<%@ LANGUAGE=VBScript %> <% Set asplObj=Server.CreateObject("ASPL.Login") asplObj.Protect Set asplObj=Nothing %> Annex Research annual global IT services Octathlont (Mar 19, 2007)

Annex Bulletin 2007-12                              March 19, 2007

A CONFIDENTIAL client edition


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Annex Research's 2007 Global IT Services Octathlon

HPS, Capgemini Tie for Overall "Gold"

EDS Wins "Bronze" after Delivering Real Turnaround

BEIJING, China, Mar 19 - It seems only appropriate that this year's annual2008_Olympics_GreatWall.JPG (89545 bytes) Octathlon results should come to you from the city that will be hosting the next Olympic Games - Beijing, China.   The 2008 Olympic signs were already everywhere even during my last visit here, including near the Great Wall (see right photo).  The winners of our annual Global IT Services Octathlon may not rate as much pomp and ceremony as the Olympic sports stars, but their Octathlon medals are certainly worth a lot more money.

The two companies whose stars shone the most brightly in the 2006 global IT services12_Oct3.jpg (24355 bytes) arena were Hewlett Packard Services (HPS) and Capgemini.  By the time all the scores were in, they ended up in a tie for Octathlon "gold" with 11 points each (see the chart and table).  HPS won three gold medals in individual competitions, along with one silver.  Capgemini, on the other hand, earned its 11 points with two gold, two silver and one bronze medal (click on the right chart). 

A much-improved EDS won the "bronze" with nine points.  It was the first time since 2003 that the second largest company in the IT services business earned an Octathlon medal.

As for the all-time results, after 12 years of global Octathlon competitions, Accenture continues to lead with 21.5 points, followed by IGS with 15.5 points and HPS with 12 points.  Capgemini and EDS are fourth and fifth respectively (see above chart).

Octathlon Scoring 

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 competitions of the top global IT services vendors.

The eight categories are:

1. Revenue Growth – current year

2.                        "           "            …and 5-year

3. Market Share Gain/Loss

4. Net Margin

5. Gross Margin

6. Frugality

7. Sales Productivity

8. New Contract Sales

All these figures are for the prior calendar year results, 2006 in this report.  We also wish to remind our readers that the only competitors among the Top 7 that don’t publish their new contract sales are HPS and Fujitsu.  As a result, we treated them as  “no shows” in this Octathlon category.

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

1.-2. Revenue Growth (2 Medals)

The “gold” medal for revenue growth in 2006 went to Capgemini (with a 21%12_Oct4.jpg (43034 bytes) surge; up 10% in constant currency - right chart).  Just like last year, Accenture won the “silver” with a 5.2% increase, while EDS earned the “bronze” with a 4% rise.

The long-term revenue growth "gold," however, went to HPS, also with a 21% compound annual growth.  Just as foreign currency translations aided Capgemini's in 2006, the Compaq acquisition boosted the HPS revenue rise in the last five years (the Compaq deal was announced in September 2001, and consummated in mid 2002).

The long-term revenue growth "silver" went to Capgemini, while Accenture earned the "bronze" (click here to see a detailed table).

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 2005 results.

Slow Growth: A Chronic Problem 

It should be noted that most revenue growth medal winners grew by acquisitions (except for Accenture).  Among some major deals, CSC acquired DynCorp (2003), HP acquired Compaq (2002), while IBM acquired PwCC (2002).  Lacking any major acquisitions in 2006, revenue growth of the Top 7 contenders slowed down to 4%.  So once one of the fastest growing industry segments, the top of the global IT services market is now showing sub-par performance.

The currency- and acquisitions-aided growth of our two gold medal winners this year barely masks a chronic problem that has enveloped the top 7 players in the global IT services game.  It is a lack of growth.  For the last three years, it has averaged only 4%.  Which is four to five times less than their average growth rates of in the 1990s (see above chart and the thumbnail below).

Maturation of the high-end of the IT services market is clearly one reason for it.  The low12_Oct15.jpg (43121 bytes) hanging fruit has been picked.  As a result, it is now harder to extract more business from the same client base.  

Another reason, however, is vendor-related.  It is complacency that success breeds.  None of the top 7 global IT services companies has gone out of its way to find and develop new markets.  Even the fastest growing sub-segment - BPO (Business Process Outsourcing) - is a 10-year old trend.  And it is still largely focused on the same client base as the traditional infrastructure outsourcing.

None of the leaders has ventured into SMB (Small & Medium Business) market in any discernible way.  Or developed a strong presence in big emerging countries (China, India, Russia, Brazil...).  Nor have they followed our "amoeba syndrome" advice - split up in order to grow.  

So if the top 7 revenue growth chart looks boring, if not alarming, they have only themselves to blame.  As long as they nurture complacency, sooner or later some newcomer will upset the apple cart (GoogleServ, anyone?).  Just as IBM did in the late 1980s and early 1990s, for example, when it took over the IT services industry by storm.  

Of course, doing it prophylactically, rather reactively, would serve today's IT services leaders better.  Alas, that's not how human nature or market works.  Most companies wait till their feet are held to the fire to get moving quickly.  That's when they will all start to scramble in an effort to reinvent themselves.  

3. Market Share (1 Medal)

Capgemini, EDS and Accenture were the market share gainers among the Top 7 in a year that did not see much movement in this Octathlon category.  None of the competitors won or lost more than a point of market share in 2006.  

The three medal winners gained 0.9%, 0.5% and 0.1% respectively.  IBM, the biggest market share loser, dropped only 0.7 of a point.12_Oct16.jpg (30658 bytes)

In the U.S. market, Accenture gained share in 2006, mostly at IBM's expense.  The rest of the competition more or less treaded water (right chart)

12_Oct19.jpg (29866 bytes)In Europe, Capgemini and EDS were the big gainers, while IBM, Accenture and CSC lost share (left chart).

Octath1.jpg (39789 bytes) In 2004, Capgemini and Accenture had surpassed EDS, dropping the former “Euro star” to the fourth place (right chart).  But as we predicted a year ago,  EDS is staging a comeback, after it had won the big British defense contract.

12_Oct20.jpg (31934 bytes)In the Asia/Pacific market, IBM and Accenture gained share, CSC inched forward a bit, while rest of the competitors lost share (left chart).



4.-5. Profitability (2 Medals)

Just like in the last two years, Accenture again won easily the gross margin “gold,” followed by IGS and Capgemini, which claimed the “silver” and the “bronze” respectively.

The net margin “gold” went to HPS this year for its vastly improved profitability in 2006.  IGS and Accenture claimed the “silver” and the “bronze” respectively.  

Octathlon Net Margin
Top 7 in '06 4.8%
Top 7 in '05 4.0%
Top 7 in '04 1.8%
Top 7 in '03 2.3%

What the top 7 global IT services industry leaders may be lacking in revenue growth, they have evidently more than made up in improved profitability.  Net profit margins have more than doubled in the last three to four years.  And a major factor in this has been "offshoring," "rightshoring," "nearshoring" or any other new term that has sprung up in the last four years that connotes "A Passage to India" (and to other places with lower labor costs).

So it is clear that the executives' focus has been on the bottom line, even if the growth at the top line is sagging.  Good defense can will ball games as can good offense.  But it is rarely a way to grow the fan base and fill ballpark seats.

The ideal combinations is, of course, having both (good growth and high profitability).  But that's easier said than done.  Maybe when our three-year old Holy Grail trend finally gets untracked, and the client companies do start to reinvent themselves (see "IT Industry: Whither Goeth It?", Jan 2004), IT leaders' shareholders can hope to see both.

6. Frugality (1 Medal)

Just as Accenture seems to be pre-subscribed to profitability medals, EDS has been a perennial winner of frugality competitions.  One of the most beleaguered competitors in the 2002-2005 time frame, EDS still continued its unfettered grip on the “gold” for the lowest operating expenses.  At 8.7% of revenues (down from 9.2% the year before), EDS’ 2006 operating expenses were by far the lowest among the Top 7 competitors.

The “silver” medal winner HPS came in at 12.4% of revenues, while the third place finisher CSC clocked in at 13.2%.  The top 7's operating expenses averaged averaged 15.6% in 2006.

7. Sales Productivity (1 Medal)

HPS edged out Fujitsu and IBM by a nose in 2006  to win the “gold” in the sales productivity category (revenue per capita).  The “silver” and the “bronze" medal winners were virtually in a dead heat.  It was the same lineup of medal winners as in last year's Octathlon.  The aggregate average sales productivity of the Top 7 competitors was flat with 2005 at about $196,000 per capita.

8. New Contract Sales (1 Medal)

EDS won the "gold" in new contract sales in 2005 with a 38% improvement (to $20.5 billion) over the dismal 2004 results.   And in repeated that feat last year with a 29% surge to $26.5 billion despite, what Wall Street calls, a "difficult comparison."   Capgemini got the "silver" with a 21% jump, while CSC earned a "bronze" with an 18% increase.

Overall, the aggregate new contract sales of the companies that report them surged by 12% in 2006 to $120 billion.  Which bodes well for future revenue growth of the industry leaders (assuming, of course, the "rescoping" and cancellations do not reduce the backlog at the other end).

As we pointed out in our last year's Octathlon report, 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 the change in gross new bookings.

Summary: The Growth Problem

As you have seen, the largest global IT services companies suffer from the same ailment.  It's called the growth problem.  And it's a chronic condition.  The five-year annual growth rates have dropped from 17% to 4%.  

If this sounds like a deja vu conclusion, it is.  It is pretty much the same thing we said a year ago about the Octathlon 2006 results.  So what's to be done?

Some IT leaders are looking to supplement indigenous growth with big acquisitions.  Capgemini's and EDS's purchases of Kanbay and MphasiS respectively (see "By Leaps and Bounds," Oct 2006, and "On Sunny Side of Street," Feb 2007), would certainly qualify as "big" ones.  But they happened late in 2006, and thus did not affect the Octathlon 2007 results very much.  

EDS's new acquisitiveness, however, heralded by its executives in February and fortified by a $3 to $4 billion war chest, could certainly make a difference in this year's growth results.  And if IBM extends its buying spree from software to services, we could see a growth spike among the top 7 this year.

Break Up and Diversify

Our next piece of advice to the IT services industry leaders (especially the biggest, IBM Global Services), will again sound like a broken record: Break up and diversify.  We have been recommending these two things for over 11 years now.

Break up in order to growth faster (see "amoeba syndrome" in "Break Up, IBM!", Mar 1996).  Diversify, so as to open up new markets (SMB, emerging countries).

Alas, as long as the top 7's bottom line margins keep improving, as they have been, and the Indian and other labor markets keep producing enough cheap and skilled engineers to feed the offshoring machine, we won't be holding our breath for such bold moves any time soon.  As we've said earlier, usually such actions are born out of fear - of hearing competitive footsteps right behind.  Alas, we see no such incentive at the moment.

So back to deja vu; "same old, same old" blocking and tackling...

Click here for detailed tables and charts (Annex clients only)

Happy bargain hunting!

Bob Djurdjevic

NOTE: Growth by acquisitions applies to all revenue medal winners except for Accenture.  As we first noted in 2003, Accenture is the only company among the Top 7 whose growth has been mostly organic (internal).  The only exception was its 2006 acquisition of Capgemini's North American healthcare operation.  But the purchase of a $170 million revenue-unit (based on its 2004 results) was a relatively minor move on Accenture scale of things that did not have a material impact on the company's growth rates.

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Volume XXIII, Annex Bulletin 2007-12
March 19, 2007

Bob Djurdjevic, Editor
(c) Copyright 2007 by Annex Research, Inc. All rights reserved.
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