CRS222 Financial Analysis Of Systems Integrators Aug89

This document, "Financial Analysis of Systems Integrators" from August 1989, was prepared for Digital Equipment Corporation to analyze the financial landscape and competitive structure of the emerging systems integration (SI) industry.

Key takeaways from the report include:

• Market Definition & Challenges: Systems integration is a newly recognized business, but its definition varies widely among analysts, leading to inconsistent market size estimates. Data collection is challenging due to the lack of disaggregated financial reporting by many firms.
• Market Size & Growth (Input's Estimates): The total U.S. SI market was estimated at $4.8 billion in 1988, equally split between commercial and federal government sectors. It was projected to grow at a 25% Compound Annual Growth Rate (CAGR) to $14.7 billion by 1993. Commercial SI was expected to grow faster (30% CAGR) than federal SI (19% CAGR), increasing its share to 60.5% by 1993.
• Market Concentration: The SI market is highly concentrated. In 1988, IBM (21.28%) and EDS (12.64%) dominated the overall market. In the commercial sector, IBM (25.79%) and Anderson Consulting (21.79%) were leaders. Digital Equipment Corporation's overall market share was estimated at 3.51%.
• Nature of the Business: SI is a capital-intensive business, requiring significant investment in software development, testing, and contract management. This favors large, financially strong firms, creating significant barriers to entry for smaller competitors due to customer aversion to risk with major strategic investments.
• Efficiency & Margins (Computer Systems News' Estimates): Based on Computer Systems News' data (which estimated the 1988 market at $5.9 billion, differing from Input due to definitional variations), hardware vendors involved in SI had a much higher average SI revenue per employee ($212,564) compared to "pure" integrators ($93,381) and "facilitators" (accounting firms, $65,499). This is partly attributed to hardware manufacturers' higher margins (over 25% on equipment) versus integrators' 10-12% margins on services.
• Market Differences: The report highlights significant contrasts between the federal and commercial SI markets in terms of customer requirements, competitive bidding, risk exposure, and profit potential.

The document also provides detailed profiles of major systems integrators like IBM, EDS, Anderson Consulting, and Digital Equipment Corporation, outlining their services, market focus, and future outlook. For Digital, the report notes that a formal SI strategy was only disclosed in September 1988, drawing skills from various internal groups rather than a central SI division, with a 1988 SI revenue split of 40% government and 60% commercial.