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Stock Strategist Industry Reports

IT Services Abounds With Moats

Different sectors within the industry require different skill sets to gain a competitive edge.

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Its sheer size and fragmentation make IT services one of the more dynamic--and more misunderstood--industries in the technology sector. We believe it is an industry that warrants investors' attention, given its defensive nature, solid growth prospects and profit margins offered to the top competitors, and relatively high concentration of economic moats.

Before delving deep into economic moats, it is important to understand the size, general characteristics, and different subsectors that make up the IT services industry. The key differentiator among services firms is the sectors in which they participate. Each sector has different characteristics that define the skill sets that companies need to build in order to earn a moat around their operations. These characteristics also explain the relative ease with which service providers can straddle the different sectors. For example, while it is easy for a consulting service provider to expand its reach and move into outsourcing, the reverse transition is very challenging.

Swami Shanmugasundaram does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.