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IT SERVICES

Analysis of IBM Global Services 2000 Business Results

Growth Slows to a Trickle

Profit Drops as IGS Continues to Expand Its Employment in Double Digits

PHOENIX, Apr. 12 - After growing at a torrid pace, IBM Global Services (IGS), Big Blue’s ace in a hole and its only success story of the past decade, slowed down its revenue growth in 2000 to a trickle (up only 4%; or 3% including maintenance).  And even after adjusting for foreign currency translations and the sale of the IBM Global Network to AT&T in 1999, the IGS growth was still in the single digits (9%).  That’s less than half of its stellar annual increases in the 1990s (21% compounded annually - tied with CSC for the industry’s best record).

The IBM IT services company’s slowdown is all the more perplexing considering its record new contract signings last year ($55 billion).  It suggests that its contract cancellations and/or expirations may have been also at record levels in 2000.

Undaunted by the business slowdown, IGS continue to hire new staff aggressively last year.  Employment shot up in double digits as the IBM IT services unit added another 19,000 people to its payroll.  That’s a 13% increase over the year before, when 17,000 new employees joined IGS. 

“Services… is a countercyclical business,” IBM CEO, Lou Gerstner, tried to justify the IGS optimism in his letter to shareholders.  “In a tightening economic environment, customers are going to invest in projects that deliver rock-solid, tangible, near-term payoffs, not in speculative exploratory schemes.”

If the latter is true, it may not apply to long-term services deals like IGS’s, whose typical contract terms are five to 10 years.  That’s hardly “near-term,” as the IBM chief put it.  More likely, any investment that would take five to 10 years to pay off could be considered “speculative” or “exploratory.”  Which means that the terms of an average services contract may be shortening as the economic conditions are tightening, and the customer focus is on cost displacement, rather than speculative growth.

Text Box:  IGS’s aggressive hiring took its toll on its bottom line.  We estimate that its pretax profit (excluding maintenance) declined by 8% in 2000, as its Selling, General & Administrative (SG&A) expenses jumped by 13%, to 9.8% of revenues (see Table 2 in the printed edition of this Annex Bulletin).

As a result, IBM’s “ace in the hole” from the 1990s has not only slowed down its growth, but also carries the lowest pretax margin of the top four IBM profit contributors (8% vs. 18% for servers, 22% for software, and 35% for maintenance - see the chart).

Geographies.  The U.S. market continues to be the largest IGS geographic segment with revenues at $11.5 billion, up 5% in 2000, according to our estimates.  Its European business, on the other hand, was virtually flat at $.8.7 billion, thanks to a negative effect of foreign currency translations. 

Text Box:  
 
The company’s fastest growing regions were Asia/Pacific and other geographic segments which grew by 6.5% to $7.1 billion last year.  Asia/Pacific is also the market in which IBM dominates its IT services rivals’ market share by the greatest margin.

Horizontal Segments.  IGS’s horizontal business segments vary significantly depending on the geographic region.  In the U.S., for example, outsourcing accounts for about 47% of the company’s revenues.  By contrast, in Europe, it is only a 34% segment.

Systems integration, on the other hand, is much more prominent in Europe.  That’s where we estimate it represents a 45% share of business versus only 29% in the U.S. (see the charts).

Happy bargain hunting!

Bob Djurdjevic






 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume XVII, No. 2001-09
April 16, 2001

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

P.O. Box 97100,      Phoenix, Arizona 85060-7100
TEL: (602) 824-8111        FAX:

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