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INDUSTRY TRENDS

Annex Research 2004 Global IT Services Octathlon

HPS Wins “by a Nose”

CSC Claims the “Silver;” IBM Gets the “Bronze;” Growth Accelerates

PHOENIX, April 21 – “It’s déjà vu all over again,” as Yogi Berra would have put it, probably sans the French accents.  Hewlett Packard Services (HPS) has done it again.  Last year’s Cinderella has proven it was not a-flash-in-a-pan, one-year wonder.  HPS won the overall “gold” again in the Annex Research 2004 Global IT Services Octathlon with 13 points.Text Box:

Computer Sciences Corp. (CSC) came second with 12 points, while IBM Global Services (IGS) placed third with nine points.  Accenture was fourth with six points, while EDS and Cap Gemini earned four points each, tying for the fifth place.

Just to recap quickly for our new readers the IT Services Octathlon scoring… The overall medal standings are determined by awarding three points for a “gold,” two points for a “silver,” and one point for a “bronze” in each of the eight competition categories for the Top 6 global IT services vendors.

The eight categories are:

1. Revenue Growth – current year

2.          …and 10-year

3. Market Share Gain/Loss

4. Net Margin

5. Gross Margin

6. Frugality (Operating Expense Margin)

7. Sales Productivity

8. New Contract Sales

Regular Annex Bulletin readers will notice that we have added a new category to our annual global IT services competition – New Contract Sales.  This is the first year in which this “event” is being staged, although we have recorded the results retroactively for two years, so as to be able to gauge the growth rates and market share changes. 

The only competitor among the Top 6 that doesn’t publish its new contract sales results is HPS.  As a result, we treated HPS as a “no show” in this competition category.

And now, here’s a “play-by-play” report from this year’s competition.

Revenue Growth (2 Medals)

The “gold” medal for the best revenue growth in 2003 went to CSC (up 22% over 2002).  HPS won the “silver” with a 19% surge, while IGS earned the “bronze” with a 17% spurt.

Accenture was fourth with a 9% increase in revenues, while EDS and Cap Gemini brought up the rear with a 0.5% rise, and a 4% decline respectively.

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As with previous Octathlons, all revenue figures used in this year’s competition were either the reported numbers for companies whose fiscal year-end ends Dec 31, or were our estimates of other competitors’ calendar year 2003 results.

The “gold” for long-term growth went to HPS (up 22% per year during 1998-2003, as HPS, a relative newcomer to major leagues of IT services, does not yet have a 10-year track record).  CSC won the “silver” with a 19% 10-year growth, while Accenture earned the “bronze” with a 16% annual increases during 1994-2003.

It should be noted that all three revenue growth medal winners for 2003 grew by acquisitions.  CSC acquired DynCorp (2003), HP acquired Compaq (2002), while IBM acquired PwCC (2002).

The same is true of long-term medal winners, except for Accenture.  As we noted last year, too, Accenture is the only company among the Top 6 whose growth has been mostly organic (internal). 

In fact, Accenture (formerly known as Andersen Consulting) had to overcome the reverse problem - breaking away from Arthur Andersen.  When it finally did that in mid-2000, after a bitterly contested arbitration process, Andersen Consulting went public in July 2001 under the name Accenture.  Given what happened with Arthur Andersen in the aftermath of the Enron scandal, the timing of Accenture’s breakaway could have been more fortuitous.

Growth Accelerates

The double-digit revenue growth of the three medal winners pulled the overall growth rates for the Top 6 competitors back into double digits.  In 2003, their aggregate revenues increased by 12%, from $98 billion to $110 billion.  That’s double the aggregate growth rate of the Top 6 the year before (6% in 2002).

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Last year was also the first year ever that the Top 6 surpassed the $100 billion-mark.  But the 2003 growth rate is still below the 10-year average (13%).

Market Share (1 Medal)

IGS continued to gain most market share in 2003, winning the Top 6 “gold” with a 1.8% global market share increase.  CSC and HPS won the “silver” and the “bronze” respectively, by increased their shares by 1.1% and 0.7%.  EDS was the big loser, dropping 2.2 points of market share.Text Box:

The U.S. market share gains for IGS and CSC were somewhat more moderate, but the loss for EDS was not.  IGS’ went up by 1.6%, CSC’s by 1.4%, while EDS’s declined by 2.3%. 

Both IGS’ and CSC’s market share gains were the biggest in Europe, as were EDS’ losses.  The two gainers’ shares surged by 2.9% and 2.1% respectively, while EDS’ dropped by 3.1%.

In the Asia/Pacific market, however, it was all IGS.  The IBM services unit gained 5.3% share.  Everybody else lost share.

Profitability (2 Medals)

Accenture again won easily the gross margin “gold,” followed by Cap Gemini and IGS, which claimed the “silver” and the “bronze” respectively. 

The net margin “gold” again went to HPS this year, while IGS and Accenture claimed the “silver” and the “bronze” respectively.

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Accenture: Unique Culture

Regular Annex Bulletin readers will have noticed that one company has been regularly winning profitability medals in our global IT services competitions.  The only question was which medal in which particular year (see IT Services Heptathlon 2002: IBM Loses Market Share, May 2002).  No wonder the company is arguably the most admired competitor by its peers.

That company is Accenture.  As you’ve just seen, it won a “gold” and a “bronze” in the two profitability categories this year.  And 2003 was not one of its best years. 

What makes Accenture so uniquely successful?  Its culture.  It is a culture of employee-owners.  It is a small company culture embedded in a $12+ billion- IT services giant.  More than the work force of any other company we follow, the Accenture employees take care of business as if it’s their own business.  Which it is…

In a 1996 column titled “Medieval Fiefdoms to Win Over Centralized Empires,” originally published in a Washington Post IT magazine, this writer compared the Accenture and IBM cultures:

“IBM vs. Andersen Consulting (now Accenture) is a study in contrasts.  IBM is a widely-held public company.  Andersen is a closely-held private partnership (was). IBM is a classic corporate empire, ruled with an iron fist from a center - the "Louvre" (make that the "Versailles" now) - by a “Louis XIX of Armonk,” and an entourage of loyal princes and cardinals who make up Lou Gerstner's court. 

Andersen is a collection of some 1,000 "medieval fiefdoms," loosely knit together by self interest rather than an elaborate management structure.  Andersen's worldwide headquarters is whatever hotel the managing partner - the first among equals, happens to be in. 

It is in the area of profitability, however, that Andersen's decentralized fiefdom-like model reigns supreme over that of any other competitor.”

Seven years later, Accenture still reigns supreme over its competitors when it comes to profitability.  But not only profitability.  Its market cap ($23 billion) towers over that of much larger competitors.

EDS, for example, a $21.5 billion-company (vs. Accenture’s $12+ billion), has the market cap of only $9.4 billion (40% of Accenture’s).  CSC, a $14 billion-competitor and our “silver” medal winner this year, has a market cap of only $8 billion (35% of Accenture’s).

In a recent conversation, we asked the Accenture CFO, Harry You, a former Morgan Stanley executive, to what he attributed the “sex appeal” of his stock.  We speculated that it might have been his Wall Street background and the corresponding connections.

You disagreed (not you, Harry You did J).  He credited the Accenture culture and the outgoing CEO, Joe Forehand.

”I thank God every morning for our 2,300 partners and all other hard-working people,” he said.  “For every $1 of our stock increase, employees get about a 2.5% pay raise.”

That's because Forehand changed the compensation plan two years ago tying 40% of the partner income to the company's performance.  So they work accordingly... smartly, not just hard. 

You also attributed the relative stability of the Accenture stock to the high percentage (about 70%) of employee ownership – which is something we also pointed out in our March report on institutional holders of the top IT services firms (see “Hedging the Bets,” Mar 2004).

Given the recent surge in Accenture’s new contract signings and its return to double-digit revenue growth (see “Burning the Track Again,” Mar 2004) - the two key Octathlon categories in which Accenture has been lagging behind some of its competitors in the last year or two – we may be looking at a favorite for next year’s overall “gold.” 

But there is much water yet to flow under the IT bridges between now and then.  So one should not count one’s chickens before they are hatched.

Frugality (1 Medal)

Just as Accenture seems to be pre-subscribed to profitability medals, EDS has been a perennial winner of the frugality competitions.  One of the most beleaguered competitors in 2002and 2003, EDS still continued its unfettered grip on the “gold” for the lowest operating expenses.  At 9.8% of revenues (up from 8.8% the year before), EDS’ 2003 operating expenses were by far the lowest among the Top 6 competitors.

The “silver” medal winner CSC came in at 12.5% of revenues, while the third place finisher HPS clocked in at 13.8%.  IGS came fourth with a 14.3% ratio.

EDS’ successive “gold’s” for frugality made it all the more ironic that Wall Street was expecting cost cuts from the new EDS management team that took over a year ago, instead of focusing on the top line growth and gross margin improvements.  The latter are some of the areas in which EDS is lagging behind its top competitors. 

It’s even more ironic, in fact downright ludicrous, that the new EDS leaders took the bait and pursued the cost and expense cuts as a panacea for recovery (see “Pain without Gain,” Oct 2003).  As a result, the company kept falling deeper into the hole, with new contract sales plummeting by 42% in 2003.

Sales Productivity (1 Medal)

HPS won its third “gold” in the sales productivity category with revenue per capita of about $205,000.  The “silver” and the “bronze” went to EDS and IGS respectively.

New Contract Sales (1 Medal)

CSC won the inaugural competition in 2004 Octathlon’s new contract sales category.  And it did it by a wide margin.  CSC’s 2003 new business awards surged by 226%, from an estimated $5.4 billion the year before, to over $17 billion.

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Cap Gemini won the “silver” with a 30% jump in new contracts, thanks, in part, to its big win at Britain’s Inland Revenue (see “Biggest Feather in Cap’s Cap,” Dec 2003).  Accenture was third with an estimated 14% rise in new contract signings, while the biggest competitor (IGS) placed fourth with a 5% increase.  The Top 6 aggregate new business increased by 10% in 2003 to $117 billion.

As you have seen from our recent analyses of IBM and IGS’ results in the last four years, selling new IT services seems the easy part (see “Crown Jewel Restored?”, Mar 2004).  Keeping the business you’ve sold is another story.  “Rescoping,” cancellations and expirations have been robbing the IBM shareholders of some $11 billion-worth of new business each quarter.

As a result, we think that monitoring the changes in the IT services vendors’ backlog would be a more accurate way of gauging their net sales performance.  Alas, only IBM publishes its backlog.  So we’ve settled for the next best thing – measuring gross sales as expressed in new contract signings.

Except for HPS, of course.  HPS doesn’t even publish that, as you saw earlier.

Oh well… maybe next year?

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

Past Heptathlons: Annex Research IT Services Heptathlon 2003 (May 23, 2003) Annex Research IT Services Heptathlon 2002 (May 21, 2002)IT Services Heptathlon 2000 (May 11, 2001)1999 IT Services Heptathlon (Apr 17, 2000)

2004: IBM Going Retro with Mainframes (Apr 2004);  Mainframe at 40! (Apr 2004);  Accenture: Burning the Track (Mar 2004); "Crown Jewel" Restored? (Mar 2004); "Cap Gemini: Another, Smaller Loss" (Feb 2004);  "CSC: Good Quarter Gets Boos" (Feb 2004); "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); "Hype Exceeds Results," (Jan 2004);  "Cronyism Is Alive and Well at EDS" (Jan 2004);  "Five Most and Least Likely Forecasts for 2004" (Jan 2004)

Or just click on and use appropriate  keywords.

Volume XX, Annex Bulletin 2004-12
April 21, 2004

Bob Djurdjevic, Editor
(c) Copyright 2004 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

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

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