the first decade of the 2000s before declining somewhat during 2008 and into 2009 in response to an overall economic downturn. However, employment in the computer systems design and related services industry was expected to increase almost 4 percent annually between 2010 and 2020, reaching 2.1 million jobs by the start of the third decade of the twenty-first century, according to the U.S. Bureau of Labor Statistics. Computer specialists, who already accounted for more than half the employment in this sector, were expected to experience the most opportunity, as the computer industry continued to elevate technology expectations and capabilities. Output in the industry was predicted to increase 6 percent per year during the same time, with the amount of chained dollars rising from $258.5 billion in 2010 to $466.5 billion in 2020.

Organization and Structure

Those computer related services not classified under other SIC codes included hardware and software requirement analysis and diskette conversion services. Some consultants marketed themselves to businesses as experts in a particular area. Those who performed hardware requirement analysis thrived in the computer-centered economy by recognizing the need for business to select the best computer equipment for its goals. These analysts were usually hired on a contract basis to spend several weeks or months working with a company to select the company's computer hardware. Often they discovered that existing equipment was not satisfactory and that either upgrades or complete overhauls were necessary to bring the company up to date.

TechServ Alliance (formerly the National Association of Computer Consultant Businesses) is a nonprofit trade organization, based in Washington, D.C., whose members include skilled professional consultants or programmers. Founded in 1987, TechServ supports legislation, provides job fairs and model legal contracts for members, and encourages professional standards among its members. TechServ also lobbies Congress to consider the needs of independent contractors and employees in the industry.

The Independent Computer Consultants Association (ICCA) is a nonprofit trade association based in St. Louis that was founded in 1976. Its members are experts in hardware and software. ICCA publishes tips for hiring computer consultants as a support for its members. It also compiles industry statistics, offers insurance programs for member companies, and develops standard consulting contracts.

Computer related services consultants perform tasks similar to those performed by other computer professionals. Many work for large computer firms before going off by themselves or joining consulting firms. The consulting firms tend to be small to medium in size and can be found in every kind of community in the United States, from large metropolitan areas to rural communities. Those consultants working in the smaller areas commute to their clients' offices, often working there for the duration of a project.

Background and Development

As computers and computer systems became commonplace in the working world, the necessity for computer related services increased. From the 1950s through the 1980s, technology made huge leaps forward. As costs fell in the 1970s and 1980s, more businesses came online for straightforward tasks. By the late 1980s, very sophisticated computer equipment needed equally sophisticated specialists who could handle disk conversion, database development, and recertification of disks and tapes. These consultants worked to make a niche for themselves among businesses of all sizes and types.

In the 1980s, a handful of companies like IBM Corporation and some smaller rivals dominated the computer services industry. However, corporate downsizing and reengineering forced economic power to shift from a handful of monopolies to hundreds of smaller high-tech specialists. The power in the marketplace also shifted during the 1990s from those making the computers to those using the computers. A direct and striking result of this trend was the explosion in demand for computer services.

Computer service companies originally were hired to automate record-keeping tasks such as payroll. They expanded into such customer-related areas as fund transfer systems, just-in-time inventory systems, and customer information systems. Many companies could only hire these service firms in the best of financial times due to the high cost of the services. Early programming was highly individualized, but the needs of business by the 1990s necessitated more standardization.

New tax laws and proposed health care changes were some of the areas of concern to the computer consulting industry. TechServ wanted computer systems analysts and other computer consultants to be considered professionals exempt from overtime rates. Their staff members worked with the U.S. Department of Labor to create laws that dealt fairly with TechServ's members. The 1986 tax law's Section 1706 indicated that only technical services firms could deduct the use of independent contractors. The TechServ Alliance actively tried to repeal this part of the law. President Clinton proposed to repeal Section 1706 as part of his health care reform bill, saying that more workers needed to be treated as employees.

Pennsylvania enacted a 6 percent sales-and-use tax for computer related services. It met with strong resistance from the industry, whose leaders said that computer services firms were in the early stages of development and could be harmed by the steep tax. At the same time, these firms were contending with an influx of products that were designed to be operated by average office personnel without the assistance of specialists.

Prepackaged software also took away some of the steam of these companies as more users of computer hardware and software became familiar with their equipment, needing less support from computer services professionals. There was also a longer lag between the purchase of computer equipment and the need for computer professional services, which forced lean operations for these companies. As more companies integrated computer systems into their operations, new additions to the installed base increased slowly because many purchases were just upgrades.

By the mid-1990s, an increasing connection existed between the computer and telecommunications industries, especially in Europe and Japan. This was expected to help computer professional services firms, as consultants were called in to connect changing technologies so that performance was seamless.

The Independent Computer Consultants Association (ICCA) encouraged its member consultants to use formal contracts that outlined such details as payment terms, length and scope of the project, and copyright information on the finished project. Custom software developers, for example, usually held the rights to the computer code they developed, and the customer was allowed to use the system, but not to sell it.

Beginning in 1988, the Internal Revenue Service (IRS) penalized companies for calling employees independent contractors and not paying taxes for them. The IRS used several factors to determine whether a part-time worker was an employee or an independent contractor. These included employee training, working hours, payment practices, and the company's right to discharge the worker or the worker's right to terminate the working relationship. As long as the employer controlled what the work was and how it was to be done, the worker was considered an employee.

Many in the industry were also concerned about competition from foreign computer experts. The TechServ Alliance fought the abuse of immigration laws that allowed foreign workers to do computer consulting work at illegally low rates and without proper visas.

New technologies such as computer-aided software engineering, or CASE, allowed some companies to handle their own computer programming without bringing in consultants. Some consulting companies fought this trend by offering skilled specialists who could perform computer tasks at rates far below the company's cost to do the work in-house.

In the early 1990s, an increasing proportion of computer related services was in e-mail systems and services. This technology included the proliferating voice mail systems as well as electronic messaging systems that traveled across computer networks. Other telecommunications areas were expanding into computer consultants' territory as well. Integrated services digital networks, or ISDNs, provided computer professionals with another field in which their services could be used. The key for companies in the computer related services industry was to stay ahead of the corporate world and to continue offering services that enabled corporations to focus on their business while the consultants took care of their computer needs.

In the late 1990s, as the new millennium neared, computer consultants reaped a bonanza as U.S. businesses, large and small, spent heavily to have their computer systems safeguarded against the so-called Y2K bug. The widespread fear was that computer systems would fail to recognize the arrival of the year 2000 and would either stop functioning altogether or would malfunction. As it turned out, perhaps because of the billions spent on preparations or perhaps because the threat was never as big as it was reported to be, the new millennium arrived with virtually no dislocation in the computer sector. However, as long as bugs in software continue to pose a problem, computer consultants will have plenty of business trying to track down and eliminate them.

The growth of firms in the computer related services industry was in double digits toward the end of the twentieth century. Companies increasingly turned to computer specialists to handle their disk conversions, database developments, and troubleshooting. The popularity of the information superhighway and its effects on U.S. companies meant a larger role for consultant services. Although many companies developed extensive in-house computer centers from the 1960s through the 1980s, beginning in the 1990s they increasingly turned to computer service firms, particularly to handle special assignments. Some found that it was more cost effective to lay off or reassign their own computer personnel while using third-party data processors, systems integrators, or computer consultants. Computer services firms made it their responsibility to stay on the cutting edge of technology and to offer services that most in-house departments could not match. By 2008, approximately 67,500 establishments, averaging $2.3 million in annual revenue, operated in the miscellaneous computer related services category, generating a total of $150.3 billion--up from $144.9 billion in 2006.

Worldwide revenues of the information technology industry rose to more than $1 trillion in 1998, up from $688 billion only three years earlier, according to the Information Technology Industry Council (ITIC). These revenues represented sales of computers and related equipment, software and services, business equipment, and telecommunications equipment and services.

U.S. Census Bureau data put revenues of the U.S. computer services industry at nearly $109 billion in 1998. Spending for computer related services, not elsewhere classified, accounted for a little over $4.3 billion of this total. According to ITIC, the information technology sector represented nearly half the rapid growth the United States benefited from in the late 1990s through 2000. Then, in 2001, the information technology business climate plunged. Some analysts attributed the decline to the result of more capital spending by businesses prior to Y2K compliance services. Others attributed the downturn of the overall softened economy, brought about by the September 11, 2001, terrorist attacks on the United States. Reductions in corporate spending affected every sector of the information technology industry, especially service providers.

According to the Information Technology Association of America, U.S. revenues of the information technology industry stood at $727 billion in the mid-2000s. Consumers were the largest investors when it came to information technology, spending $256.2 billion in 2004, while financial institutions and business services invested $205.5 billion. The government sector spent $168.9 billion and $96.5 billion was spent in manufacturing.

There have been six key studies conducted by the Congressional Budget Office (CBO), the Council of Economic Advisors, and others, who agreed that information technology and "productivity growth acceleration" were the chief components in the thriving U.S. economy. Continued information technology spending was necessary to deter the increasing costs averted to fight the war on terrorism while the United States fought the war in Iraq. The CBO's budget for 2003 through 2012 called for a surplus of more than $500 billion in spending in the information technology industry. Additional funding was allocated toward security.

Nearing the end of the 2000s, the U.S. economy was in a deep recession, and the world economy was highly unstable. Banking, real estate, credit companies, and automotive companies--some of IT services' largest customers--were some of the hardest hit. For example, research firm Celent reported that IT spending by the financial services industry showed a 4.5 percent and 6.4 percent year-on-year increase in 2007 and 2006, respectively. However, Celent estimated that IT spending for this sector would decline to $353.3 billion in 2009, a 1.3 percent decline from the $358 billion in 2008.

According to a survey conducted by Deloitte Consulting and reported by Computer Weekly in May 2009, 80 percent of businesses and government departments either had cut or were planning to cut IT costs. Of that total, about 84 percent of cuts were being made from outside the IT department, leading to concerns that the decision makers did not fully understand the associated costs and risks of the cuts. These cuts come primarily from two sources: staffing or infrastructure. Neville Howard, a partner at Deloitte, noted the dangers to each approach: "Relying on out-of-date systems leads to problems today, while cutting back on staff will make life difficult in the future" Another approach is to renegotiate outsourced contracts, dividing responsibilities among numerous providers who submit the lowest bid for each project. The trouble, Howard suggests, is the difficulty the firm faces when, eventually, it wants to piece those contracts back together.

The computer services industry was also undergoing a transformation as more and more services moved onto the Internet. Known as "cloud computing," IT and business operation providers rent or sell space on the Internet, where large amounts of data can be stored and processed. Cloud computing often alleviated the need for large, expensive in-house computer infrastructures that had become obsolete. Likewise, software capabilities were also moving to cloud computing.

Current Conditions

According to the U.S. Census Bureau, there were about 48,545 establishments engaged in the computer systems design services industry in 2010. Together these firms employed approximately 484,000 people who earned a total annual payroll of more than $39 million.

According to a report by research firm IBISWorld, computer systems design, development, and integration services accounted for 36 percent of revenues in the overall IT consulting industry in 2011. The report estimated the IT consulting industry to be worth about $336 billion and predicted a continuation of merger and acquisition activity into the 2010s. In addition, "The growing popularity of cloud computing will lead companies to seek the expertise of consultants, as will firms' desire to secure their proprietary and confidential data."

Industry Leaders

In the early 2010s, more than 80 percent of the companies in this industry were small entrepreneurial firms with annual sales below $2 million. Many non-computer firms joined the industry by adding divisions or by acquiring computer services companies. Banks, publishers, airlines, and telecommunications companies were among those whose information technology divisions were involved in this industry.

Computer professional services included custom software, system design, and outsourcing services. Among the major players in this industry were Automatic Data Processing (ADP), Ceridian Corp., and Acxiom Corp. Perot Systems Corp. of Plano, Texas, which had been an industry leader, had annual sales of $2.8 billion and about 22,000 employees when it was acquired by Dell in 2009 for $3.9 billion In fiscal 2011, industry leader ADP of Roseland, New Jersey, posted revenues of more than $9.8 billion. The firm had 51,000 employees and more than half a million clients. Ceridian, based in Minneapolis, generated revenues of almost $1.5 billion in 2011 with approximately 9,500 employees. Acxiom of Little Rock, Arkansas, earned $1.1 billion that year and employed 6,600.

Workforce

The IT workforce in the United States reached 4 million jobs in November 2008 before steadily declining into 2009. According to the TechServ Alliance, between November 2008 and the end of March 2009, the IT industry lost approximately 150,000 jobs. In January 2012, however, industry employment reached an all-time high of nearly 4.1 million.

Those consultants and analysts who took advanced training in new technologies and who had a broad base of knowledge were better placed to succeed in the competitive world of computer services. The ICCA had its own certifying organization known as the Institute for Certification of Computer Professionals. This institute administered a standard computerized examination at more than 140 sites around the world. Those who passed the exam were designated Certified Computing Professionals and could market themselves as experts in computer systems.

America and the World

The United States was the largest market for computer services in the early 2010s, with almost half the information services used by consumers worldwide used in the United States. Computer consultants and consulting firms, therefore, were on solid ground in the U.S. market. Many foreign companies used U.S.-based computer related services as they tried to enter U.S. markets or as they concentrated on their own markets. Overall, U.S. computer professional services were highly successful abroad. Some U.S. companies also had subsidiaries in South America and Europe.

As countries around the world began to allow corporations to operate privately, computer services firms stood to gain new entry into foreign markets by helping the companies bring their operations up to date. With the U.S. marketplace beginning to mature, many consulting operations looked abroad for growth, with China as the most anticipated new market. On the other hand, IT service providers were increasingly under threat of competition from non-U.S.-based contractors vying for U.S. business. As more and more services moved to the Internet, it became easier for foreign companies to compete with traditionally U.S.-based businesses.

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