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Annex Bulletin 2009-11 June 23, 2009
A partially OPEN edition
Suddenly, All Lines Point South - Analysis of HP's 2Q09 business results
Back on Growth Track - Analysis of IBM Global Services 2008 results
Updated 6/23/09, 8:30PM HIT
Analysis of Global IT Services Octathlon 2009 Results
IBM Takes the "Gold"
Accenture, HP Get the "Silver," Bronze;" And Then There Were Six... (Not So Little "Indians") Left after EDS Vanished
HAIKU, Maui, June 23 – Remember the "Ten Little Indians" nursery rhyme? (written by Septimus Winner in 1868). Once upon a time, there were lots of "little Indians" in the global IT services game. But after HP took a mega bite out of the worldwide competition last year by gobbling up the $21 billion-EDS, there were now only six (not so little) "Indians" left at the top of the rung. So our 2009 Global IT Services Octathlon has been reduced to a six-way race.
No matter. It was an exciting finish nonetheless. In the end, IBM Global Services (IGS) nosed out Accenture for the "gold." HP, the new behemoth of the IT services industry, finished third despite winning all of the revenue growth medals (thanks to that EDS megadeal, of course).
It was IBM's third overall "gold" medal in the last 13 annual Octathlons, but the first in the current decade. Accenture, on the other hand, retains the title as the most successful global IT services company since we started our Octathlons back in 1996, even though IBM has narrowed the gap and its lead this year (right chart). HP placed third overall, followed by Capgemini and (the now defunct) EDS.
HP's acquisition of EDS has changed the landscape of the global IT services competition, although not as dramatically as one might have intuitively suspected when #6 competitor swallows up the #2. That's because IBM, with services revenues expected to surpass $70 billion this year, is still roughly double the size of the new #2, especially considering the latter company's disappointing second quarter results (see "Suddenly, All Lines Point South," May 2009).
Elsewhere around the world, the gap between IBM and HP is smaller, such as in Europe, for example (middle right chart). And in some market, such as in Asia/Pacific, IBM is not even the biggest competitor (right). That's where Fujitsu holds the pole position. But there is no question that overall, IBM was and still is by far the largest competitor in the global IT services arena.
And that holds true when it comes to profitability, and not just revenues. That's where IBM and Accenture traded "gold" and "silver" medals for Net vs. Gross profit in 2008 (left chart). But it wasn't just the top two that improved their bottom lines.
The average net margin of the top six competitors surged from 4.8% two years ago, to 5.7% in the latest Octathlon. And that's in the middle of the world's worst recession since the Great Depression! That's in part due to an increased footprint that all top global IT services "Indians" have in the (cheaper) Indian labor market. The outsourcers and outsourcing so as to lower costs and improve margins.
Meanwhile, the aggregate annual revenue growth of the top six was only 1% despite the HP spike caused by the EDS acquisition. So by the time curtain dropped on 2008, HP, IBM and Accenture gained market share, while others lost.
Another interesting phenomenon in the IT services competition is that the companies who create their own technologies also seem to be more productive in terms of revenue per capita. So year after year, IBM, HP and Fujitsu keep winning the top honors in our Octathlons in the Sales Productivity category (left chart).
We are not quite sure why that is. Perhaps the makers of technology are better at leveraging it? Or maybe the investments in their factory automation is paying dividends relative to the more labor-intensive work that the "pure" services companies perform? Either way, they certainly have the cost advantage compared to the latter competitors who have to pay retail prices to procure their hardware, software and network solutions.
Just to recap quickly for the new readers our Global 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:
All these figures are for the prior calendar
year results, 2008 in this report. We also wish to remind our readers that
some competitors among the Top 7, now Top 6, such as HPS and Fujitsu,
that don’t publish their new contract sales. As
a result, we treated them as “no
shows” in this Octathlon category.
Summary: A Win-Win Industry?
Overall, the Octathlon 2009 results show that the global IT services companies are among the most resilient business when it comes weathering economic storms. Time will tell whether or not they are really "recession-proof." So far, however, they have demonstrated their ability to grow and make money in both good times and bad. When the economy is good, they are helping their clients grow. When it turns south, they are helping them save. Which seems like a win-win industry.
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