SIC 7373
COMPUTER INTEGRATED SYSTEMS DESIGN



Establishments in this industry are primarily engaged in developing or modifying computer software and packaging or bundling the software with purchased computer hardware—computers and computer peripheral equipment—to create and market an integrated system for a specific application. Establishments in this industry must provide each of the following services: the development or modification of the computer software; the marketing of purchased computer hardware; and involvement in all phases of systems development from design through installation. Establishments primarily engaged in selling computer hardware are classified in SIC 5045: Computers and Computer Peripheral Equipment and Software, and SIC 5734: Computer and Computer Software Stores; those manufacturing computers and computer peripheral equipment are classified in SIC 3570: Computer and Office Equipment.

NAICS Code(s)

541512 (Computer Systems Design Services)

Industry Snapshot

Spurred by e-commerce development and other trends, systems integration revenues grew more than 13 percent each year during the late 1990s. According to the latest data available from the U.S. Census Bureau in early 2003, revenues totaled $87.8 billion in 2000. However, in 2001 and 2002 systems integrators were victims of a weak economy and related reductions in corporate spending that affected virtually every sector of the information technology (IT) industry—especially service providers. Although IDC, a world leader in IT industry analysis, estimated that overall technology spending would improve in 2003 by some 6 percent—following an unprecedented fall (2.3 percent) in 2002. The research firm predicted a somewhat slower recovery for software spending, which affects the integration industry.

Roughly 48 percent of the industry's revenues in 2000 were specifically attributable to integrated systems design services, while the remainder came from things like computer programming and systems management services. E-commerce integration, which involves linking Internet-based data and applications with corporate databases and other non-Internet applications, has been one of the fastest-growing segments of the systems integration industry. Other growth drivers in recent years have included corporate migration to large enterprise application environments like enterprise resource planning (ERP) and supply-chain management (SCM) systems, mergers and acquisitions that require marrying the separate data systems of the merged entity, and the ongoing need to share business data and applications across diverse platforms and software environments.

Organization and Structure

Once a company identifies the specific design, operational, or management functions it wants its information system to perform—and the level of that performance—a systems integrator creates a system to meet those objectives. Systems integration services combine expertise in hardware, software, and communications to deliver complete information systems, including their design and development, the management of vendor contracts, the purchase of equipment and its technical integration, the implementation of the system, and any training necessary for the company to run its new or modified system.

The Information Technology Association of America, a trade group for the computer hardware and services industries, used the following analogy to explain systems integration: "In construction industry terms, the systems integrator would compare to the general contractor who interfaces with the electrician, the plumber, the mason, and any other trades that are necessary for the job, and who may undertake part of the task (for example, the role of architect). In systems integration, this general or 'prime' contractor responsibility may be assumed by an outside vendor or by the user, who may also wish to provide some of the core skills."

Integration services are, in practice, commonly offered as part of a broader package of services, many of which are not considered integration. These activities range from consulting to application development to system management. Indeed, few, if any, large systems integrators practice integration exclusively.

Companies wishing to establish or upgrade an information system turn to systems integrators for a variety of reasons. In an industry where knowledge about computers is not central to the business—such as health care, insurance, automobile manufacturing, and numerous others—engaging the services of a systems integrator gives companies access to cutting-edge skills and technologies. Having a single contract with a systems integrator, rather than separate contracts with numerous separate vendors, gives companies a fixed price and delivery date for an entire system and assurance that the system will meet their stated needs. In addition, the integrator protects the user from problems that are typical when engaging multiple vendors—including incompatible platforms, interfacing difficulties, and contract loopholes.

Like most computer service industries, systems integration has attracted many entrepreneurs. In the past, relatively little capital was needed, compared to the computer hardware industry. Agreements with equipment manufacturers for the products to be placed in the system are made on a current-period basis. Cash outlays increase as contracts increase; there is no need to manufacture anything in anticipation of growth. The majority of the investment is made in highly specialized staff with experience in several complex fields—systems and applications software, hardware, telecommunications products, and networks. In addition, experts are needed to oversee the entire process and work with customers. When selling a service, marketing also proves an important component in the structure of the business.

Systems integration companies generally grow geographically at first, simply providing their service to a wider range of customers. Because profits do not need to be invested in increased manufacturing or in research and development, systems integration companies generate a positive cash flow more easily than manufacturers. Cash flow makes acquisitions a common method of expansion, particularly into new service fields. Many systems integration companies have expanded into other computer or business services in order to avoid becoming overly dependent on one service, which might allow a competitor to undercut them or new products or regulations to jeopardize their business.

Like most computer service industries, systems integration is offered by many small, entrepreneurial companies. The majority are privately owned. Still, larger integrators account for much of the industry's revenue. With the increased popularity of systems integration in the 1990s, a strong middle tier of companies with revenues between $50 and $100 million developed. A few companies offering systems integration generated $500 million to more than $1 billion in revenues.

Systems integration companies generally cater to either federal customers or commercial customers. Large systems integration firms maintain separate departments for the two types of customers. This division was common because soliciting contracts differs markedly between the two sectors, and the projects themselves were often fulfilled differently.

Federal regulations dictated the bidding process for government agencies. Government contracts are generally longer term, whereas commercial ones might be either long or short term and tend to be more dynamic. Government agencies frequently contract with systems integrators in order to avoid lengthy procurement cycles and still keep up with technological advances. A systems integrator may be hired to design and buy a whole system, so that no competitive bidding is required for each separate component of the network or system. The contract might also stipulate that the systems integrator will update the system as necessary to meet the agency's functional specifications. Recent revisions in federal procurement policies, however, have made government contracts more like commercial ones in some respects.

Commercial companies contract with systems integrators because they see a competitive advantage. For instance, incorporating new technologies could improve their efficiency, save them money in the long run, or help them match their competitors.

Background and Development

Systems integration was traditionally dominated by original equipment manufacturers, which bought equipment, components, and software from various suppliers to produce a complete computer system that it then sold to end-users. In the early 1980s, the industry boomed, and computer service firms began to compete in this area. Industry revenues in 1980 were $2.2 billion; in one year they rose 36 percent to $2.9 billion.

The federal sector contributed significantly to the growing popularity of systems integration in the 1980s. Government agencies previously approached the development of their information systems in a technical manner, prescribing the individual technical components to be included in the vendor's bid. Because the federal procurement process was lengthy, an overly technical approach meant that technical specifications could become outdated even before the bidding process was over. To keep up with the rapidly changing computer industry, agencies began using functional specifications rather than technical ones, and systems integrators to simplify the procurement process. Several large federal contracts in the early 1980s caught the commercial world's attention and helped popularize systems integration services. For example, EDS won a contract in 1982 to computerize administrative functions in 47 U.S. Army bases, generating revenues of $1 billion over 10 years. Around the same time, the Planning Research Corporation won a similar contract from the U.S. Patent Office.

The advances in mini- and microcomputers in the late 1980s opened up the market for systems integration. Smaller companies, for whom mainframe systems were unfeasible, began establishing in-house computer systems and turned to systems integrators for assistance. In addition, larger companies continued to need help integrating new technologies.

Revenues in the systems integration industry grew at a healthy rate through the late 1980s and early 1990s, averaging 7.5 percent per year. However, a survey conducted by the Information Technology Association of America of predominantly public systems integration companies showed that their average net profit margin fell from 6.1 percent in 1988 to an average net loss of 0.09 percent in 1992. According to the U.S. Department of Commerce, revenues rose 8.7 percent between 1993 and 1994, and were expected to continue to rise between 1994 and 1997 at an annual rate of 8.1 percent.

The steady rise in revenues despite a general economic downturn in the early 1990s was spurred by various factors. Industry downsizing helped value-added resellers, who once handled predominantly low-cost products from small companies. Many began handling sophisticated, expensive design automation products from manufacturers who reduced or eliminated their dedicated sales forces in an effort to cut costs. Approximately 1,800 companies provided systems integration services in the United States in 1993. Their revenues totaled an estimated $19.3 billion that year and were expected to reach $20.9 billion in 1994.

Networking services were a strong portion of the systems integration industry's growth in the early 1990s. Centralized mainframe computing, once the mainstay in the business world, was gradually supplemented, sometimes even replaced, by distributed networks of minicomputers, workstations, and personal computers. The many options available and the constant introduction of new products discouraged companies from designing systems themselves. Analysts expected this trend toward open system architectures to affect the systems integration industry through the 1990s. Rapid advances in telecommunications technology also contributed to the increasing reliance on systems integrators. The advantages of remote connectivity to geographically dispersed companies was only partly realized by the mid-1990s, creating strong demand for network integration services.

Services for computer-aided design (CAD), computer-aided manufacturing (CAM), and computer-aided engineering (CAE) were not growing as quickly as the systems integration services industry as a whole in the early 1990s, as the incorporation of these technologies slowed. Despite the already high installed base, the ever-increasing complexity of designs and the advantages of automation for the mechanical, architectural, engineering, construction, and mapping industries was expected to sustain the growth of CAD/CAM/CAE technology and services. Growth from 1992 to 1995 was languid, averaging 3 to 7 percent a year. By 1996 annual growth shot up to almost 16 percent, and in 1997 it approached a frenzied 30 percent.

The industry ended the 1990s at a healthy pace. Amid strong demand, in 1998 industry revenue approached $32 billion, according to the U.S. Census Bureau; this was up from just $20 billion as of 1996 and about $13 billion in 1990.

Current Conditions

By the late 1990s annual growth had slowed down, amounting to 22 percent in 1998 and about 13 percent in 1999 and 2000, when industry revenue nearly totaled $88 billion. Although more current Census Bureau data was not available in early 2003, it is likely that growth slowed in 2001 and 2002 amidst a weak economic climate and reduced IT spending in the corporate sector. While traditionally higher than government figures, private sector data indicate the industry's growth rate did slow down in the early 2000s. For example, the June 2002 IT Services Business Report found that U.S. IT service revenues in the system integration category were expected to increase 3 percent in 2002 to $116 billion, and 9 percent in 2003 to $126 billion. According to some reports, many companies were forced to table all but the most critical systems integration projects in 2002 due to budgetary restrictions.

Competitive Environment. The competitive landscape for integrators has changed in recent years. Some smaller firms, for instance, have had an advantage in the market for rapid e-commerce integration, where they may be seen as more flexible, more responsive, possibly more knowledgeable, and better able to meet tight deadlines. Meanwhile, large integrators like EDS and IBM Global Services bring tremendous resources and bargaining power to the table, and have been able to win larger, more complex contracts through their name recognition and stable brand image—even though they sometimes subcontract the actual work to smaller, less-well-known firms. The industry has also seen a wave of mergers and acquisitions, as companies seek the right mix of competencies and market access to best meet new demand.

E-Commerce Integration. Web and e-commerce integration continued to be a major focal point for the industry in the early 2000s. Brisk demand for these services first emerged in the mid- and late 1990s, as companies embraced the Internet as a sales and marketing channel. Typical e-commerce integration projects include linking a Web site and its supporting applications to existing corporate systems for storing product information, recording orders, managing transactions, and storing customer information. Because e-commerce initiatives are seen increasingly as vital to a company's competitive strategy, the market for e-commerce integration can be particularly demanding, requiring fast turnaround and extensive knowledge of different systems—new and old.

Enterprise Application Integration. Another important growth driver, especially in the large corporate market, has been the widespread adoption of enterprise applications aimed at unifying data storage and management across broad swaths of corporate activities—from human resources and payroll to manufacturing and logistics. Many also have industry-specific components intended for, say, telecommunications providers or financial services. These applications, offered by vendors like Oracle, PeopleSoft, and SAP, come with many preconfigured functions and tools, but generally require customization and integration for specific users. Thus, systems integrators often sell, install, and customize them for individual clients. In a corporate survey conducted by Accenture Ltd.'s Institute for Strategic Change and reported in the December 2, 2002, issue of Computerworld , 46 percent of respondents acknowledged the use of enterprise application integration (EAI) systems, and 9 percent indicated that they planned to use EAI software within two years.

Web Services. Just as basic point-to-point integration, in which the focus was on enabling communication between two specific systems, gave way to broader EAI frameworks that enabled communication among multiple applications, a simpler, more cost-effective means of systems integration known as Web services was making major waves in the early 2000s. Simply put, Web services involve programming standards like Extensible Markup Language (XML) that allow communication between newer applications and legacy systems—within or between organizations—that were not designed to be co-operable.

Web services will likely impact the systems integration industry in several ways. One impact is potentially negative, since companies can use Web services in-house to achieve integration that once required trained application integrators. This is good news for the corporate sector, given that for every $1 spent on software, companies spend anywhere from $3 to $20 on integration services, based on different estimates.

Given circumstances such as these, many feel that the role of system integrators is changing from a technical one to more of a consultative one, in which the integration of business processes is the primary focus. However, some industry players argued that in the early 2000s Web services still were no match for traditional EAI adaptations, and that the demise of the system integrator was not yet in sight. Indeed, along with security, systems integration was a top priority for many organizations in 2002 and 2003.

Exactly how this will play out remains to be seen. For example, in 2002 some EAI vendors were making the switch from their own systems to those based on Web services, indicating that the two elements may coexist in harmony to some degree. One thing seems certain—Web services are of great interest within the corporate world. According to the Accenture survey cited in Computerworld , 87 percent of respondents revealed that they planned to "experiment with Web services technology for possible application integration uses."

Industry Leaders

By revenue size the two largest firms in the industry, both in the United States and the world, are New York-based IBM Global Services and Electronic Data Systems of Texas. Both are massive service organizations that provide a complete range of computer services like outsourced management and consulting in addition to systems integration. In 2001 IBM Global Services recorded almost $35 billion in revenues, or nearly 41 percent of IBM's overall sales of $85.9 billion. EDS posted $21.5 in total revenue, of which services were a sizable percentage. IBM's figures include nonintegration revenue because the firm does not report systems integration separately.

Another important group of systems integrators is the large accounting and consulting firms. These include Deloitte & Touche, Ernst & Young, KPMG, and Price-waterhouseCoopers. Increasingly these firms distance their consulting functions from their accounting business, for fear of conflicts of interest. One leading consulting firm, Accenture Ltd., was formerly part of the now-defunct Andersen Consulting. Nonetheless, leading consulting firms all have vibrant computer services arms, which include integration services. All five of the aforementioned consultants have revenues in the billions.

Additional players that rank in the industry's top 10 include the integrated hardware-services providers Hewlett-Packard Co. (HP) and Unisys Corp. Each of these has a thriving hardware business (although less so for Unisys, which has focused mainly on services) in addition to offering professional services. HP reported 2001 service revenues of $7.6 billion (which includes more than just systems integration), representing almost 17 percent of its overall revenues of $45.2 billion. Unisys had overall revenues of $6 billion, $1.2 billion of which came specifically from systems integration services. Both companies provide a full array of services, including consulting and applications development. Other major systems integrators include Computer Sciences Corp.; American Management Systems, Inc.; Computer Associates International, Inc.; and Perot Systems Corp.; all of which had 2001 revenues of more than $1 billion.

Workforce

The majority of jobs in the systems integration industry were white collar, and many required specialized knowledge. Functional area specialists had considerable expertise in a particular industry, such as financial services or health care, and used that knowledge to help the systems integration team tailor solutions to the specific needs of a company. Project managers coordinated entire projects, including planning, budgeting, training, the initial operation of new systems, and selecting products, services, and vendors. The transmission of information between people, computers, and locations was handled by communications specialists who analyzed and designed networks that carried data, voice, and video traffic.

Software specialists analyzed software requirements and designed software to meet client needs, created "blueprints" for systems integration projects, and were often involved in the development and implementation cycles. Hardware specialists designed optimal hardware configurations and managed the operation of hardware for systems in use. Supporting staff marketed and sold services, negotiated contracts, or worked in finance or accounting.

By the mid- to late 1990s, a great demand for systems integrators emerged, especially those with a strong understanding of the Internet, intranet, and Web-based application design. The demand was for people with skills in Java programming, security and firewall experts, and people who could connect presentation-level interfaces with databases and legacy systems.

Further Reading

April, Carolyn A. "Integration Lightens Up." InfoWorld , 14 October 2001.

Caton, Michael. "The Great Systems Integrator Search." PC Week , 21 June 1999.

Downey, Geoffrey. "Oracle Chief Slams System Integrators." Computer Dealer News , 16 March 2001.

Elgin, Ben. "Be Sure to Watch Your Back." Sm@rt Reseller , 27 September 1999.

Girishankar, Saroja. "Integrators Turn Their Attention to E-Commerce." Information Week , 21 May 1999.

Hoffman, Thomas. "Budget Cuts, Other Problems Hamper App Integration Efforts." Computerworld , 2 December 2002.

Homan, David; Surya Kalavagunta; and Christine Klima. "Web Services and Integration." InformationWeek , 21 October 2002.

Klinger, Linda. "Fed Downsizing Sends Work to Systems Integrators." Washington Business Journal , 22 January 1999.

Laberis, Bill. "Integration Nation." Adweek Magazine's Technology Marketing , October 2002.

Madden, John. "Changing of the Guard." PC Week , 17 May 1999.

——. "CSC, EDS Jump into Web Hosting." PC Week Online , 2 March 2000. Available from http://www.pcweek.com .

Schulte, Roy. "Predicts 2003: SOA is Changing Software." Gartner, Inc. 9 December 2002. Available from http://www.gartner.com .

Sullivan, Tom. "Take Your Medicine—Integration Is Like Fighting the Flu: While You're in the Throes, Nothing Could Be More Miserable, but Battling Through it Results in Many Business Benefits." InfoWorld , 13 August 2001.

U.S. Census Bureau. Service Annual Survey: 2000. . Washington, D.C.: U.S. Department of Commerce, Economics and Statistics Administration, U.S. Census Bureau. December 2001. Available from http://www.census.gov .

"U.S. IT Services Down 14 Percent in 2001 to $146.5 Billion." IT Services Business Report , January 2002. Available from http://www.itreport.com .

Vowler, Julia. "Contemplate a Mammoth Investment." Computer Weekly , 30 September 1999.



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