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Also, check out: "Cap Gemini: A "French Microsoft?""IGS Profits, Productivity Surge," "EDS: Growth Slows, Equity Grows,"  "CSC: A Mouse That Roars?", "A Solid Quarter", "EDS Sets New Records", "Andersen: Another Super Year", "Cap Gemini: The Most Improved?"

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SERVICES

 







 Final Results of the 1998 IT Services Hexathlon

Andersen Wins "Gold" in "Photo Finish" over Cap Gemini

In a Year of Photo Finish Tie-breakers, CSC Wins "Bronze" over EDS

PHOENIX, May 25 - In a year of photo-finish tie-breakers, Andersen Consulting edged out Cap Gemini Group (CGG) for the overall "gold" medal in the 1998 IT Services Hexathlon. This is Andersen's third consecutive "gold," albeit won by the narrowest of margins this time.

The competition for the "bronze" medal was just as fierce. And it also ended up with a photo finish tie-breaker which CSC won by whisker over EDS.

With two "golds" and two "silvers" to their credit in individual business Hexathlon categories, Andersen and CCG each collected 10 out of 36 total points awarded to the IT services medal winners (based on a scoring of three points for a "gold;" two for a "silver;" and one for a "bronze"). To break the tie, we had to look at the remaining two categories - sales productivity and operating expenses - in which neither of the two competitors had won a medal. Since Andersen had better results in both these areas, it became the 1998 IT services champ.

The "bronze" medal competition was almost identical. Both CSC and EDS finished with four points in overall Hexathlon standings - CSC with a "silver" and two "bronzes" in individual categories; EDS with a "gold" and a "bronze." To break the tie, we had to look at the revenue growth and the gross margins results, where neither company had earned a medal. Since CSC performed better in each of these categories, it won the overall Hexathlon "bronze" in the end.

 

 

 

 

 

 

 

 

The "bronze" medal competition also had a photo finish tie-breaker even in an individual category. Which went to EDS, as it turned out. Both CSC and EDS finished 1998 with pretax margins of 6.7% - good enough for a "bronze" in this Hexathlon category. So it took the next decimal point to break the tie, and award the pretax margin "bronze" to EDS.

The 1998 Hexathlon also included Amdahl and Unisys for the first time, in addition to the top five global IT services competitors from previous years - IBM Global Services, EDS, Andersen Consulting, CSC and CGG. That's because both of these former mainframe companies (Amdahl, Unisys) have gone through a major metamorphosis in recent years, transforming themselves into predominantly IT services operations.

In 1998, for example, both Amdahl and Unisys derived more than two-thirds of their revenues from services (see "The New Phoenix," Annex Bulletin 99-07, 2/22/99, and "Unisys Returns to Profitable Growth," 98-37, 10/22/98). And in their first appearance in an Annex Research IT Services Hexathlon, both of the rookies won some brass. Amdahl earned two "bronzes" - in revenue growth and gross margin categories, while Unisys won a "gold" for the top sales productivity.

As it turned out, the rookies' medals came at the expense of IBM, which would have won them had the field not been expanded in 1998. Had the Big Blue's IGS unit won those medals, it would have earned an overall Hexathlon "bronze" for 1998, as it did last year. But that's now Monday morning quarterbacking.

Another interesting phenomenon which the 1998 Hexathlon produced is that the two largest IT services competitors (IBM, EDS) have been both shut out from the overall medals. Which suggests that the quality growth in this industry segment is happening in the middle tiers of the IT services leaders.

SUMMARY. As for some overall industry leader trends which are discernible from the 1998 IT Services Hexathlon results, perhaps the most obvious one is that the IT services' growth is accelerating again, after a temporary slowdown in 1997 (brought about mostly by the drop off in EDS' growth rates from 16.3% in 1996, to 5.5% in 1997). The 1998 aggregate revenue growth rate of the seven leaders was 21.3%, up from 17.4% in 1997, and nearly matching the 21.5% surge in 1996.

On the other hand, we figure that the overall growth in global 1998 IT spending was about 8%, increasing the total amount of money the world spends on creating and implementing IT solutions to just over $1.3 trillion. Within that total, the hardware purchases declined; while software and the internal budgets of the IT customers went up in high single digits.

 

 

 

 

 

 

 

In other words, the IT services field is clearly the place to be if one is looking for growth opportunities and market power. The growth rates in this IT industry segment are more than double those in other computer-related fields. The fact that outsourcing empowers the service companies to make purchasing decisions on behalf of their customers, extends their market power far beyond the dollars and cents which the bean counters can report.

And now, here are the rest of the individual Hexathalon results of the top five IT services companies:

PROFITABILITY. Andersen's estimated net margin of 8.6% topped the field. CGG was second with 4.8%; CSC third with 4.5%, having edged out EDS for the "bronze" by a whisker (EDS' net margin was 4.4%).

Andersen also led all competitors in terms of pretax margins (12.7%). CGG was second (10.4%); EDS was third (6.7%) by a whisker over CSC, as previously reported.

But, for the second year in a row, CGG won the "gold" among the top competitors in terms of its 1998 gross margins (35.9%). Andersen was second with 30%, Amdahl third with a 23.4% gross margin.

Unfortunately for CGG, the relatively high taxes and other financial burdens which European companies bear to a greater extent than their American counterparts, erased some of that CGG gross profit edge by the time the money trickled down to the bottom line.

GROWTH. The 1998 Hexathlon competition produced a change in the leader for the revenue growth category. CCG has dethroned Andersen, despite the latter company's third successive 25% or better revenue increase. And not by a small margin, either. CGG won the revenue "gold" growth with a 36.9% surge over 1997.

Of course, as we've pointed out before, this growth rate was helped by favorable foreign currency translations in 1997. But even without that, CGG's revenue growth of 28% in French Francs would have earned it the "gold," albeit by a smaller margin.

Ironically, last year CGG missed the revenue growth "gold" for the same reason. Its 36% surge in French Francs would have earned it the "gold" in 1997. As it turned out, CGG had to settle for a tie with EDS for the overall "silver" medal. But that's the way the currency cookie crumbled back then.

In 1998, however, CGG won this competition hands down, no matter how you slice it.

EXPENSES. Despite the pounding which the EDS stock keeps taking on Wall Street, this Texas-based company led all others in terms of expense-to-revenue ratios - for the second year in a row. And EDS earned its 1998 thriftiest competitor "gold" medal by a wide margin - checking in at the finish line with operating expenses at 11.4% of revenues, down from 12.9% in 1997.

CSC was second with 14.9%; IBM third with 16.6%.

So when the Wall Street pundits pounce on the new EDS leaders, the CEO Dick Brown, and the CFO Jim Daley, as they did last month in New York, pounding on them, and demanding pounds of flesh in cost cutting, the new EDS "change agents" should not forget to point out that they are already running the leanest operation in the world among the top IT services companies. And that their main challenge is generating revenue growth, not cost cutting.

Meanwhile, the main challenge of the Wall Street pundits seems to be figuring out which end is up. And what game is being played. And where. And what it takes to win...

SALES PRODUCTIVITY. As we've pointed out before, Unisys, a rookie among the top seven IT services leaders won the "gold" for sales productivity (revenue per employee). The "silver" went to IBM, while CSC won the "bronze."

Perhaps also worthy of note is that the average sales productivity of the IT services leaders shot up by a whopping 17% in 1998 over 1997.

In part, this is due to the introduction of two new competitors, each of whom had sales productivity results higher than last year's average. But even with Amdahl and Unisys removed from the totals, the five leaders' 1998 sales productivity would have gone up by 8.5% over 1997.

SPECIAL AWARDS. A special award for the "most balanced" company in 1998 has to go to IBM Global Services. Although IGS won only two medals (for operating expenses and sales productivity), it was a tough competitor in all events, placing fourth or fifth in all other categories.

Happy bargain hunting!

Bob Djurdjevic

Other Charts

  • 1998 IT Services Hexathlon - Profitability (3 categories)
  • 1998 IT Services Hexathlon - Revenue Growth
  • 1998 IT Services Hexathlon - Operating Expenses
  • 1998 IT Services Hexathlon - Sales Productivity

Also, check out Annex Bulletins... "IGS Profits, Productivity Surge," "EDS: Growth Slows, Equity Grows,"  "CSC: A Mouse That Roars?", "A Solid Quarter", "EDS Sets New Records", "Andersen: Another Super Year", "Cap Gemini: The Most Improved?"

Annex Research is a well respected consulting firm serving the information needs of today's senior IT executives. For more information please call 602/824-8111.


Volume XV, No. 99-16
May 25, 1999

Editor: Bob Djurdjevic
Published by Annex Research;
e-mail: annex@djurdjevic.com

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