SIC 7371
COMPUTER PROGRAMMING SERVICES



This industry consists of establishments primarily engaged in providing computer programming services on a contract or fee basis. Establishments of this industry perform a variety of additional services, such as computer software design and analysis; modification of software; and training in the use of custom software. Massproduced software development is discussed under SIC 7372: Prepackaged Software.

NAICS Code(s)

541511 (Custom Computer Programming Services)

Industry Snapshot

According to the U.S. Census Bureau, the custom programming services industry achieved revenues of more than $69 billion in 2000, making it one of the largest segments of the broader information technology (IT) services sector. Though it receives much less attention than the packaged software segment, custom software development is usually somewhat larger in terms of annual revenues.

The industry grew rapidly during the 1990s, as businesses upgraded and expanded their computer systems. Although annual growth was uneven from 1990 to 1998, ranging from as low as 6.8 percent in 1992 to more than 28 percent in 1998, the industry's gross receipts climbed during the period at a compound average of 13.6 percent a year, based on U.S. Census Bureau data. However, the surge in the late 1990s was fueled in part by one-time Year 2000 (Y2K) compliance services, Web-enabled applications, e-commerce, and the overall dot-com craze.

Although U.S. Census Bureau figures for 2001 were not yet available in early 2003, preventing specific year-to-year comparisons, a number of reports indicate that the custom software design industry was struggling in the early 2000s, along with the larger IT industry. These difficult times were due to a slack economy and a decrease in technology spending within the corporate sector. According to estimates from research firm IDC, after a record 2.3 percent drop in 2002, overall technology spending was expected to improve in 2003, rising nearly 6 percent. IDC revealed that the IT services category was hit especially hard in 2002, and that weak spending in the software category would likely continue into 2003. Other research organizations, including the Aberdeen Group, forecast more modest worldwide IT spending increases (4 percent).

Organization and Structure

Among the industry's top players, such as IBM and EDS, custom programming services are only one of a multitude of IT services offered, ranging from consulting and training to systems integration and facilities management. Indeed, the broader IT services industry has increasingly evolved toward a one-stop solution model, where a single contractor provides a comprehensive set of computer services to its clients. As such, many non-government statistical sources, and often the companies themselves, do not separate custom programming from these other activities.

Custom programming services are used primarily as an alternative to using packaged software unmodified and hiring in-house programming staff to write custom software. The first use is noteworthy as a reminder that packaged software is often modified by third-party vendors for specific businesses; not all custom software work begins from scratch. The second use highlights that the industry is closely associated with outsourcing technical functions. In fact, it is sometimes described as the IT outsourcing industry.

A separate and popular way for companies to obtain programming services without committing to maintaining an in-house staff of programmers is to contract for leased or temporary programmers and consultants. Several large national agencies have special units devoted to placing experienced technical workers. However, unless the contracting firm is itself a programming services provider, such activities are considered outside the scope of this industry.

A variety of trade and professional organizations represent the industry. Among others, the National Association of Computer Consultant Businesses (NACCB) and Independent Computer Consultants Association (ICCA) have members involved in contract programming. These trade associations represent their members in different ways. NACCB, headquartered in Washington, D.C., lobbies government officials on behalf of member businesses. ICCA is based in St. Louis and offers certification exams. Successful completion of a computerized test allows a member to be designated a Certified Computing Professional.

Background and Development

As computer systems became commonplace in businesses and other organizations, the need for custom programming and other computer programming services increased. From the 1950s through the 1980s technology made huge leaps forward. Computer programmers were difficult to find in the early years, so many companies did not bother to hire them. By the late 1980s and early 1990s, very sophisticated computer equipment needed equally sophisticated code to handle growing amounts of information at rapidly increasing speeds.

Computer service companies were originally hired to automate record-keeping tasks, such as payroll. Later, they expanded into customer-related areas, such 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—given the high cost of the services. Early programming was highly customized, but the needs of businesses by the 1990s necessitated more standardization.

Computer programming companies grew in part by presenting themselves as a cost-saving alternative to in-house programming departments. According to the prevailing logic, they were specialists and could save corporations money by programming systems and software on a contract basis. Although there has been the occasional backlash against service firms when their clients are not satisfied with the outside service's performance—sometimes spurring the disgruntled customer to bring the project back in-house—custom programming services are still widely seen as being more cost-efficient than internal development.

Revenues from custom programming and related services grew swiftly during the late 1990s, as businesses sought higher levels of automation and efficiency, greater control over internal and external information, and the ability to conduct business transactions electronically, particularly over the Internet. From 1990 to 1998, industry revenues more than tripled from $21 billion to $64 billion, according to government statistics, yielding a 13.6 percent compound annual growth rate.

The Census Bureau estimated that in the late 1990s more than 32,000 U.S. establishments provided custom programming services as their primary line of business. The lion's share—more than 95 percent—had fewer than 50 employees. Those figures did not include firms that offer custom programming as secondary activities.

In the late 1990s, the industry enjoyed a surge in business related to Year 2000 (Y2K) computer conversion. The entire process, which involved checking and modifying software to ensure it would work properly after the date change, cost businesses worldwide anywhere from $280 billion to $600 billion by various estimates. Only part of that money went for programming, though, as a great deal was also spent on other preparedness measures, such as keeping extra staff and special supplies on hand in the event of a major crash. Although January 1, 2000, proved an uneventful day for most computer systems—provoking sharp criticism of computer consultants who some believe overstated the risks—residual spending on Y2K problems was expected to total another $20 billion during 2000.

Current Conditions

Census Bureau data suggests that the industry's revenues increased more than 16 percent between 1999 and 2000, reaching $69.4 billion. However, as the economy weakened, these overall numbers likely decreased considerably in 2001 and 2002. Despite an overall decline, it is worth noting that industry players fared differently depending on their area of programming specialty. For example, according to Weekly Corporate Growth Report , research firm Gartner indicated that some portions of the custom software industry, including companies concentrating on Internet software, suffered declines of up to 30 percent. Those in the database management field fared much better, with decreases closer to 2 percent. Other firms, such as those offering security software, actually were able to achieve growth in a difficult economic climate, with revenue increases of more than 12 percent.

Information released in the June 2002 IT Services Business Report indicates that U.S. IT service revenues in the system integration category, which included firms engaged in application development and management, were expected to increase 3 percent in 2002 to $116 billion, and 9 percent in 2003 to $126 billion. Although these figures include more than just custom programming service revenues, they serve to illustrate the industry's expected recovery in the early 2000s.

By 2000 the Census Bureau reported that industry firms typically brought in around 58 percent of their gross revenues from programming services; the rest came from activities classified under other industries. This percentage was somewhat lower in comparison to late 1990s levels, which were closer to 75 percent.

Traditional custom-developed applications and utilities continue to face rising competition from packaged software, which has grown more powerful, flexible, and cost-efficient, particularly since the mid-1990s. Indeed, some package vendors, including SAP and Oracle, have increasingly tooled their high-end applications like enterprise resource planning (ERP) suites to enable relatively fast customization. Such packages come with a range of standard functions, as well as a development environment that allows individual businesses—usually mid-to large-sized ones—to adapt the software to their own needs and existing systems. SAP, for example, has been at the forefront of working with customers to build hybrid applications that are in large part custom, but then are generalized and resold to other customers with similar needs. In effect, customers enjoy benefits of customization without as many costs and uncertainties as with all-out custom development.

Some believe the emerging application service provider (ASP) model, where businesses rent software applications over the Internet instead of installing and running them on their own machines, will further change the competitive dynamic in the custom software business. Under this scenario, ASPs may well go beyond hosting and maintaining software, and actually perform customization for individual clients. Depending how this plays out, it could spell either an opportunity or a threat to the conventional custom programming industry. By 2002 ASPs were achieving much success with Web native applications. IDC indicated that e-marketplaces represented an especially lucrative market for ASPs. The company forecast spending on Web native ASPs would reach $1.5 billion by 2006, increasing significantly from $200 million in 2001.

In 2003 so-called "Web services" were an especially hot area of the custom software market. In this scenario, programmers used a number of standards to enable communication between different Web-based applications. The ultimate goal of Web services was to enable universal system communications within or between organizations. In an article by Roy Schulte, research firm Gartner predicted that the emergence of Web services would "affect application design, many types of software products and even the nature of business-to-business value-added networks."

Industry Leaders

Custom programming services are furnished by a diverse group of companies, including several multinational firms that provide a comprehensive set of IT services to large businesses and government agencies. Some of the biggest include IBM Corp., Electronic Data Systems Corp., and Computer Sciences Corp.

On the second tier is a collection of service vendors that focus on national or regional customers, and often on a more limited range of systems and technologies. Examples of companies in this group include American Management Systems, Inc.; Accenture, Ltd.; Analysts International Corp.; Ciber, Inc.; Keane, Inc.; and MPS Group, Inc.

Workforce

In recent years the U.S. labor market for programmers and others with IT skills has been exceptionally tight. Acute demand for high-tech employees has led to worker shortages, aggressive recruitment of foreign workers, and rising salaries for individuals with highly sought skills. Software engineers (or programmers) represent a major occupational group within the industry. In 2001 approximately 361,660 application software engineers were employed in the United States, making an average of $72,370 per year. Working in systems software were 261,520 engineers, earning an average annual salary of $74,490.

Professionals employed by computer programming firms often receive ongoing education and training in new technologies. More programmers are needed in software maintenance than in software development, and these maintenance programmers must be familiar with many types of hardware and software. They need to understand Internet and networking technology, and to be flexible enough to work as development programmers. Many employers are interested in technical staff that not only has a strong understanding of prevailing languages and technologies in their field, but also are willing to quickly develop new skills, as corporate needs change. Programmers with broad training and in-depth knowledge of several fields have the greatest potential for success.

Computer services jobs are predominately white-collar positions. Unlike workers in telecommunications equipment, who are more likely to find jobs as precision workers, computer services workers are more likely to work as professionals, technicians, or managers.

America and the World

The United States is a leader in computer programming, as well as in other computer professional services. Because of the U.S. high-tech worker shortage, however, the U.S. industry has grown more dependent on skilled contract workers overseas to keep pace with the steep demand for IT services. (The shortage has also spurred U.S.-based IT services companies to lobby for higher immigration rates of technically skilled workers into the United States.) Non-U.S. programmers often earn somewhat less than their U.S. counterparts and, according to some studies, are more productive, making international labor at times more cost-efficient. Important international labor markets for U.S. firms include India, Ireland, and Israel.

Computer professional services such as programming were encouraged by the passage of the North American Free Trade Agreement (NAFTA) and the expansion of the General Agreement on Tariffs and Trade (GATT). The U.S.-Canada Free Trade Agreement of 1989 led some U.S. computer services companies to expand into other markets by buying Canadian firms. Some U.S. companies also had subsidiaries in South America and Europe.

Custom programming remains an area of vigorous cross-border trade. Most international trade in computer services is realized through affiliate organizations based in the target market. Despite their historically lopsided market advantage, U.S. firms face stiff competition from foreign companies, particularly those located in Western Europe and Japan.

Further Reading

Bailey, John. "Decoding the Custom Software Design Industry." Weekly Corporate Growth Report , 17 June 2002.

Caton, Michael. "The Next-Generation App." PC Week , 3 January 2000.

Grassi, Carl. "IRS Clarifies Rule for Software Cost Deductibility." Crain's Cleveland Business , 11 November 2002.

"IDC Research: IT Spending to Rise in 2003." Nua Internet Surveys. 22 November 2002. Available from http://www.nua.com .

Information Technology Association of America. IT Services Division Home Page. Washington, D.C.: 2003. Available from http://www.itaa.org .

Leibs, Scott. "The 'Build-vs-Buy' Debate." Industry Week , 3 May 1999.

Menagh, Melanie. "Programmers for a New Century." Computerworld , 1 November 1999.

Ricadela, Aaron. "A New Wave Nears." Informationweek , 11 February 2002.

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

Stedman, Craig. "SAP Taps Users to Build Software; Firms Get Near-Custom Industry Applications." Computerworld , 31 January 2000.

"Top 50 U.S. IT Services Firms." IT Services Business Report , June 1999. Available from http://www.itreport.com .

"U.S. ASP Services Spending to Grow Over $1.5 Billion by 2006." ASPstreet , 6 June 2002. Available from http://www.aspstreet.com .

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 .



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