Friday, 27 February 2009

Ordina finally gives up on BPO

(By Anthony Miller – Friday, 27 Feb 2009 9:55am). Netherlands-based mid-cap ‘local hero’ Ordina has finally thrown in the towel on its loss-making BPO operations, as the company mooted back in November. This is a huge back-down for CEO Ronald Kasteel, who had pitched Ordina’s BPO tent in the heart of the financial services sector, focusing on Tier 2/3 banks. BPO was also Ordina's primary source of new-name accounts. Wrong time, wrong place. Ordina is also one of the last bastions of onshore delivery. In my previous incarnation ‘on the dark side’ as an equities analyst, I had many spirited conversations with Kasteel on the need to develop offshore delivery capability. He was never a believer until December 2006 when the only way he could win a major 7-year deal with Rabobank was by partnering with Cognizant. Cognizant is great at playing ‘Trojan horse’, doing a similar partnership with Germany’s T-Systems. As Logica and others beef up their offshore delivery into Ordina’s home market, the future just has got to look bleak.

Serco – hostage to fortune or right place, right time?

(By Anthony Miller – Friday, 27 Feb 2009 9:20am). How’s about this as a statement of confidence in your business: “With our substantial order book (and) excellent revenue visibility ... we are guiding to revenue and margin by the end of 2012”. Even the mighty Capita (see here and here) isn’t that bold! But in today’s prelims report (see here) Serco management are pretty clear that their 90% exposure to UK and international public sector markets is definitely ‘right place, right time’.

Serco is a very different sort of BPO animal to Capita, with a much lower focus on back-office BPO. But this appears to be changing, with its first local authority partnership at Glasgow City Council (£265m/10 years) signalling encroachment on Capita’s prime stomping ground (20% of group revenues). You may recall that Serco acquired UK IT/BPO player, ITNET, back in 2005. ITNET was well entrenched in local government but it has to be said that there was little evidence that Serco knew what to do with it once it got it! That now seems to have changed, and it looks like Serco is learning how to drive a Capita-like multidiscipline services strategy to greater effect.

That being said, Serco has a long way to catch up with Capita in local government. Capita claims ‘relationships’ in a majority of the UK’s 468 local authorities, ten of which are ‘strategic partnerships’ (e.g. Birmingham). But with local government’s pressing requirement to drive 3% annual efficiency gains – and who knows what other recommendations from the forthcoming HM Treasury Operational Efficiency Programme report – there’s going to be lots more opportunity for both players. So, to answer the question in the title, we also think it’s the latter!

Harvey Nash closes strong year, but ...

(By Anthony Miller – Friday, 27 Feb 2009 8:20am). In today’s trading update (see here), recruitment – and increasingly, offshore outsourcing – firm Harvey Nash looks like it made its numbers last year (to 31st Jan. ’09) but like almost all in the industry, is taking a dim view of FY10. As they expected, permanent recruitment (nearly 40% of the business) got hit badly in the latter half so management have downgraded their outlook on revenues and profit. I will be speaking to CEO Albert Ellis later and hope to bring you more afterwards.

Twitter update

(By Richard Holway 9.00am 27th Feb 09) My Twitter experiment is now into its 5th day. Thanks for all the suggestions on who to follow. Also I am quite amazed at the number of followers the WiseGreyOwl has accumulated. I am trying hard to like it but…

It’s the sheer volume of totally banal posts that get me. The domestic arrangements, lunch, dinner, late running trains, taking your seat at a rock concert etc etc etc. With the exception of the Google Mail outage, I’ve learned nothing that was of any value.

That said, there is an excellent article on Tweeters in the FT Sweet to tweet. In addition, I had a very interesting conversation with the head of a major PR company yesterday who had just been awarded a major contract from a company to ‘promote’ themselves on Twitter. Interestingly I was sworn to secrecy as clearly they didn’t want Tweeters to think that the Twitter posts were from a PR company! I have noticed that many of the Tweets are now clearly commercial (eg from our competitors like IDC, Forrester etc.) Maybe we should just use Twitter to post links to UKHotViews article?

Dire Dell

(By Richard Holway 8.00am 27th Feb 09) Dell’s results last night were pretty bad showing a 16% fall in revenues to $13.4b. See FT report - Dell profits drop as business takes a battering

Dell’s results were used as an illustration of the woes of the industry as a whole. Whereas I think they are much more of a reflection on Dell.

1 – Dell is still stuck in a model which was great 10 years ago but the world has moved on – Dell hasn’t.

2 – Whereas IBM has moved out of PCs and, in the last ten years has worked hard to position itself as a much more rounded ‘services’ company, Dell has yet to make any effective moves in that direction.

3 – Dell’s extremely poor customer service a few years back has left an indelible mark. Whereas customers (like us) would loyally buy Dell, that loyality has evaporated. To be honest, with the exception of Apple, I can’t think of anything in the hardware sector that I would now buy on ‘brand’ alone.

4 – Even on its homeground of PCs and laptops, Dell has failed to move with the times; allowing Acer, Asus etc to ‘eat its lunch’ in the netbook market.

Bluntly, I don’t see Dell’s fortunes changing anytime soon either.
Footnote - Just to add to the competition for Dell, Nokia yesterday announced that is to enter the netbook market. "We don't have to look even for five years from now to see that what we know as a cellphone and what we know as a PC are in many ways converging," Chief Executive Olli-Pekka Kallasvuo said. "Today we have hundreds of millions of people who are having their first Internet experience on the phone."

Thursday, 26 February 2009

Unisys UK sees silver lining on banking clouds

(By Anthony Miller - Thursday 26th Feb. 2009 6:15pm). I recently caught up with Duncan Tait, Unisys MD for the UK, Middle East and Africa, and sensed a somewhat more upbeat assessment of Unisys’ fortunes in the UK than might be garnered from their recent woeful group results (see Unisys – in dire need of a raison d’etre). Besides looking after the UK, Tait also runs Unisys’ operations in Africa and the Middle East, though I’d be surprised if that amounted to any more than 15-20% of his territory. As it happens, Unisys is growing strongly in Africa (I suspect we’re talking double-digits here), as most of Unisys’ business is in the public sector, particularly, policing and security. Of course, the 2010 World Cup will also offer some opportunities too.

Unisys has kind of slipped off our radar in recent years, partly because it is very coy about breaking out their revenues. We know their Europe/Africa business was 35% of the group’s $5.2bn revenues last year so, on that basis, we’d estimate that Unisys UK revenues were around £500m, of which we assume ~90% is IT services, probably just enough to retain a spot in the UK Top 20.

As you might expect from its heritage, the backbone of Unisys’ UK business is in Banking, where it still processes some 70% of payments going through the UK banking system. What is perhaps less well known is that 40% of the UK’s mortgage processing runs on Unisys software, and I understand there may be some interesting announcements coming up in this area later in the year. While you might think mortgage processing is rather in the doldrums at present – and you’d be right – there are aspects which are enjoying somewhat of an ‘unfortunate’ revival, notably arrears handling. This is looking like fertile ground for Unisys.

Unisys’ other strong suit here in the UK is public sector, again focused around policing and security, but also including local government. These are all good places to be.

Meeting Duncan Tait, I felt that Unisys’ ‘raison d’etre’ was rather better established in the UK than I had anticipated. It seems that its services business is less and less reliant on its proprietary hardware, and that’s just as well. Having said that, they will surely have a secure market for application management for many years to come, as there can’t be many third-party players out there specialising in Unisys apps! In particular, the usual suspect Indians really don’t figure on Tait’s key competitor list. But in any event, the UK can’t carry the load for the rest of Unisys singlehandedly, so we rather hope the rest of the business can (re)find its purpose before too long.

Spring leaps ahead

(By Anthony Miller – Thursday, 25 Feb 2009 5:50 PM). Hands up everyone who remembers Karl Chapman. OK, hands down again. For those who don’t remember him, Chapman founded CRT Group (as in "Consultancy, Recruitment and Training") back in 1989 through the reverse takeover of a listed shell company capitalised at £400K with a 40p share price. Now roll forward twenty years. Spring Group – the latter-day incarnation of CRT – has a 35p share price, although it’s currently worth some £52m. Much has happened in between.

I tell you this only because I reconnected with Spring today at their prelims briefing, and caught up again with CEO Peter Searle, who I’ve known for years through his prior roles at Adecco/Computer People, and for the first time with non-executive chairman, Amir Eilon, an ex-investment banker whose obvious deep knowledge of the recruitment marketplace apparent during our conversation rather belied his modest claim to me that he knew nothing about the industry.

The fact that Spring is still around today – and is indeed one of the leading ITSAs (IT staff agencies) in the UK market – is verging on the miraculous given the mercurial Chapman’s magnificent flights of fancy. In 1997 – at the peak of IT skills demand – he spent nearly £3m launching CareerIT, a programme which aimed to recruit up to 2,000 new IT staff from non-IT backgrounds. Despite an overwhelming deluge of applicants (some 7,000 in one month alone) a year later they had placed just 169 candidates in permanent positions. A couple of years on, Chapman spent over £15m trying turn Spring into a highly centralised ‘e-ITSA’. Part of the proposition, by the way, was to offer share options to loyal IT contractors (yes, an oxymoron if ever there was). Spring’s shares soared to 300p when the scheme was announced in Jan. 2000, though crashed within months. In May 2000, it was announced that Chapman was to step down. He was succeeded as CEO and chairman by Jon Chait, who was MD and CFO of Manpower’s international businesses. Part of the deal was for Spring to buy Chait’s own e-software business, Magenta. Great times, eh?

Since then, Spring has seen various management changes, and I am greatly heartened to see that, in Searle, they finally have a CEO on board who actually knows the industry, knows what he’s doing and knows how to do it. You can read Spring’s results here and basically they look very good – indeed, Spring’s share price rose 11% today. Spring is still primarily an ITSA, but have diversified to their great benefit (like one of our other favourite ITSAs, SThree) beyond the UK and beyond IT. One of the key growth engines of Spring’s business – arguably especially in these troubled times – is recruitment process outsourcing. RPO is, to all intents and purposes BPO, where the ‘business process’ is recruitment. In other words, Spring takes over the recruitment functions of its clients, filling permanent and temporary positions directly or through other staffing agencies. RPO was pioneered by recruitment firm Alexander Mann Solutions and I will tell you more about them soon, being as I met up with their CFO, Gordon Stuart (yes, he of Xansa fame) just last week. By the way, Spring NED Jonathan Wright spent some 10 years at Alexander Mann Group, the ‘parent’ firm of Alexander Mann Solutions founded by ‘Dragon’ James Caan.

There really is so much else to tell about how Spring got from there to here and what they are doing now, but that will have to wait for another time. Meanwhile I’ll add just one more snippet to the wonderful story. Spring’s largest shareholder (37%) is ET Training LLC, part of Knowledge Universe, a US-based education player founded by Michael Milliken, Lowell Milliken and Larry Ellison. How would you like to have that bunch as ‘silent partners’?

Salesforce.com – feeling a Billion Dollars

(By Richard Holway 5.00pm 26th Feb 09) It feels like we, and a lot of others, have been referring to revenues at Salesforce.com as $1b+ for some time now. Now it’s official. Revenues for year to 31st Jan 09 were up 44% at $1.08b. In Q4, revenues grew 34% to $289.6m. Deferred revenues, perhaps an even better indicator, grew a bit more slowly – by 26% to $594m.

Salesforce.com is, perhaps, the bellwether of cloud computing or at least the SaaS bit of it. Given the new product licence sales at SAP and Oracle, Salesforce.com does show how resilient the model is in a downturn. Users benefit because they have lower upfront costs on both licences and the hardware needed to run them. In a downturn, that’s pretty attractive. It doesn’t help those with existing systems much though. Having made the upfront investment, it is cheaper to stick with it in the short term. Hence, in this climate, the incumbent software providers retain customers for longer but win far fewer new customers.

This loyalty seems to afflict Salesforce clients too though. They claim an attrition rate of <1% and now have over 55,000 customers. (14,000 more than a year back) Conversely, the other issue is that Salesforce.com users (over the medium term) only pay for what they use. So if their staff numbers reduce, ultimately the user pays less. (Salesforce’s contract doesn’t make that immediate though) Maybe in recognisition of that, Salesforce.com has lowered guidance for 2010. But, even then, it’s a still pretty impressive 20% growth to $1.3b.

Concerns over the model and some recent senior executive departures had spooked investors. Salesforce shares have more than halved in the last year. Even these results have failed to shift the shares today.

Capita update

(By Anthony Miller – Thursday, 26 Feb 2009 4:10pm). The stark difference in talking to Capita management vs other players in the sector becomes most apparent when you ask about the impact that the economy is having on decision making and pricing pressure. In Capita’s case the answer is “None and None”! Actually, CEO Paul Pindar mooted that in some cases decision making is a little swifter as the urgency to save costs becomes stronger. Frankly, if we got that response from almost any other player we’d be rather incredulous – but, as they say in the classics, the numbers speak for themselves.

And the numbers, as I highlighted earlier, are very good. About 6% of Capita’s 18% revenue growth came from acquisitions and most of the organic growth came from big-ticket wins. ‘True’ underlying growth was about 2%, which indicates a deceleration in 'discretionary' spend, usually the ‘cream’ on outsourcing contracts. Typically, Capita’s growth mix is roughly one-third acquisitive, one-third big-ticket and one-third underlying. So when underlying growth slows, they make it up with big-ticket wins. Indeed, so far in 2009 Capita has (nearly) signed a £500m/15 year Life & Pensions deal with Axa Sun Life (see Capita scores L&P megadeal at Axa) and four other big contracts totalling £110m. That’s about half the value of the all major deals they won in the whole of 2008! And, by the way, they only have one major contract, with DCSF, (£35m p.a.) up for renewal between now and 2012.

What was also quite striking was the distinct change in tone when Pindar talked about central government, now 10% of Capita’s revenues (2007: 12%). Previously Pindar had seemed resigned to a lack of government interest in actively pursuing BPO. Now he sees the mood in Whitehall changing – perhaps not surprisingly in the current economic climate – and expects gathering momentum as a result of HM Treasury’s Operational Efficiency Programme report, part of which is authored by ex-Logica CEO, Dr. Martin Read. The health sector is another area which has been low-key for Capita. However, revenues doubled last year (albeit to 2% of total), and Capita’s win at NHS Choices and the recent CHKS acquisition (see Capita makes 'intelligent' healthcare acquisition) are clear signals that they are now taking this sector seriously.

I asked Capita COO Simon Pilling whether the consolidation in the UK IT services sector was having any impact on their ability to partner with IT services players. In particular, I was curious how their relationship stands at Axon – with whom Capita partners at Service Birmingham, their JV with Birmingham City Council. Capita also partners with Axon to a lesser extent at Sheffield City Council. Pilling said that nothing has changed since Axon was acquired by HCL, but it was pretty clear to me they will be unlikely to partner with them in future deals now that HCL has made its aspirations in the UK L&P BPO market glaringly clear by buying Liberata Financial Services. Not many people realise that Capita has some 3,500 staff working in IT services (almost 10% of total headcount), mainly to support the IT infrastructure for client processing. Capita usually eschews major application development work, preferring to outsource this to the likes of Axon, Mastek, Sopra and Harvey Nash (via their Vietnam-based offshore development centre). Capita has its own offshore BPO centre in India with some 3,200 FTEs, and this is expected to be 4,500 by the end of the year.

I must say, it’s hard to find the ‘soft underbelly’ in Capita’s business – I’m not even sure there is one in practical terms. It’s very simply an extremely well managed company in the right place at the right time – and the right time, by the way, is any time!

TechMarketView LLP teams with PAC

(By Richard Holway 9.30am 26th Feb 09) Although we announced this ourselves last week, Pierre Audoin Consultants (PAC) has put out their own announcement on our partnership to the world’s media this morning. To read Click here.

We are really pleased to renew this relationship. Back in 1991 I was approached by Jean Francois Perret of PAC who wanted Richard Holway Limited (at that stage that was just me!) to provide the UK section of an idea they had to produce a report on the whole European SITS scene. From 1992 to 2000, we did just that and it was a great relationship – a win-win for both parties. It all ended (unfortunately in my view) when my company was acquired by Ovum in late 2000.

But we are now back together. PAC’s fantastic wealth of experience and data on the European scene is hugely valuable. We will be cooperating once again on the UK sizing and forecasts which will now be jointly branded PAC/TechMarketView. We will, of course, be adding our opinionated views on the forecasts - something that, perhaps, we are uniquely placed to do.

Indeed, our first report MarketViews, which incorporated these forecasts was launched last week. See Click here. This is the first in a series of reports which TechMarketView subscribers will be getting. Others will include IndustryViews, CompanyViews, OffshoreViews and a whole series of AnalystViews papers on various subjects of topical interest. We have been really pleased with the reaction to our launch in the first few days. The more subscribers, the better the service will be!

We would love to welcome you too! Please email us on info@techmarketview.com and we will be delighted to send you more details.

Capita – ever ‘Boring’

(By Anthony Miller – Thursday, 26 Feb 2009 7:30am). For as many years as we have been tracking the company, Capita just never fails to be ‘boringly predictable’ – in the very best sense – whatever the economic climate. Today’s prelims (see here) once again show Capita’s mastery of the UK BPO market, with 18% revenue growth, more than double the market rate, and similar EPS growth. The only signs of weakness CEO Paul Pindar alluded to were in their recruitment businesses and property consultancy. Although together these two divisions comprise around 20% of group revenues, Pindar assessed the high-risk parts at less than 10%. But it is the very portfolio nature of Capita’s services and the heavy weighting towards long-term contracts that provides such great resilience. Management’s sharp eye for bolt-on acquisitions (12 last year for a total of £147m) keeps Capita at the forefront of emerging opportunities with no risk of the dreaded ‘acquisition indigestion’. In our just-released MarketViews report, we forecast that the UK BPO market will grow 8% this year, the fastest growing segment in the UK software and IT services marketplace. At current course and speed it’s hard to imagine that Capita will not yet again increase the distance between itself and its competitors as organisations look to cut costs by outsourcing their back offices. I’m off to the investor briefing now and will update you later today.

Wednesday, 25 February 2009

A tale of two trainees

(By Anthony Miller – Wednesday, 25 Feb 2009 10:30pm). I must confess to a personal interest in the FT article (see here) regarding the increasingly acrimonious dispute between Dublin-based Internet casino and gaming software firm CryptoLogic, and its ex-CEO, Javaid Aziz. Some may remember that Javaid was at one point CEO of IBM UK, later moving on to become Senior VP at Silicon Graphics Europe. He later founded ASP start-up Aspective before joining CryptoLogic as CEO in April 2007.

Well, would you believe that Javaid and I both joined IBM UK as raw recruits on the very same day – Monday 3rd September, 1973 – in the very same branch – London South Manufacturing – in what was then IBM’s Croydon office opposite East Croydon station. Our paths have crossed very few times since I left IBM but often enough for me to note that he kept his hair while I didn’t. I guess we each choose our paths in life, Javaid climbing to lofty heights in global IT and me as an industry analyst. OK, I may not get paid as much (hint, hint – you know how to subscribe to our services) but there again I truly hope Javaid is as happy with his lot in life as I am with mine!

John O’Connell gives up chair at Portrait Software

(By Richard Holway 9.00pm 24th Feb 09) Our post last November – Portrait gets new CEO – had already given news that Luke McKeever was taking over from Nick Randall as CEO at Portrait Software in March 09. However, the announcement today said that Chairman (and good friend) John O’Connell was stepping down as non-exec Chairman with effect from 28th Feb. “in order to have more time to focus on his many other business and charitable interests”.

I would guess John's patience might have run out. He's given it a good bash. The appointment of a new CEO is a real result though. Portrait is yet another example of a company that just shouldn't be on AIM. It is a small company best off either away from the glare of publicity as a private company or, in my view the best option, as part of a larger group. But that view could be repeated for many others. To illustrate this, just try buying (or selling) a few shares in Portrait and see what happens. Crazy.

GoogleMail still in Beta - After FOUR years?

(By Richard Holway 9.00pm 25th Feb 09) At the end of my post yesterday – Twitter alert on GoogleMail outage , I asked why the 4 year old GoogleMail was still in Beta. I was directed by a reader to this post on NetworkWorld which contains this quote from “a Google spokesperson”:

"We have very high internal metrics our consumer products have to meet before coming out of beta. Our teams continue to work to improve these products and provide users with an even better experience. We believe beta has a different meaning when applied to applications on the Web, where people expect continual improvements in a product. On the Web, you don't have to wait for the next version to be on the shelf or an update to become available. Improvements are rolled out as they're developed. Rather than the packaged, stagnant software of decades past, we're moving to a world of regular updates and constant feature refinement where applications live in the cloud."

The implications of this are rather mind-boggling. So everything now is to be forever a ‘work in progress’? Or perhaps, as the reader pointed out, it was so Google could never get sued. As in “It is only a Beta version so you should expect it not to work sometimes”. But after 4 years and 113m users?

I was also directed to a report on the Google outage on BBC News “Google itself relies on the service and press spokespeople for the firm were unable to e-mail journalists with statements regarding the problem”.

My convoluted sense of humour rather likes the “we cannot tell you our services are down because our services are down”.

Footnote – I asked the reader who answered my query if I could quote his name. The reply I got was “No. My boss reads UKHotviews and I should be doing something else... !” Personally I’d give the guy a promotion.

Logica update

(By Anthony Miller – Wednesday 25th Feb. ’09 4:00pm). First a quick erratum to my piece in this morning’s UKHotViews email. Logica’s 1H09 guidance was in fact +10% in GBP terms and flat in constant currency – apologies for that!

I’ve just been speaking to Joe Hemming, Logica UK CEO (I was gently chastised for previously referring to Joe as UK MD!), upon who group CEO (hope that’s the correct title) Andy Green heaped praise during this morning’s investor briefing. And well deserved too, as the UK business had been having a horrible time with two prior years of revenue decline which saw margins crashing to 4.6%. Now Logica UK is back to 7% growth – about twice the market rate last year – and 7.8% ‘adjusted’ margin. The UK is also of course Logica’s outsourcing and offshoring star, with 45% of revenues from outsourcing (mainly application management) and 23% of effort delivered ‘offshore’. Hemming sees scope to increase both.

Logica got 58% of its UK revenues from the public sector, with a broad spread of clients in central government, defence and criminal justice. Local government is only a small part of the picture but it’s an area Hemming sees opportunity either as a ‘prime’ or by partnering with some of the larger councils in some form of shared services arrangement. But the real turn-around story was in Energy & Utilities, 15% of UK revenues and now back growing again (+4%). Financial Services suffered in the UK as elsewhere, down 13%, but is <10% of UK revenues.

I must say that I heard a much more confident Logica management today – almost a ‘spring in their step’ or as close as you can get when the ground is shifting as much as it is in the marketplace. If this confidence is indeed reflected throughout the rest of organisation then that’s a good place to be when facing such challenging markets and hungry competitors.

Logica accelerates offshore delivery into Continental Europe

(By Anthony Miller – Wednesday 25th Feb. ’09 7:50am). There’s much to congratulate Logica CEO Andy Green about in today’s prelims (see here) but what really caught my eye was the following statement: “For the first time, the absolute number of offshore resources being deployed on customer projects into mainland Europe exceeded those working into the UK.” There’s a very clear message here for the ‘nay-sayers’ sceptical about the disposition of European companies to push work offshore. Indeed, Logica boosted ‘nearshore and offshore’ headcount to 5,000 (~13% of group headcount) of which 3,700 are in India. It’s still a long haul to take the total number up to the 8,000 target for 2009 that Green set in his major strategy statement last year, but now the number starts to look achievable. UK offshore mix rose from 17% in April ’08 to 23% and looks set to beat the 25% ’09 target. This is just great progress.

At first blush the FY numbers look good – indeed beating prior guidance. ‘Proforma’ growth was 5% and ‘adjusted’ margins hit 7.5%. UK revenues (20% of the group) grew 7% - sharing pole position with Nordics (28% of group revenues), and UK margins substantially recovered from the 4.6% in ‘07 to 7.8%. Weakest growth came from Netherlands (20% of group) and Germany (6% of group), both at 2% proforma. Nordics also had the best margins (8.8%) albeit down 40bps yoy. Public Sector and Energy & Utilities were the star verticals, growing 12% and 10% respectively proforma. Financial Services fell back 2%. It was slightly disappointing to see the outsourcing mix only rise 1% to 32%, somewhat short of Green’s 35% target.

Like some other players, management is taking a more cautious view on ’09 guidance, giving visibility just to the first half. That being said, overall progress certainly looks encouraging.

It always has to be said that the devil is in the (extensive) detail – especially on margins, which exclude most restructuring costs. I will be poring through the numbers during the course of the day and also speaking to Logica UK MD, Joe Hemming. More later.

Tuesday, 24 February 2009

Twitter alert to Gmail outage

(By Richard Holway 9.00pm 24th Feb 09) As I announced yesterday, I have joined Twitter as WiseGreyOwl as an experiment. I seem to have created quite a ‘following’ already. Bluntly, I am bewildered - 99% of everything I have read on Twitter so far has been banal in the extreme.

But something did happen on Twitter just after 9.30am this morning. Suddenly everyone seemed to be screaming that they couldn’t access their GMail accounts. I tried mine and they were right. GMail was down. The way the Twitterers dealt with this you would have thought the end of the world had arrived. Life as we know it ground to a halt. All they had left was Twitter!

As you can read in the FT GMail crash raises webservices fears, the outage lasted 2 hours, affected nearly 120m users and hit those in Europe worst as America was asleep at the time. Anyone would think this was the first time any webmail service or ISP had failed. My Tiscali mail account had a similar glitch on Friday and nobody even reported that. I’ve had so many glitches in the last 15 years since I started using email that I have a belt, braces and safety pin approach – diverting all my emails to three web mail accounts. Fortunately they have never all gone down at the same time.

The FT also states that the GMail crash is a body blow to Cloud. As in “Who would trust their computing to a service which goes down for two hours”. I’m not belittling it, but I wish my office PC had the reliability record of GMail. I even have all my data backed up in the Cloud and feel it is now a lot more secure than the physical backups I took before.

Doubters may seize on a 2 hour outage for their own reasons but Cloud is, in my opinion, an unstoppable force.

Footnote - Can someone explain to me why, after all this time, Google Mail still carries the suffix 'Beta'?

SDL translates service into profit

(By Anthony Miller – Tuesday 24th Feb. ’09 9:30am). You could argue that SDL truly epitomises ‘software as a service’ – not because it delivers its products ‘in the Cloud’ but because it gets 85% of its £159m revenues from services, most of which is recurring. SDL had already signalled a pretty good year in January’s trading update (see SDL translates globalisation into growth). Now that the numbers are in (see here) they are indeed good. Revenues grew 35% (22% constant currency) of which 24% was organic. Margins rose 150bps to 12.5%. However, management report some delays converting deals as you would expect. But we think SDL really are in the right place at the right time. I hope to bring you more later.

Microgen's conundrum

(By Anthony Miller – Tuesday 24th Feb. ’09 9:15am). The basic conundrum facing Microgen management is that their fastest growing business line is less than 25% of company revenues and is losing money. Revenues for Microgen Aptitude Solutions Division – which sells their suite of business process management (BPM) products – grew 39% to £7.6m but losses ticked up from £2.3m to £2.4m. There again, on the ‘glass half full’ principle, this is a margin improvement from ‑42% to ‑31%. BPM is one of the fast-growing ‘middleware’ product areas. It’s finding greater favour now as companies try to make their business processes more efficient. The BPM market is highly competitive, though, with the likes of IDS Scheer’s ARIS establishing a strong market position due to its OEM relationships with major ERP players like SAP, Oracle and Microsoft.

At the other end of the spectrum, so to speak, Microgen’s largest division (58% of group revenues), Financial Systems (FSD), is by far the most profitable (margins hiked from 41% to 47%). But revenues are on the decline, falling 11% to £19m, mainly due to a drop in generic IT consultancy. FSD has nearly 70% recurring revenues, which is a pretty strong backbone for Microgen, albeit in a troubled vertical sector.

The smallest ‘leg’ of Microgen’s business is Billing Services, the ‘legacy’ printing services business. Revenues were flat at £6.4m (19% group revenues) and margins trimmed 90bps to just under 30%. Microgen has moved more of this business to electronic document distribution (now 60%) but pricing is page-based so revenues directly suffer the vagaries of customer printing demand.
For the record, FY08 revenues were just under flat at £33m but ‘adjusted’ margins rose 40bps to 18.3% (see here). All in all, these are actually pretty good results, and management's firm grip on the reins is reflected in the strong cash flow (OCF up 45%). While it’s hard to see why Microgen remains public, at least management has kept investor interest through a dividend and share buy-back programme. As such, Microgen’s stock, down around 20% over the past 12 months, has not suffered as much as some mini-conglomerate-style software and IT services businesses such as Anite (-45%). Management should decide which of its businesses it really wants to be in (hint, hint: BPM) and go for it - but not in the public eye.

Monday, 23 February 2009

The Big Debate

(By Richard Holway 6.00pm 23rd Feb 09) Many readers attended The Big Debate on 11th Feb 09 - between Fujitsu's Richard Christou and myself. I wasn't in a position (obviously!) to take notes and do my own writeup. But I clearly need not have worried. Lindsay Willott from TheMarketingPractice wrote a truly excellent record of the evening which you can read here - The Future for Global IT Services.

More PR

(By Richard Holway – Monday 23rd Feb 09 5.30pm) Further to the writeup on TechMarketView’s MarketViews report in Monday’s FT- Cutbacks likely to hurt IT services- we got rather a lot of calls from other media asking for similar comment.

One was from Ian Grant at Computer Weekly who, as a result, wrote an article entitled Suppliers that can save firms money will win in 2009 . Most of the comments I made, and Ian reported, have been aired on HotViews many times before. But it comes as a shock to reread them sometimes!

"Holway said he was not predicting the demise of firms like Microsoft or HP or SAP or IBM. But he said it had taken IBM 10 years of pain to turn itself from a seller of products to a supplier of services. "People underestimate the time and pain needed to change," he said.

Holway suggested the best way forward for Microsoft was to buy Facebook and to turn it into the portal for everything Facebook customers used. This is similar to Google's approach with Google Docs, Picasa and other applications.

He said notwithstanding Facebook's recent reversal over ownership of personal data on its site, Microsoft's pursuit of Yahoo was wrong. "Why chase yesterday's company when you can get tomorrow's, and probably for less than you'd pay for Yahoo?" he said."

WiseGreyOwl goes a Twittering

(By Richard Holway 5.00pm 23rd Feb 09) Over the last few months I have been bombarded by people asking why I’m not on Twitter. I was an early adopter of Facebook (which I love mainly for keeping up with family and friends) and LinkedIn (which so far I have found totally useless). Some of my friends have been feeding their Tweets onto Facebook and the standard of comment has been banal. Recent tweets have included “I am in a car wash” and “Preparing lentils for dinner”. My life does not have room for that!

Twitter now has 6m followers (tiny compared to Facebook’s 160m) and has grown 10-fold in the last year. Despite having no revenue – and no realistic revenue model - Twitter is currently valued at $250m and apparently recently turned down a $500m offer from Facebook (who also have no revenue – and no realistic revenue model)

But friends say I must give it a go – so I am.

You can now follow me as WiseGreyOwl on Twitter. I’ll give it 2 weeks to see if it changes my view.

What I need now is some Twitters to follow. So, if you can recommend some really good ones for me to follow, pls ‘Tweet’ the WiseGreyOwl.

Why WiseGreyOwl?
On 3rd Dec 2002, the FINANCIAL TIMES ran a series entitled “The ten people every senior executive in tech needs to know”. Amazingly I was listed!

”Richard Holway is the wise grey owl of the UK technology sector, which he has been involved in for 36 years, 16 of them as an influential, fiercely independent and highly-respected analyst. His deep and intricate knowledge of the technology industry allowed him to be one of the few analysts to recognise and describe the technology and internet boom of recent years for what it was: a crazy, passing fad. In 1992 his company, which was sold to Ovum in 2000, began the Boring Award, for companies that recorded 10 years of consistent earnings growth. It has been awarded”

Many people said I should use the name – indeed I am the proud owner of http://www.wisegreyowl.com/. Hence at last finding a use for the nom de plume on Twitter.

‘Braveheart’ Craneware conquering US healthcare market

(By Anthony Miller – Monday 23rd Feb. ’09 9:15am). Continuing the (unintended) Scottish theme in today’s UKHotViews, I see that tiny Scotland-based healthcare software player, Craneware, is chalking up great results in the US (see here). Revenues at half-time (to 31st Dec. ’08) grew 22% to $10.6m, the contracted backlog is up 28% to $51m, and operating margins grew from 15.1% to 21.5% yoy.

Craneware was founded in May ‘99 and obtained £50,000 seed capital from LIFE (Lothian Investment Fund for Enterprise) later that year. Management raised an extra £1m the following year with 3i and SEP. Craneware listed on AIM in Sep. ’07 and its head office has been based in Livingston, Scotland, since Nov. ‘00 where R&D and customer support functions are also located.

Craneware is totally focused on what must currently be the real ‘sweet spot’ of the US healthcare market, i.e. revenue cycle management. They sell a suite of products that seems to cover the entire process from pricing through to collection. This is a rather different part of the market than much larger UK-owned-but-US-focused healthcare players Misys/Allscripts and Sage/Emdeon operate in. They cover the operational side of running a hospital or healthcare practice, such as appointment scheduling and electronic medical records. Craneware doesn’t do any of that stuff – it’s basically all about financial management. I think this is likely to show a much quicker ROI than the painful process of computerising the mountain of paper medical records in a typical hospitals or physician’s practice. Definitely worth a chorus of ‘Scotland the Brave’.

NHS Scotland includes Indian Mastek in latest award

(By Anthony Miller – Monday 23rd Feb ’09 8:15am). It’s a relatively small amount to be shared among a relatively large number of players, but National Services Scotland (i.e. their NHS) has recently awarded a £5m software development and support framework agreement to ten suppliers, including India SI, Mastek, and French SI, Sopra. I’d guess that the Sopra connection is through Newell & Budge, the Scotland-based IT services firm the French SI acquired back in 2005 (and see Sopra suffers in the UK) but Mastek – as far as I know – has no Scottish roots. However, Mastek is also one of BT’s subcontractors on the NHS Spine programme and has been Capita’s offshore application development partner since 1995. Mastek is tiny compared to the ‘usual suspect’ Indian SIs, with annual revenues around $230m. However, over 60% of Mastek’s revenues derive from the UK. Just another example to show that the UK public sector is not closed to offshore players if they can learn how to dance in step with the political music.

Sunday, 22 February 2009

PR

(By Richard Holway – Sunday 22nd Feb 09 8.00pm) Although I’m best known as an analyst, I guess the greatest part of my time in IT has really been in marketing – I was the Group Marketing Director of Hoskyns (now Capgemini) in the late 1970s/early 1980s. As such I’ve had about 30 years dealing with the press.

I would suspect that the publication most read by the current readership of UKHotViews and, perhaps even more importantly our ‘target audience’ as we launch our subscriber services, is the Financial Times. I’m therefore pretty chuffed that we got a pretty good write-up in Monday’s FT. See Cutbacks likely to hurt IT services.

Some of the bits of the article weren’t exactly what I said in the interview – but that’s something else I have learned to live with over the last few decades!

Triple A

(By Richard Holway – Sunday 22nd Feb 09 6.00pm) My eye was attracted to Triple AAAAAAAA in Saturday’s FT Lex column. Back in 1980 there were 60 non financial Triple A rated stocks in the US – now there are just six. But what really caught my eye was that two of these (or a third of all Triple A rated companies if you wanted to make a headline) are tech companies. One is Microsoft and the other is Automatic Data Processing (ADP). Whatever doubts I might have about Microsoft, they don’t include the likelihood of Microsoft defaulting on its debt (particularly given their $18.7 billion cash balance. See my 26th Jan 09 post – CASH).

Some may question the inclusion of ADP as a ‘tech’ company. But we have included IT-oriented BPO players in our analysis since we started in 1986. Indeed, I well remember in early 1999 when the FTSE introduced their IT index (it was the precursor to TechMark). When I scanned the constituents I noted that Capita was not included and called Paul Pindar to point out the ‘mistake’. Paul was adamant that he didn’t want to be thought of a tech company and, in an echo of the famous Groucho Marx quote, said “Richard, I wouldn’t want to belong to any index that had Misys as a constituent.” Capita has never been in TechMark either – but has, despite Pindar’s protestations, always been a Boring Triple A constituent of our research.

Sopra suffers in the UK

(By Anthony Miller; Sunday 22nd Feb 09 5.00pm). We thought the recent announcement of French mid-cap Sopra’s FY08 results earlier in the month (see here) worth a belated mention for a few reasons. Firstly, their UK business. This is essentially based on three acquisitions: Mentor (1999); CS Rand (2001); and the largest, Scotland-based Newell & Budge (2005). Indeed, it was Scotland that kind of let the team down last year due to banking sector contract cancellations (e.g. RBS). But it seems to me that Sopra’s UK business cannot have been firing on all cylinders for some years. UK revenues last year were €73m (+1.7% organic), let’s call it £55‑60m. Yet when Sopra acquired N&B, the Scottish systems house was “on target” to reach £37‑38m in 2005 and was expected to hit £60m revenues in 2006. Mentor record £10m revenues the year before it was acquired. Hmm, something just doesn't seem right.

The second thing that piqued my interest is that despite its modest size Sopra seems to be ‘getting’ the offshore message. Indeed, N&B already had 100 FTEs in Delhi back in 2005; now Sopra has 600 FTEs there (in Noida, to be more precise), which is ~20% of its 3,000-strong delivery centre workforce excluding its semi-autonomous products arm, Axway. They also have 50 FTEs in Casablanca and 200 in Madrid, though I do struggle with calling the latter destination ‘offshore’. However, Sopra’s total headcount exceeds 12,000 so there’s a lot more work being done outside of Sopra’s delivery centres which surely deserves closer attention. Sopra aims to boost offshore headcount by another 700 FTEs this year, but also refers to partnering with the likes of Wipro and MindTree “when necessary”. Mind you, I always worry when a small player like Sopra tries to partner with a large Indian SI like Wipro; phrases involving ‘tails wagging dogs’ spring to mind (and I have absolutely no idea how well that translates into French!).

Finally, I just wonder about the durability of Sopra’s group business model. Through a combination of organic and acquisitive growth, Sopra seems to have ended up with a bit of a mish-mash of businesses. The most profitable is its enterprise application integration (EAI) products business Axway, accounting for 15% of group revenues and nearly 20% of group profit. There’s also a management consulting business (Orga), contributing a tiny 4% of group revenues and 2% of profit – that’s a 5% margin, the lowest in the group. The core business – and the key growth engine – is Sopra’s domestic SI business, which accounts for over 60% of group revenues and profit, and grew 14% (organic) in 2008. It's not clear to me exactly how all the bits are meant to work together; Sopra appears rather unfocused and geographically diverse for a company of its size. This may cause disproportionately greater grief during the downturn than more focused mid-tier peers, as there is unlikely to be a single set of levers that management can pull to adjust the entirety of its business operations – i.e. too many bits to keep an eye on. As we have said many times before, the mid-market is a very uncomfortable place to be.

Friday, 20 February 2009

Intuit lowers guidance again

(By Anthony Miller). US accounting software market leader, Intuit, downgraded FY09 guidance for a second time yesterday when it announced Q2 results (see here). At its Q1 results (Nov. ’08) Intuit was forecasting revenues to grow by 6%-10%, after reaffirming 9%-12% growth a couple of months earlier. Now they are expecting only 2%-6% revenue growth. Similarly, early forecasts for $724-744m FY09 operating income have been lowered to $682-735m, which will drag EPS down 6%. This will not bode well for Sage, which gets 39% of revenues and 29% of profits from North America. Intuit's downgrade also signifies how rapidly market conditions are deteriorating. Sage’s traditional US software business grew barely 1% in FY08 (see Recurring revenues keep Sage growing) and more recently, CEO Paul Walker signalled that ‘volatile’ trading conditions were dragging down business (see Currencies hit Sage net debt). Thank goodness for those recurring revenues!

Bad time to be an IT contractor - Barometer points to Stormy times

(By Richard Holway) Our trusty ITSA barometer has been pointing to bad weather ahead for over a year now but the barometer is now pointing to a really big storm.

I’m indebted to George O’Connor of Panmure Gordon for bringing to my attention that BP has this week written to its IT contractors telling them their rates are to be cut by 10%. Also ContractorUK - see Capgemini to cut IT contractors by 30% - says that Capgemini has cut pay rates for some of its IT freelancers by 15%, as part of a wider strategy to reduce reliance on contractors by a reported 30%.

"As the outlook for IT services worsens, Capgemini is looking to use offshore staff to preserve margins. The plan is to grow the group’s current offshore workforce of 25,000 in lower-cost locations like India to grow to 40,000 by 2010. Short-term the company is exporting 220 support staff offshore. Capgemini has no plans to grow its onshore workforce and would be “very restrictive” in its hiring other than for offshore posts."

Anyone (and that includes the established analyst firms) who still believes that IT, and even IT services, will continue to grow in these troubled times is living in make-believeland. We even expect HM Government, in the April Budget, to announce considerable cuts/savings in public sector IT spend as a result of the Martin Read Review (which we have assisted) . It’s not a case of LESS IT. It’s a case of as much (or MORE) IT but for much less money. It’s a buyers market. Tough, but we all have to learn to ‘lump it or leave it’.

Temenos follows suit on revenue guidance

(By Anthony Miller). The only thing really surprising about Switzerland-based banking software firm Temenos’ FY08 results (see here) was that it took quite so long for them to be hit by the downturn. It wasn’t until Q4 that customers started delaying signings, with the inevitable effect on the quarter’s revenues (down 2% yoy) and profits (down 17%). Like many other players, Temenos also declined to provide revenue guidance for the year, but set a target 2009 operating margin of 19-20%, some 4-5% higher than last year, more in line with 2007 margins.

There were a couple of points of ’local’ interest. First, the integration of Financial Objects (FO), which Temenos acquired in July last year, is now pretty much complete. Management says that they are ‘encouraged’ by FO customer interest in Temenos' flagship T24 banking package. Temenos also claim continued success replacing Misys systems, with average deal size up 13% yoy and 21 installations completed to date. I suspect their success rate will slow now that Misys appears to be well on the way to getting its act together under CEO Mike Lawrie, and Banking Head Guy Warren.

Thursday, 19 February 2009

Pity the management consultants...

(By Richard Holway) In my Bearingpoint files for bankruptcy story yesterday I noted the difficulties facing other management consultancies in these troubled times. I was mainly referring to the firms like Bearingpoint with specific tech interests. But I note in The Times today – Now even consultants are feeling the squeeze – that the problems are as acute in the ‘pure plays’ too.

Bain & Company, the Boston-based firm, has told its partners that it will delay paying a quarter of their bonuses for six months. McKinsey & Company has rolled over a third of last year’s bonuses to this year. Boston Consulting Group (BCG) has admitted that partner remuneration had fallen in the tougher economic environment.”

Further to the Bearingpoint story, there are reports that Accenture are looking to buy their Asia-Pac activities.

Capita makes 'intelligent' healthcare acquisition

(By Anthony Miller). It never ceases to amaze me the canny acquisitions that UK BPO leader, Capita, manages to find. Now it’s healthcare intelligence and benchmarking firm CHKS, which Capita bought from parent HKI for £11.6m. CHKS, which specialises in online governance and performance tools, standards-based assurance programmes and health economics modelling services, turned over £8m last year, at 20% operating margin, which would rank it second behind Financial Services (!) as Capita’s most profitable business line. But more importantly, it beefs up Capita’s healthcare proposition, which currently accounts for just 1% of Capita’s ~£2.5bn revenues. Capita has a knack of planting acorns and nurturing them quickly into great oaks. With its recent contract (Nov. ’08) for the NHS Choices project, it seems we are going to see much more of Capita in the UK healthcare sector in future.

HP update

(By Anthony Miller). Frankly, this afternoon’s EMEA-orientated concall shed little further light on HP’s European services business as the company resolutely refuses to publish regional or country breakouts unlike almost every other player in the IT services market. However, we gleaned a couple of other snippets.

First, HP’s netbook business (or ‘mini-note’ as they call them), which are now offered by T-Mobile and Orange as part of their ‘buy mobile broadband and get a netbook free’ type of package. HP EMEA MD Francesco Serafini admitted that HP had been late to market with their netbook and are not driving this market (though I sensed a hint of “yet”!). HP has reshaped its low-end notebook product line to be more aggressive on price, accepting that this will pressure margins. It’s dog eats dog out there, folks.

Serafini also confirmed that HP is imposing a permanent, across-the-board salary cut for all employees, of between 2.5% and 20% depending on seniority. However, this will be ‘voluntary’ for European employees, though Serafini expects European leadership and management will ‘do the right ‘thing’. No pressure there, then.

Wednesday, 18 February 2009

UK drags HP services growth

(By Anthony Miller). Although operating margins in HP’s EDS-bolstered services unit rose 50 bps yoy to 12.8% in 1Q09 (to 31st Jan. ’09), revenues on a proforma basis fell 15% to $8.7bn. Management attributed half this drop to the unfavourable British currency, but most of the rest was a ‘real’ demand decline in its applications services business as ‘discretionary’ project work – especially the add-on ‘cream’ on major outsourcing contracts – fell away. Nonetheless, HP CEO Mark Hurd reported that the EDS integration was ahead of schedule, with 9,000 employees already laid off. He also mooted that the Satyam saga has resulted in increased customer interest in HP's services.

HP has reclassified the way it reports services revenues as the prior Outsourcing Services, Consulting & Integration and EDS business units have been "disintegrated”. IT Outsourcing now represents 45% of HP’s services business, with Technology Services (i.e. maintenance) 28%, and Application Services at 18%. BPO is still under 1% of services revenues. I hope to get a better view of HP’s European services business on Thursday pm and will add more then.

For the record, HP’s hardware businesses generally had a grim quarter. In its PC business, an 8% yoy increase in notebook volumes was not enough to offset a 13% revenue decline. Undoubtedly some of the notebook volume increase came from netbooks; Hurd reckons 80% of netbooks sales are new business, i.e. only 20% is cannibalising HP’s other PC business. Desktop PCs did poorly, with volumes down 15% and revenues down 25%. Printer volumes were down 33% and even the highly profitable supplies business saw revenues fall 7%. Enterprise Storage and Server revenues fell 18%.

Watmore appointed CEO of the Football Association

(By Richard Holway) Many readers will know Ian Watmore from his 24 years at Accenture; where he was UK MD from 2000 to 2004. Watmore joined the Government in 2004 as the first Government CIO (a position currently held by John Suffolk). Currently Watmore is the Permanent Secretary for the Department for Innovation, Universities and Skills.

So, proving that there really is life after IT, you will be interested that Watmore has just been appointed as CEO of the Football Association.

Footnote – Although we might know Watmore, I note that much of the media is saying “Ian who?”

Bearingpoint files for bankrupcy

(By Richard Holway) Technology and management consultancy, Bearingpoint, has just filed for bankrupcy in the US. This is no 'small tech company' - Bearingpoint employs 15,200 people in 60 countries worldwide and had revenues of c$3.3 billion in 2008. They have a really blue chip customer base (whatever that is worth in today's troubled times) across the private and public sectors. Although troubles at Bearingpoint have filled the rumour mill for some time - their NYSE listing was suspended two months ago- this is still quite a shock. The announcement says that their activities will continue 'as normal'...

Bearingpoint has a long, 100 year pedigree being formed out of KPMG's Consulting activities. They IPOed in 2001 and went on a buying spree. Indeed they did some 30 acquisitions between 1999 and 2002 including acquiring bits of Arthur Andersen (remember them) and KPMG's consulting operations in other countries. They changed their name to Bearingpoint in 2002. Now its their $1 billion debt which has done for them.

I think this just shows how difficult the management consultancy market is right now - something we have heard across the board at our interviews. With new projects on hold, management consultants, who often have as bad a reputation as bankers, are an easy first target for cost cutting. But this must set the alarm bells ringing in many a marbled hall right now.

Genpact ups the ante on 2009 growth

(By Anthony Miller). I didn’t know there was a contest as to who could guide for highest growth this year, but Genpact appears to think there is, trumping Cognizant’s guidance (see Cognizant signals 10% growth in 2009) with their bid for 10%-15%. Apparently, even this failed to meet market expectations, though it hasn’t affected Genpact’s stock, which is up 6% as I write.

It’s the core BPO side of the business (now 80% of total revenues) which is driving Genpact’s growth, with IT services hardest hit by the downturn. Nonetheless, CEO Pramod Bhasin is resolute in keeping IT services as part of the Genpact proposition, and we wholeheartedly agree. You just can’t do ‘transformational BPO’ without transforming the IT part of the process, so why give that bit to a partner if you don’t really have to?

On the local front, Genpact is rather coy about how much business it gets from Europe, but we think it’s around 10-15% of its now $1bn annual revenues, probably most from the UK. Europe is growing much faster than the rest of Genpact’s business – 35% last year vs 26% for the group. On that basis, their guidance suggests they expect to grow 20-25% in Europe this year, which would be a heck of a result, especially as we expect the UK BPO market – the most mature in Europe – ‘only’ to grow 8%. Clearly another offshore player to watch.

Atos Origin update

(By Anthony Miller). This morning’s extended concall put some more flesh on the bones of Atos’ ‘TOP’ strategy but I still can’t quite see how all the limbs fit together.

On the global delivery front, management talked about increasing ‘offshore and nearshore’ headcount from 4,500 to 5,500 this year. They also aim to double the offshore delivery mix in their SI business (which includes application management, AM) to 25%. I think that’s still light, particularly as AM is one of the most ‘offshoreable’ service lines and most players would want to be doing around 70% of it offshore. Now, Atos gets 40% of group revenues from the UK, Americas and Netherlands, the markets most amenable to offshoring. Even if Atos gets offshore/nearshore headcount to 5,500 (and, by the way, they don’t give country splits for this, so we don’t know how many are in ‘real’ low-cost locations) that’s only 11% of group headcount. Just doesn’t seem enough to me.

The other aspect of Atos’ strategy that confuses me is the new organisational structure. In its push to construct a more global organisation, they have chosen to separate out Consulting from other IT service lines and have put the new Global Consulting Group reporting in to the VP, Global Functions – that’s the guy also looking after Global Sales & Markets, plus IT and back office stuff like HR. The rest of Atos’ delivery sits in its Global SI and Global Managed Operations (MO) units, each reporting to the VP for Global Operations, who also ‘owns’ the country markets (now called Group Business Units). Most other IT services outfits that have tried running segregated Consulting practices found it just doesn’t work ‘end-to-end’. At a local level, this also worries me because Atos UK CEO, Keith Wilman, has done a really grand job turning around the UK consulting practice – will all his good work be undone in the new organisation? And in any event, lumping Consulting and Sales & Markets with ‘back office’ functions sounds weird to me. Anyway, the organisation chart looks really pretty and I guess that’s what counts.

Atos tops up TOP

(By Anthony Miller). Atos Origin released its ‘full monty’ 2008 results today adding colour and movement to early Feb’s revenues preview (see Atos UK grows 6% in final quarter). Excluding disposals, group margins crept up 30 bps to 4.8% though reported margins fell 50 bps to 1.8%. Regional margins were very much a case of swings and roundabouts. UK margins rose from 5.7% to 7.3%, and France was also up from 4.4% to 4.9%. However, Margins in The Netherlands really got hammered – falling from 11.8% to 8.5%, while Germany also fell, from 7.4% to 6.7%. Margins in the Americas added 10 bps to make 3.0%.

Compared with Capegmini's results (see table), I’d have to say it’s not easy to pick out obvious country trends, though Capgemini’s margin superiority across the board really stands out. Perhaps this is why Atos also announced a reorganisation, putting greater management focus on better integrated global operations (and see my comment on just this challenge in UK now leading Steria’s growth). The trouble as I see it is that Atos’ “TOP” programme (Total Operating Performance) – which is their version of Capgemini’s “I3” initiative, (as in Industrialisation, Innovation, Intimacy) - looks a bit complicated to manage, with its “four transformational levers supported by twenty transversal initiatives”. It also concerns me that service process industrialisation and offshore delivery appear to have a much lower focus in the Atos programme than in Capgemini’s (or, for that matter, even than much smaller Steria). My current understanding is that Atos has some 4,000 FTEs in its global delivery network (about 8% of its 50K global workforce) of which ~3,000 are in India. Capgemini, on the other hand, has over 25% of its global workforce offshore, with some 20K of those in India.

Anyway, Atos is expecting 2009 revenues to be slightly lower than 2008 (at constant currency) but aims to boost margins 50-100 bps, mostly in H2. The former is to be expected – the latter will be a challenge.

Tuesday, 17 February 2009

New TechMarketView - Thanks for your feedback

(By Richard Holway) Thanks for all your good wishes on the launch of TechMarketView yesterday. Even bigger thanks for the orders! The only way we will be able to give you an even better service is if we get subscribers – TechMarketView needs YOU!

As you can see, our banner ads start today on both the email and the website. If you would like to advertise on UKHotviews, pls contact us on Sales@Techmarketview.com.

Also thanks for your suggestions.

1 – Nobody liked the American date and timestamp on the email so we are removing it

2 – For all you RSS feed fans (like me) we forgot to mention that we still have an atom feed. Just link to http://www.techmarketview.com/ukhotviews.xml. or add it to your news reader. We’ll put the appropriate button on the site as soon as we can. Sorry we didn’t do that on launch.

We would really appreciate your comments on the service. Please send them to Comments@techmarketview.com.

Finally, if you really do value UKHotViews, please pass it on and get your friends and colleagues to subscribe. It will really help us.

Corporate governance and Due diligence

(By Richard Holway) As each year, month, week, day goes by, the more I feel that there is something quite rotten at the heart of our corporate society.

Ten years ago I thought there was something rotten at the heart of Misys. I thought their corporate governance, which allowed Kevin Lomax to be both Chairman and CEO and stay on way past his ‘sell by date’, to be wrong. I thought that the presence of Cadbury (who had produced the first major report on corporate governance) on the board was therefore two faced. Lomax was also on the board of M&S were similar corporate governance issues arose.

Lomax did eventually get his come-uppance. By common consent, Mike Lawrie has done a good job turning Misys around post-Lomax. Then a few weeks ago it was announced that (I quote from the FT) “Sir James Crosby, one of the most respected names in the City, is to become its non-executive chairman”. This is the same Sir James Crosby who was CEO of HBOS until 2006 and must bear a large part of the responsibility for the awful mess created there. On top of that there are growing accusations that he not only ignored warnings of excessive risk taking, but fired the whistle-blower.

All this leads on to Due diligence. I’ve been involved in quite a lot of Due diligence in the last 20 years – as, I am sure, have many HotViews readers. I’ve also been involved in aborting quite a few transactions because of what I’ve learned from Due diligence. My teams have always been told that “We will be prepared to walk away”.

I’ve banked with Lloyds since I was 18 and have been a shareholder for much of my life. Having gloried in my Boring Awards to Sage and Capita, if banks were eligible I could have awarded one to Lloyds. Boring really was – and most particularly is still - GOOD! Then along comes HBOS and Eric Daniels succumbs to the ‘this is my chance to become the biggest bank in the UK’ – pretty similar to the power drug that affected Fred Goodwin when he saw the chance of acquiring ABN. Raw ambition overtook common business sense. Not to have done sufficient Due diligence on a transaction of this size and risk is…well, personally I think it is criminal. Criminal because I (and 3m other small shareholders) are the victims – the victims have lost real money (like 80% of the value of my Lloyds shareholding) as a direct result of Daniel's misplaced ‘ambition’.

I’m also a shareholder of Misys where the person who caused the problems at HBOS which caused the problems at Lloyds is about to take over as Chairman.

As each year, month, week, day goes by, the more I feel that there is something quite rotten at the heart of our corporate society.

UK now leading Steria’s growth

(By Anthony Miller). After clawing back the revenue gap from the closing out of major contracts with the Learning & Skills Council and My Travel, Steria’s UK business turned in the fastest growth in the group in Q408, at 2.6% on a constant currency (ccy) basis. Steria’s home French market grew 0.7% in the last quarter but German revenues fell 3.2% ccy. The UK is Steria’s largest market, with 42% of the group’s €1.77bn 2008 revenues, though the 1H08 ‘drag’ set UK revenues back 1.3% ccy over the year, to reach £590m. Steria’s managed service and BPO services grew 1.5% ccy at group level vs 0.6% growth in consulting & systems integration.

I spoke to Steria UK MD, John Torrie, this morning, and it’s clear that the Xansa acquisition is really helping to push the UK business forwards. OK, it took a year or so to bed down, but towards the end of last year they picked up a new BPO contract with Whitbread and an extension to a BPO deal with O2, both with high offshore content. With some 5,000 staff in India, Steria now has over 25% of its group workforce offshore, but this looks more like 60%+ for Steria’s UK business as currently almost all the offshore delivery is for the UK market.

Notably, some 30% of Steria’s landmark BPO contract with the NHS is delivered offshore, which is likely to rise to 40% over time. This illustrates rather well the basic conundrum in UK government’s attitude to offshore services – how to balance ‘best value’ delivery with ‘British jobs for British workers’. On that basis we can’t help thinking that UK-based players with offshore ‘back-ends’ will look a more politically attractive option to the public sector than Indian ‘pure-plays’. Having said that, whether the Government considers Steria UK, or for that matter, IBM UK, Accenture, UK, HP/EDS UK, etc as ‘UK-based businesses’ is yet another confusing aspect of the conundrum.

Like every other CEO we have spoken to, Torrie is seeing opportunities “galloping to the right”, as spending decisions get delayed But he sees just as big a challenge in getting better 'leverage' within the Steria Group. In our view, Steria is still very much a federation of country-based IT services businesses now trying to ‘work as one’. The ‘old hands’ such as IBM, Accenture and EDS, have been doing this for years (sort of), but Steria – and indeed ‘our very own' Logica – are really only just starting down this path. Everyone knows (or should know) that IT services ‘propositions’ that work in one country market won’t necessarily work in another. Therefore the key to ‘leverage’ is more about process industrialisation, using common tools and systems, than trying to raise the same flag up each country’s flagpole. Torrie knows this and we think he has an ‘interesting’ challenge to get the message accepted and acted upon by group management as it is in fact he who has been tagged for just this task by Steria’s board!

Cognizant UK echoes 10% growth target

(By Anthony Miller). I have just spoken to Cognizant UK MD, Sanjiv Gossain, and he sounds very comfortable with the company’s 10% growth guidance (see Cognizant signals 10% growth in 2009). Although like other players, Gossain is seeing slower decision-making, he said other customers are being spurred into action to try to save costs. We think Cognizant is winning share both from traditional players in the UK market as well as Indian peers; indeed I suspect they have some UK customers shared with Satyam who I would imagine are thinking hard about where to put their next piece of work. Nonetheless, 10% growth in a shrinking market is a pretty bold call at this point in the year, and I am sure Gossain is giving his backlog and pipeline a really good scrub on a very regular basis. Mind you, if any player is going to grow 10% this year, Cognizant would be at the top of my list! Just for the record, we estimate that Cognizant's UK revenues finished the year somewhere between £200-250m.

Monday, 16 February 2009

What's new on TechMarketViews?

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