Snippets

European IT services spending set to grow

IT services spending in Europe will shake off its early-decade blues to recover to €129 billion euros (£90b) by 2008, according to a new report by Forrester. But the research firm warns that a surge of outsourcing uptake will reshape the whole market, forcing suppliers into wholesale reinvention.

Early predictions of an IT services spending rebound during 2003 have bombed as Europes major economies remain stubbornly stuck in a low-growth rut, said Andrew Parker of Forrester.

But successful IT services firms over the next five years will not rely on a market of booming demand. They will instead carefully match their service offerings to the cost-driven agendas and business-value expectations of clients. Through effective cherry picking among high-growth service categories, a minority of providers will beat the mainly single-digit annual spending growth, Forrester believes.

Forrester predict that for the period 2002 - 2008 European enterprise spending on IT services will grow by 8% compound annual growth rate (CAGR), which is moderate by the standards of the 1990s and is lower than American IT services spending which will achieve 10% per year over the same period.

However, it does show a 3% uplift on earlier predictions during the recession. The next two years will see the strongest resurgence of IT services spending with growth reaching 10% for all services in 2004 and 11% in 2005. A wave of outsourcing spending spurred on by firms enthusiasm for reducing costs will be the key driver for this growth.

During 2002 and 2003, Forrester found that agile firms sustained revenues by cashing in on an upturn in outsourcing deals. Forrester forecasts that this outsourcing shift will accelerate as European companies look for low-cost IT options, hand off capital IT assets, or seek new pay-as-you-go or value-based outsourcing models.

The total contract value of European outsourcing deals worth €50 million (£35m) or more increased in 2003 by 87% compared with 2002. And with a CAGR of 18%, Forrester puts business process outsourcing (BPO) at the top of the growth tree in Europe. Resulting strong growth across categories like human resources, finance and accounting, and call centre services will drive Europes 2008 BPO spending to more than €22 billion (£15b).

Finally, as large user firms turn to intermediaries for advice on outsourcing relationships or to negotiate contracts, consulting firms will see outsourcing strategy consulting accelerate. With a CAGR of 15% between 2002 and 2008 - outstripping growth in business process reengineering and IT strategy consulting by three to four times, Parker concluded.

Andrew Parker , Forrester 25/11/03

Moderate growth predicted for IT services market - Intellect finds recovery already under way

Intellect's Q1 CEO Trend Survey this quarter asked the question: "has the recovery begun?" The answer appears to be yes. Almost half of respondents reported a rise in turnover during the first quarter. More than half are expecting rises in the coming quarter. Workforce changes in Q1 were less encouraging but expectations for Q2 were better.

New questions on customer needs and expectations showed reducing costs was the main driver to additional IT investment while average payback times expected on new contracts awarded were little more than 12 months. US recession was seen by more CEOs as the major threat to the UK economy, while the number expecting the UK to join the Euro continued to fall.

However recently published research from industry experts predicts the IT services market will enjoy only "moderate growth" over the next five years. The research cited a lack of compelling emerging technologies to drive growth. IDC said that most IT services remain focused on either optimising prior investments or reducing costs in current IT environments and predicts four per cent growth in 2003.

Data released from the Office of National Statistics shows growth in 2001, 2000 and 1999 was modestly weaker than that suggested by government data.
24 April 2003

State of the Enterprise Software Market

The Nasdaq held steady during the first two months of 2003, barely moving 2 points from 1336 to 1338. However, enterprise software stocks moved head as evidenced by a 5% gain in the Capterra 50 Enterprise Software Index during the January/February time period.

Results for January 1 through February 28 are as follows:

Top 5 Stock Performers:
1. Kana (+65%)
2. Retek (+60%)
3. Epicor Software (+56%)
4. Applix (+53%)
5. Micromuse (+53%)

Worst 5 Stock Performers:
1. Commerce One (-41%)
2. Internet Security Systems (-38%)
3. i2 Technologies (-28%)
4. Hummingbird (-26%)
5. Onyx Software (-26%)

Commentary:

The number of young software companies to raise venture capital increased during the first two months of the year, but M&A activity appeared to slow down. The enterprise software market appears to be stabilizing for the moment. Vendors made significant cutbacks over the previous two years and are finally beginning to report profits. The result has been a high number of software vendors that are generating between $5 million and $100 million in annual revenue and are operating with lean sales and development organizations. This is welcome news for business software buyers who now have an abundance of vendors to choose from in addition to lower price points.

1 March 2003

IT Spending Remains on Hold

Spending on IT will inch forward this year, but will remain well adrift of the 10-12% annual growth rate of the 1990s, according to surveys by investment banks Merrill Lynch and UBS Warburg.

Some growth can be expected, although the banks do not agree on how much. Based on a survey of 100 chief information officers across Europe, Merrill Lynch suggests average IT budget growth will be just 0.8% this year. Research by UBS Warburg among 50 US and 35 European global corporations found expected IT budget growth of about 4%.

Merrill Lynch said 43% of its respondents anticipate software spending will be flat compared to 2002, with 36% saying hardware will be top of their shopping lists.

Some 42% of chief information officers have no plans to outsource major operations, despite the fact that 41% of them have extracted price reductions from their IT services suppliers over the past six months.Results from UBS Warburg's research suggest that companies are more likely to spend money on storage, servers and networking this year, and are less likely to spend on operating system upgrades and ERP solutions.

Looking beyond 2004, the UBS Warburg respondents suggest that annual IT budget growth of around 6% will be sustainable.

Mirror on the current economy

“Over the period of 9/26/02 to 10/02/02, I collected and analyzed the financials of the top 223 public companies, pulling the historical financial data from Multex Investor. - Stock Price: 62 of those companies had a stock price under $1 or 28%, 97 under $2 or 43%, and 182 under $10 or 82% - Profitability: Of those companies--excepting Microsoft, which distorts what is happening in the industry--the net profit went from a total net profit of $3 billion in 1999 to a total negative net profit of $35.5 billion in 2001. Further, the percentage of profitable companies went down substantially: in 1999 43% of the software companies I looked at were profitable; that number dropped to just 25% in 2001 where 54 companies were profitable and 165 weren't. - Year To Year Growth: Went from 84% in 1999 down to 58% in 2001, and only 35% in 2002. Meaning in 1999 84% of the companies had year to year growth from 1998 to 1999, but only 58% had year to year growth from 2000 to 2001.”

Brian Turchin , Cape Horn Strategies

E-mail: bturchin@capehornstrategies.com

As EDS struggles with falling revenues, is a new forecasting system the only solution?

EDS has outlined an action plan designed to return its outsourcing business to financial growth. The move is in response to a nosedive in EDS' share price following a warning that the company will miss profit and turnover targets in both the third and fourth quarters (MCN Direct 49), and a further slide after it paid $225 million to settle derivatives obligations associated with its employee stock option scheme (MCN Direct 50).

Planned actions to correct the situation include a reduction in overhead costs, a reprioritisation of sales expenditure, and initiatives to address under-performing areas. EDS will also refocus on growth opportunities that produce more immediate revenue, earnings and cashflow. But large-scale contracts will remain part of the strategic mix, with additional revenue expected to come from cross-selling services within EDS' portfolio.

In an open letter to shareholders, chairman and CEO Dick Brown accepted: "The last few weeks have been a difficult time for our company. EDS has been buffeted by outside market forces and by the consequences of our own decisions." Confessing the failure of the company's financial forecasting systems, Brown added: "I have commissioned a special team to review EDS' revenue forecasting processes and systems. While they served us well in the past, our systems did not meet our needs this quarter."

But as Brown struggles to get EDS back on an even keel, the company's troubles continue to mount - with the US Securities and Exchange Commission (SEC) launching an informal enquiry into events leading up to the financial warning and the derivatives debacle. Industry analysts also suggest EDS could suffer further at the hands of clients seeking to negotiate down the terms of large outsourcing contracts in a declining IT market. EDS said it will co-operate fully with the SEC and is confident the enquiry will confirm its actions were proper. On the issue of contract renegotiations, it denied any increase in the level of renegotiations it generally experiences.

MCNdirect Newsletter

Do chief execs really know what is going on?

Chief execs have been able to cite more than enough reasons for poor performance over the last year, but do they do themselves any favours by blaming it solely on factors outside the company?

Abdicating all responsibility doesn't really say 'I deserve a multimillion pound bonus' to me. We're all at the mercy of the random, yes, but when someone is bedevilled by unforeseen circumstances so often, it starts to look like they're just not foreseeing things thoroughly enough.

Katie Pucket , IT consultant