Monday, 31 August 2009

BT and Royston Hoggarth

(By Richard Holway 3.00pm Monday 31st Aug 09) I was a bit surprised to see the Sunday Telegraph carrying the headline BT ousts BT Services boss Royston Hoggarth. We had carried the news that Mark Quatermaine had been confirmed as President BT Global Services UK back in July.

The Telegraph gave the impression that Hoggarth was in some way to blame for the problems at BT Global Services by lumping him in with Francois Barrault. But Hoggarth had joined just a year back – see our 2nd Sept 08 post – New appointment at BT Global Services. As far as I understood it, Hoggarth was hired by BT to integrate Global Services in the UK (previously split into Public Sector, Health, Finance and the rest) into one business entity, to bring in the operational discipline and controls required and to help bottom the issues on the major contracts. Indeed to assist BT to take the hard decisions required during a difficult stage. Maybe Hoggarth was a bit too critical? Maybe BT Global Services 'new' management, which had afterall had been around in BT throughout the years when the problems had gone unaddressed, were a bit sensitive about that? Certainly my own experience of BT was of great frustration getting anyone to accept positive criticism - let alone take any action as a result.

Hoggarth has pursued a ‘pluralist career’ since leaving C&W in 2004 – so I was always unsure if BT was a temporary assignment for him or a route to bigger things in BT. I suspect he would have welcomed a bigger role at BT if only the politics hadn't gotten in the way.

The Telegraph article also gives the impression that all of BT Global Services ills were in the UK. This is far from the case. Indeed, I've always understood the UK to be the profitable bit - which is more than can be said for International. Sure the NHS IT was a big part of the problem but many of the other problem contracts were in International.

In any event, I really don’t think the word ‘oust’ in the Telegraph headline is appropriate. And I certainly don’t think the blame for BT Global Services ills should be attributed to Hoggarth. It’s BT Group’s top management and the CEOs and senior management of BT Global Services from 2002 – 2008 that should shoulder that responsibility.

Share Indices August

(By Richard Holway 3.00pm Monday 31st Aug 09) The Bull market – in particular in all things tech – just keeps raging. Unusually, all the Indices we follow were up in the narrow range 7%-9% - all similar to the FTSE100 rise.


The UK FTSE SCS Index rose another 7% - that’s an amazing 50% YTD. Star performers this month were Anite (up 39% benefiting from a series of positive press and broker comment) and Computacenter (up 21% - see our 27th Aug post - Computacenter winning UK services share.) Outside of the FTSE SCS Index, A trio of stocks put on 69% gains. Sanderson arranged new banking facilities, Highams (that’s what happens when a penny stock rises from 1.1p to 1.9p) and Parity because of encouraging signs in their H1 report.

Telcom – up 8% - is dominated by BT and Vodafone (both up 9%).

NASDAQ was not quite so bullish – managing a modest 2.5% rise – with similar modest performances from the big tech players like HP, Microsoft and Oracle.

Among the India-based players, telco services firm, Sasken, took pole position (+36%), just ahead of Mastek (see Mastek – the ‘Little Indian Battler’) at 35%. Star among the majors was HCL (+27%) after showing a clean pair of heels to larger peers in the recent quarter (see HCL streaks past peers). Poor showing from a couple of the BPO pure-plays, with Genpact down 9% and ExlService down 4%. This was not apparently a ‘BPO thing’ as Firstsource (nee ICICI OneSource) soared 31%.

There was a more muted stock performance from the European IT services majors, with Capgemini up 6% and Atos Origin up 5%. The smaller players did much better – Dutch ‘local hero’ (but much troubled) Ordina topped the list, up 34%, Sopra up 14% and Steria up 12%.

So is all this euphoria justified? Indeed will all this continue? When we wrote on 26th Aug of Fujitsu’s major redundancy programme, which has lead to a forecast of a 7% decline in its UK revenues, other analysts suggested they were an isolated case and pointed to the 5 year/£1.5b megadeal from BP this week as an example of a bouyant IT market. But BP was an excellent example of the severe competition in the IT market which is contributing to market contraction.

Then observers pointed to Intel on Friday as a tech bellwether indicating better times ahead. As I said in my post the day before – Dell and the netbook effect - consumers in particular are switching to low price netbooks (and smartphones) which benefit Intel. But I have severe doubts that enterprises are about to start buying fully priced PCs and laptops again.

Observers must remember that the renewal of a megadeal at a significantly lower price actually reduces the market size. Observers should remember that a bull consumer tech market is not the same as a bull enterprise IT market. Observers should remember that Acer said last week that it needs to sell six netbooks to make the same profit as one regular notebook. In some ways, the more Atom chips that Intel sells, the worse it will be for the HPs and Dells of this world.

YTD the FTSE 100 has risen 11% but the FTSE SCS is up 50%. I still find it extremely difficult to justify that dichotomy.

Friday, 28 August 2009

Parity switches offshore partners

(By Anthony Miller – Friday 28th August 2009 10:15am). There are a couple of telling statements from ITSA (IT staff agency)-cum-mini-SI, Parity CEO, Alwyn Welch, in their first half report. Both statements reflect the reality of how competitors react in a tight market – i.e. they go after each other’s lunch!

No secret, though, that UK public sector IT spending is holding up much better than in the private sector, therefore, “several of our Resources (i.e. ITSA) competitors (are) now focussing more strongly on the attractive public sector market”, traditionally one of Parity’s strongholds (see Parity finds some solace in UK Public Sector).

Welch also confirmed that even the megadeal players are scavenging around the mid-market for business (see Parity update): “Solutions (Parity’s SI business) is seeing the larger European or Global systems integrators bidding for our typical size of project and discounting to be competitive,” though he alludes to a couple of wins against the big boys. However, even these wins can be Pyrrhic victories, as Parity just doesn’t have the scale to resource all the necessary skills in-house – indeed it has had to lay off some employees, and half the remaining staff are taking a voluntary couple of week’s unpaid leave in H2 (in effect, a 7.5% salary sacrifice). Therefore Parity has to rely on “margin-depleting associates” (i.e. contractors) to bridge the gaps, though it is still hiring Microsoft skills.

Maybe they will get some relief from a recently announced tie up with Bangalore-based SI, Sonata Software. Previously Parity had (unfruitfully) partnered with Bangalore-based Calsoft, and with London-HQ’ed Endava, which provides services from Romania and Moldova. When I spoke to Welch just now, he seemed far more confident that the Sonata relationship would work well for both Parity and the Indian SI as they look for joint go-to-market opportunities as well as in a traditional subcontract onshore/offshore model. Sonata has some 2,700 FTEs and last year (to 31st March ’09) turned over about $350m.

Unfortunately Parity is stuck between a rock and a hard place – and the place is getting harder – and the rock bigger! This will make it very tough for Welch to turn around the first-half pre-tax loss in order to keep the company above the waterline for the full year. But at least they held margin in their well-respected ITSA business, no mean feat to be sure.

HCL streaks past peers

(By Anthony Miller – Friday 28th August 2009 9:45am). Earlier this week the last of the India-based majors to report results, HCL, capped off its year (to 30th June) with a terrific quarter at nearly 8% sequential growth (to $607m), showing even Cognizant a clean pair of heels (+4%). This put HCL firmly past the $2b revenue mark ($2.18b to be more precise), a real milestone. Even at constant currencies (ccy) HCL grew 4% seq, with Europe (now of course including Axon) up 1.6% seq ccy, representing 29% of HCL’s global revenues. Operating margins grew 1.6 pts seq to 18.0% though this was 1.2 pts down yoy.

Perhaps slightly surprising, especially in the light of the Axon acquisition, was that HCL’s enterprise application services revenues shrunk very slightly (1%) in the quarter (ccy). In contrast, its flagship infrastructure management business grew 21% on the same basis – just a huge result – and now represents nearly 18% of the total. HCL acquired a US data centre recently to bolster its IM ambitions, and TechMarketView subscription service clients will be able to read more about that and HCL’s results in the next issue of OffshoreViews very soon.

Delcam - battling on in difficult conditions

(By Philip Carnelley, 28 Aug 09, 09:45) Delcam, the CAM (computer-aided manufacturing) software specialist says it faced “very challenging market conditions” in the first half of the year, with much of its customer base (manufacturers) deferring buying decisions. Sales were down 5% to £16.1m, due to software license sales falling 21%, to £6.9m. Operating profit dropped from £1.3m to just £266k.On a brighter note, recurring revenues for maintenance rose 13% to £5.8m and services were up 21%, to £2.8m.

A notable aspect of the figures is that despite its falling profitability, Delcam increased R&D spend slightly, aiming to gain “strategic advantage” and take market share - seeing market conditions as opportunity not just a problem. Its R&D spend was £4.7m – 29% of turnover, high for a mature software company. By comparison,
Aveva, the (rather larger) engineering software company spent 16% of turnover on R&D last year. Delcam has in recent years diversified its customer base into newer market areas – dental, medical and footwear – a decision which is paying off, as these markets are doing better than its traditional manufacturing base. It also noted that sales in India and China continue to rise. The company has predicted an increase in profitability in the second half and that it expects to outperform its competitors due to the spread of its business. Its shares are up 5% this morning on these results.

Gresham – still loss-making, disposes of its NonStop support business

(By Philip Carnelley, 28 Aug 2009, 09:30) Gresham Computing, the loss-making financial solutions provider, has sold its subsidiary Gresham Software Labs Pty Limited, a software and support business specialising in storage software and support for HP NonStop systems. The sale is for a total consideration of £470k, in two tranches, much of which goes to clear debts by the subsidiary to its parent.

Gresham also reported today its interims to 30 June: it made a trading loss of near £1m (2008: £0.5m loss) on revenues of £5.6m – down 22%, in part due to the disposals last year. In 2008 Gresham lost £800k in the year (a big improvement from the prior year), so things seem to have gone backward. Gresham’s annual report shows that £100 invested in the company in 2003 would be worth around £10 today – whereas if invested in the FTSE Techmark Index it would be around £120. Full marks to Gresham for honesty. Gresham has a long history (35 years) in the UK market – let’s hope they can deal with the challenges.

Netbooks and their effect on Dell and Acer

(By Richard Holway 7.00am Friday 28th Aug 09) Last night Dell, the world’s second largest PC maker, announced a 22% reduction in revenues to $12.76b. Profits fell a pretty similar 23% . The results were ‘as expected’. Dell said it was seeing “seasonal demand improvements in its consumer and federal-government businesses, though it expects slower orders from business customers in the U.S. and Europe. Business spending likely won’t pick up until 2010, with IT buyers in the U.S. showing the first signs of recovery”.

More insight into Dell’s woes (indeed the woes of the whole PC sector) came from Acer’s results – also announced yesterday. Acer is now the world’s third largest PC maker and the #1 netbook maker. Acer suffered a 5% reduction in revenues in Q2 but a 20% reduction in profits. Unit shipments rose 24% but Acer said it needs to sell six netbooks to make the same amount of profit it would from a single regular notebook PC. Acer expects netbook unit sales to rise 40% in H2.

Even Acer still seems to argue that netbooks do not cannibalize regular notebook sales – but I find that difficult to believe. The argument goes that users buy both. That certainly has not applied in the Holway household.

Both Dell and Acer are banking on the launch of Windows 7 boosting PC sales. I agree. But it’s far more likely to boost netbook sales than regular PCs. Netbooks are getting both cheaper and better. On top of that both Dell and Acer face a whole new raft of competition from the likes of Nokia (see my 27th Aug post – Convergence as Nokia launches netbook) and from Apple’s iTablet.


The next period is going to be great for consumers but pretty tough for manufacturers’ profits.

Thursday, 27 August 2009

Hurray - Number of students taking science GCSEs increases at last

(By Richard Holway 10.00pm Wednesday 27th Aug 09) For many years I have been fighting a crusade to get more of our young people interested in STEM subjects. For example see my post on 19th Feb 2008 – STEMing the tide and 3rd June 2008 Maths - From Geek to Chic. For years I have written of declines in the numbers of students taking STEM subjects at GCSE, A-Level and at University.

So I really do applaud today’s GCSE results which show record rises in entries for maths, physics, chemistry and biology – after a long period of decline. Indeed up 18% in biology, 20% in chemistry and 21% in physics (between 15,000 and 16,000 extra students in each subject) in a year when GCSE entries overall fell by 3.5%.

However there was a further decline in those taking Information and Communication Technology which went down by 12,080 (14.1 per cent). Numbers have fallen by a third (33 per cent) in the past three years, from a total of 109,601 in 2006 to 73,519 this year.

Most people tell me that’s because the ICT GCSE is just a world away from today’s computing world and its current requirements. We really need to do something about that urgently.

But, if our kids are finally getting interested in STEM subjects again then it is even more important that we create the Entry-level IT jobs for them. Assuming today’s bulge in GCSE students goes onto further education, it is incumbent on us to ensure that we increase the number of entry level jobs over the next 2-5 years. As you are aware that is one of the key objectives of the Making BrITain Great Again IT Manifesto.

IBM, Accenture, TCS, Infosys, Wipro in BP megadeal

(By Anthony Miller – Thursday 27th August 2009 6:45pm). It’s a bit tricky trying to piece together exactly who is doing what to whom and for how much in all the media flurry, but the bottom line is that BP has awarded a five-year megadeal variously valued at $1b, $1.5b and even £1.5b to IBM, Accenture, and the top three India-based SIs, TCS, Infosys and Wipro (I’d plump for the $1.5b number, by the way).

As best as I can surmise, the workload is apportioned thus:

- Accenture: SAP development.

- Infosys: AD&M for BP’s Integrated Supply and Trading and Exploration and Production businesses.

- Wipro: AD&M for BP’s global Fuels Value Chain and Corporate businesses.

- TCS: AD&M for BP’s refining, manufacturing and corporate IT businesses with the possibility of future AD work in BP’s upstream and trading businesses.

- IBM: The overall winner, to manage and run all of the oil giant's enterprise applications and integrated service desk responsibilities, including global SAP maintenance and its system development centre.

BP was already a substantial client of all these players, but my sense is that Accenture has been the net ‘loser’ among the incumbents. Mind you, BP apparently had some 40 IT suppliers prior, so it’s the other 35-ish that are really hurting. It was also reported that BP expected to spend $2b on the deals, which shows how effectively they were able to screw down prices to bring the contracts in $500m under budget. Much more for much less it seems, and another perfect example of how a deal that might be perceived by some observers to indicate an IT market in rude health is one which, in truth, is just as likely to see it reduce in size!

The other thing to bear in mind is that this is likely to be a framework agreement where the ‘winners’ still have to bid for the various pieces of business. This is how other major vendor consolidations, such as with GM and ABN Amro, were conducted (India-based majors also took a fair slice of these too). It appears that some of the incumbents’ current work with BP is ‘assured’, but the rest, it seems, is to play for.

Nonetheless, all – perhaps bar Accenture – must be feeling rightfully pleased with themselves after 12 months of hard bargaining!

By the way, it looks like next cab off the rank will be Exxon, which is reported to be negotiating with the usual Inida-based suspects, this time including L&T Infotech and HCL, on a similar deal mooted around $1b. One report quoted an employee advising, "ExxonMobil wants to work with fewer, large and medium-sized vendors at lower rates.Yet again, vendor consolidation at work, with huge spoils for the few winners, wooden spoons for the many losers, but less total spend in the market.

What’s the Point of Avanade?

That was our opening question to Avanade’s UK MD, Ian Jordan, and President of Europe, Ashish Kumar when we recently met them. For those who don’t know, the “world’s largest Microsoft SI” was created in April 2000 as a joint venture between Accenture and Microsoft, who remain its principal owners. And, of course, they both have consulting and SI capabilities of their own. So why establish Avanade?

To find out why, you should read our latest CompanyViews note, The Point of Avanade. Of course, to do that you need to be a TechMarketView subscription service client and, as ever, Puni Rajah (prajah@techmarketview.com) can tell you how.

Sopheon – wrong place, wrong time

(By Philip Carnelley, 27 Aug 09, 09:30) Sopheon’s interims today confirmed what it has been saying in its trading statements (Efficiency winning out over innovation): it’s been finding things tough this year. The product innovation software company announced revenues down 5%, to £4.1m for the half year. It turned from profit to loss: £0.3m at the EBITDA level and a £1m loss before tax. After strong results in 2008 (47% growth and a move into operating profit after some years of losses) this is disappointing, even if not unexpected.

In the current economic climate, product innovation is not top of mind at many companies. Though some will subscribe to the theory that innovation is the best route forward in a recession, most ‘make do and mend’ and focus first on operating efficiency. Another problem for Sopheon is that the majority of its staff are outside the UK and therefore cost more in sterling terms. It exacerbated this by adding staff in response to its 2008 performance (it is now slimming down again). So this could be summed up as ‘wrong place, wrong time.’ Nevertheless, management believes that orders are being deferred, not lost, though even so, most players find deferred orders rarely return at the original contract value. The pipeline is said to remain “strong” and undoubtedly companies’ thoughts will – indeed must – return in the coming months to product innovation. But for Sopheon, the wait is proving rather painful.

Computacenter winning UK services share

(By Anthony Miller – Thursday 27th August 2009 8:45am). There’s a stark contrast between the fortunes of Computacenter, which reported its 1H09 results this morning, and Fujitsu Services, which stunned the market with news of substantial layoffs yesterday (see Fujitsu announces major UK redundancy programme). Whereas Fujitsu’s UK business, primarily infrastructure support services, is suffering a 7% revenue decline, Computacenter’s UK services business, also primarily infrastructure support, grew 8%. There’s a difference in scale, of course. Fujitsu’s UK revenues were around £2b last year (to 31st March ’09), over 80% in services. Computacenter UK turned over £1.4b last year (to 31st Dec. ’08) of which 23% was services. That should have worked in Fujitsu’s favour, but clearly Computacenter is winning share.

Both companies are facing the same market conditions. As Computacenter CEO, Mike Norris, put it, “... we have seen a significant consequent reduction in our customers’ operating budgets. This is no surprise and we expect this to continue for the foreseeable future.” I suspect this is not just the ‘more for less’ syndrome in full play (i.e. pricing pressure) – it may well be that even ‘keep the lights on’ operations are being dimmed. I would also imagine Fujitsu has a higher exposure to project-related services, such as infrastructure implementation and integration, which typically comes on the back of new hardware roll-outs. Norris noted just this effect at Computacenter: “Customers’ expenditure on professional (i.e. project) services declined as customers put non-critical project expenditure on hold.”

I can only deduce that the difference must be in execution. Computacenter’s UK services, under the command of Digica ex-CEO, Mark Howling, seems to have responded quicker to the downturn (Computacenter has already pretty much done its restructuring) and seems to be nimbler at picking up the business that’s still out in the market. Indeed, Computacenter’s UK first-half (adjusted) operating margins (incl. h/w) rose 70bps yoy to 2.0%. With the wafer-thin margins at play in low-level services businesses, it really does pay to keep ahead of the game.

Wednesday, 26 August 2009

Serco update

(By Anthony Miller - Wednesday 26th August 2009 3:30pm). After chatting with Serco CEO, Chris Hyman, at this morning's results briefing (see Serco targets double-digit growth in 2009), I am rather of the view we will be seeing more of the support services giant in the traditional UK IT/BPO services marketplace. Hyman told me they generate some £300m p.a. in IT/BPO, almost all in the UK – that already puts them just outside the UK SITS Top 20, something I suspect is not well appreciated by many in the marketplace.

Serco is on the lookout for acquisitions to boost its “very, very small” BPO business (which suggests to me that the acquisition of UK IT/BPO player ITNET back in 2005 never really delivered on the promise). They now have a real incentive to fix the BPO problem. Hyman said that clients are increasingly looking for a single supplier to prime large contracts, and that sometimes leaves Serco out in the cold – or at least as second string – if the deal has a large IT or BPO component. Indeed, this is why Serco couldn’t prime at Essex County Council (see IBM beats Capita, Mouchel, TCS and T-Systems to Essex deal) though I understand they are back in the frame in a subcontract role. That’s not where Serco really wants to be.

I got the impression Hyman does not see the same sense of urgency to boost Serco’s IT services capability as Capita (e.g. see Capita buys Carillion IT Services). Hyman seems happy – for now – to continue to rely on partners such as IBM, Logica, Raytheon, Lockheed and others besides. I just wonder for how much longer he will be prepared to cede what is becoming an increasingly larger part of major public sector deals to his competitors. If the answer turns out to be 'not much longer', then they will first need to work out what went wrong at ITNET before attempting anything bigger and bolder!

Fujitsu announces major UK redundancy programme

(By Richard Holway 11.00am Wednesday 26th Aug 09) Fujitsu’s UK IT services operation has just announced a proposed 1200 redundancy programme – equivalent to just under 10% of its UK workforce. This will not be an 'across the board' cut. Some areas will undoubtedly be harder hit than others. This comes on top of an existing pay freeze, pension curtailment (see our 17th May 09 post – Fujitsu closes its final salary pension scheme), contractor and temporary staff reductions etc

I talked earlier today with Roger Gilbert, Fujitsu’s UK CEO who took on the role on 1st Apr as part of Richard Christou’s major reorganisation (see our 31st Mar 09 post – Fujitsu’s new Global Business Group). Since then Gilbert has been undertaking a review of the UK business in the light of the integration of FSC and a pretty disappointing order book going into the new year.

Gilbert is now forecasting a 7% decline in Fujitsu’s UK revenues. Fujitsu claimed UK revenues of c£2b in their last FY to 31st March 09 of which £1640m was what we count as SITS (the rest is hardware and other non-SITS) Subscribers can read more in our recent CompanyViews report. Gilbert reckons we are safe to apply the 7% decline to both figures.

Fujitsu has found that the downturn has affected both its public and private sector business and order book. It’s not only a shortage of new business and projects but also the ‘More for Less’ syndrome when existing contracts come up for renewal. I asked Gilbert whether offshore had played an additional role in these redundancies and the answer was ‘inevitably we will do more offshoring’. Indeed you just can’t be competitive today without it. Gilbert did point out the significant ‘nearshore’ resources Fujitsu has in Northern Ireland.

I was also concerned about the effects on Fujitsu’s graduate recruitment programme. They took on c100 this year. Gilbert was ‘very reluctant to apply a complete ban on future graduate recruitment’ as it was such an important part of Fujitsu’s ethos. Hear Hear. But, I just cannot see it proceeding at previous levels against this backdrop.

For all those readers who have doubted our forecasts of continued reduction in UK SITS in 2009, remember that Fujitsu is/was the 5th largest supplier of SITS to the UK market. A 7% reduction in revenues from such a significant player would need huge increases from a large number of smaller players just to compensate. And I have no doubt that Fujitsu will not be alone amongst our Top Ranked UK SITS players in reporting revenue reductions this year.

Note - This post was made just after our 11.00am cut off point for the Wednesday email. Can we remind readers that if they want to read our comments on 'breaking news' they can refer to the www.Techmarketview.com website throughout the day or sign up for our Twitter feed @techmarketview.

eReaders – fighting the wrong battle

(By Richard Holway 9.00am Wednesday 26th Aug 09) Yesterday Sony launched its new WiFI-enabled, 3G, touch screen eReader – the rather clumsily-named ‘Reader Daily Edition’. It sells for $399 – a clear $100 less than Amazon’s market-leading Kindle.

Sony has done a deal with AT&T so that US readers can download newspapers with no associated network charges.

The concept of reading my daily (or evening) newspaper on an ereader on the train is something that greatly appeals to me. Reading it on my iPhone is difficult and getting your netbook out on the train or in the street is often not on.
But I just don’t get why I should need a dedicated bit of kit that only does books and newspapers. That’s why I am so excited about the Apple iTablet. As far as I can see, the Apple product would do everything that Kindle or the Sony Reader can do but it will also do everything a netbook and iPhone can do too! So I could easily place my iTablet on my lap on the train to read the paper, watch last night’s Coronation Street, read a book downloaded from the iTunes store, play a game from the Apple Apps Store, listen to my music (with full album cover design and notes)…oh and do my emails and a bit of work too!

Sony didn’t understand what was happening in the digital market when they let Apple’s iPod take over from the dominate position they had with the Walkman. I think they may be about to misjudge what the market wants yet again with their eReader.

Serco targets double-digit growth in 2009

(By Anthony Miller – Wednesday 26th August 2009 7:30am). It looks like it’s ‘onwards and upwards’ for UK-based BPO giant Serco. Half-time revenues came in just shy of £2b, up 21% at constant currency, about half of which was organic (see here). CEO Chris Hyman expects to maintain double-digit organic growth this year, which at current course and speed would be a better result than Capita (see Growth slows at Capita). On the other hand, Serco’s 5.2% operating margins (+30bps yoy) are under half Capita’s, reflecting the latter’s advantage in sticking to back-office processing. Serco are incredibly opaque about their ‘traditional’ IT services and back-office BPO activities, so I am off to their results briefing to see if I can rent some holes in the curtain and peek through.

Steria to handle police complaints

(By Anthony Miller – Wednesday 26th August 2009 7:15am). So to speak. To be precise, Steria has just announced a £45m, 10-year ICT/telephony deal with the IPCC (Independent Police Complaints Commission), including a new case management system. Steria has a long history with UK law enforcement, working with a number of county police forces. Steria reports first-half results on Monday and I will bring you more then. I will certainly be looking to see whether their UK business has been able to hold on to the stellar 11% margins it achieved last year (see Steria UK stuns with 11% margins) and of course how the NHS Shared Business Services JV is faring.

Tuesday, 25 August 2009

Convergence as Nokia launches a netbook

(By Richard Holway 7.00pm Tuesday 25th Aug 09) Yesterday – see Smartphones rule as Dell enters the market - I told you about Dell (until recently one of the world’s leading suppliers of PCs) launching a smartphone. Today, I can tell you about Nokia (the world’s leading supplier of smartphones) launching a PC. To be more precise, it’s a netbook – or what Nokia calls a ‘Booklet 3G’.

It’s Windows 7 based, nice aluminium case, weighs 1.25kg, claimed 12 hour battery life, GPS, HD ready, lovely ‘Apple-like’ keyboard etc. That’s a pretty tasty spec! Its USP (apparently) is its ‘internal mobile broadband card with SIM’. Indeed, exactly what you would expect from Nokia. Pricing will be announced on 2nd Sept 09 but Nokia’s buying power might make this an extremely competitive offering.

The netbook market is getting pretty crowded but Nokia does have an impressive customer base and associated distribution network. So the ‘conventional’ computer manufacturers should be rightly concerned about this move.

On top of that, we are eagerly anticipating the Apple iTablet – possibly in Sept. I believe this could be another mega success and could yet again change the whole market; in particular for netbooks and ebooks. Yet another reason for those conventional manufacturers to be even more worried.

Snow Leopard won’t change Apple’s spots

(By Philip Carnelley, 25 Aug 09, 10.00) There's great excitement in the Mac user community today as Apple has announced that its much-anticipated new Mac OS release – with the sexy name of Snow Leopard – will be this Friday, 28th. Let me declare an interest – I have used Macs, on and off, since the 1980s. But even so, I don’t think it’s particularly significant. The new features are improvements, for sure: for example, it's a bit faster, and smaller; it has 64-bit support, and MS Exchange compatibility. But they aren’t things to make Windows users switch to the Mac. What has of course given Apple a major boost is the halo effect of the iPods and iPhones, which have brought it in front of a much wider audience. It’s said half of recent Mac buyers never had one before – so the user base is growing. Yet let’s remember that Macs account for at best 8% of PC sales in the US, and about half that worldwide.

T
he major problem for Apple is inertia. Most people who buy a computer today already have one – and it’s Windows. Despite all the praise for the Mac’s user interface, you still need to learn it. It is not ‘intuitively obvious’ any more than Windows. To help overcome switching problems, there is a product called ‘Parallels’ which allows you to run Windows software on a Mac. It’s widely used because there are a significant number of programs that only work on a PC – and people want them. Parallels isn’t a reason to buy a Mac. Surely no-one would buy a Mac – considerably more than the equivalent Dell, Compaq etc – to run Windows software. It does lower a barrier. But I note that Parallels comes with two hours of video to explain to people who already know how to use Windows how to use a Mac, and the differences between Macs and Windows. Need I say more?

ANT expresses confidence in the future despite continued losses

(By Philip Carnelley, 25 Aug 09, 09.45) Encouraging interim sales numbers today from ANT, one of the smallest IT companies on AIM. It provides software and services for digital TV delivery, and has blue-chip clients including Cisco, Chungwa Telecom, France Telecom, Philips and Samsung. Revenues for the first half were up 26% to £2m, though operating losses remained at around £1m, with cash outflow of £0.6m, and we note that it hasn’t made a profit for at least four years. Reasons for the company’s optimism are its first sale to the satellite TV sector, a deal with Arab Media Corporation, together with several new contracts with major set-top box manufacturers.

A wider significance can be drawn from this: ANT represents the tip of a substantial iceberg. The UK has literally hundreds of small software companies – or services companies who develop interesting software as part of their business proposition – but few are known outside their specialist niche. ANT is more visible because it’s AIM-listed. Quite a number of them, like ANT, are located in and around Cambridge. Many of them are doing well despite the general economy. As we have commented (Entry-level IT jobs), Britain needs tech companies to build/maintain our IP and skills base: we need them to do well and expand. We hope ANT can build on its results and fulfil its future promise. We will be writing more about the structure of the British software industry in our research over the coming months.

Monday, 24 August 2009

IT leads Britain out of recession?

(By Richard Holway 10.00pm Monday 24th Aug 09) Yes, you did read the title correctly. A study today from the Institute of Chartered Accountants reports that business confidence is back in positive territory with the biggest rise in two years. The ICA predicts a 0.5% growth in GDP in Q3.

Perhaps the most surprising part of the report was that "IT was the most optimistic sector, followed by banking, finance and insurance". The survey was conducted amongst 1000 chartered accountants - rather than CEOs (although many IT CEOs seem to be accountants these days!)

I have to admit that this doesn't match with our own findings. We still find most CEOs extremely cautious about the near term outlook. However the debate is not so much over "it's going to get even worse"; more "it's not getting any better". And, again, the diversity of outlook is more polarised than ever. Anything 'new' (project, package, staff etc) is still very difficult whereas "Make do and Mend" and "Can you save us money NOW?" continue to report good business.

I've long believed that "confidence" is the main reason for both boom and bust. So if 'confidence' is returning then you can be sure that growth is not too far behind. In IT we have long said that real growth will not return until Q3 2010. We'd be delighted to change that prediction...but just not yet.

Entry-level IT jobs

(By Richard Holway 2.00pm Monday 24th Aug 09) Further to my post yesterday - Entry-level IT jobs as BT abandons graduate programme – The Times today - BT suspends graduate recruitment programme – adds:

“The Graduate Market in 2009, by High Fliers, a research company, based on research with The Times Top 100 Graduate Employers, found that recruitment targets for 2009 have been cut by 28 per cent since October.
Of the 20,000 graduate vacancies originally advertised for this academic year, at least 5,500 have been cancelled or left unfilled, with the worst losses in telecoms, investment banking, IT and pharmaceuticals, where entry-level vacancies have halved.”


This sorry state of affairs was confirmed by the Association of Graduate Recruiters which found that graduates jobs have been cut by 25% this year alone. 48 graduates compete for every job on offer. IT was the worst hit area with a 44.5% decline. I was just amazed to find that IT now represents just 1.1% of graduate vacancies. (Accounting leads the table at 24.4%)

This situation in IT is reminiscent of – but far worse than - the situation in the years after the 2000 dot.com bubble burst. In 2002 graduate jobs fell by ‘only’ 6.5% - although IT was worse affected. But this let the offshore providers in. They took on hoards of graduates and trained them. These staff now have 5+ years experience and are able to provide the core workforce (what we disparagingly call the 'vanilla flavoured jobs') at much reduced rates. In research we conducted a few years, we estimated that c40% of all UK IT services by job numbers (not revenue) in 2009 would be undertaken either offshore or by employees of offshore companies working in the UK. By the way, offshore is not just Indian providers but also includes, for example, those from Eastern Europe.

I honestly believe that by letting this entry-level IT jobs situation continue – indeed it seems to be getting worse – we are ‘sleep walking into IT oblivion for the UK sector’. Huge numbers of offshore staff will soon have 10+ years IT experience and be able to take on the complex ‘high-skills’ roles that we had hoped would be forever ‘home grown’. Clearly a complete fallacy.

Both the Government and the Private sector could insist that it will only let contracts to non-UK HQed companies if they guarantee to undertake a certain percentage of their IT entry-level and graduate recruitment in the UK. We make such demands in other areas – so why not in entry-level IT jobs too?

MBO for FDM increasingly likely

(By Philip Carnelley, 24 Aug 2009, 09:00) We reported back in June (Management bids for FDM) that FDM’s management team was looking at a buyout of FDM shares, backed by Inflexion Private Equity, at a price of 120p – a premium of roughly 20-25%. FDM reported this morning that the price being mooted has now risen to 135p, and that formal due diligence will begin. It seems that the MBO team and their backers have faith in the future vision for the company being promoted by CEO Rod Flavell, though we have our doubts (see FDM – a dream too far?). At the least, it indicates that they're prepared to take a punt, given that this is a profitable, cash generating company with money in the bank. But many's the company which has abandoned its 'knitting' to embark on a new grand vision, and subsequently come a cropper. We trust FDM won't make this mistake. Of course, no formal offer has yet been made, but surely due diligence won’t show up anything the CEO and his team don’t already know.

Sunday, 23 August 2009

Accenture cuts senior jobs

(By Richard Holway 6.00pm Sunday 23rd Aug 09) Accenture is to cut its senior executive staff by about 7% or 336 jobs, as part of its cost-cutting program. It will take $247m in pre-tax restructuring charges in Q4. Accenture globally has about 177,000 employees, of which 4,800 are senior executive employees, so in its totality it is small beer.

Accenture expects a third consecutive quarter of reducing sales and revenues. Revenue for the current quarter will be in the range $5- $5.2 billion – as per the June forecast. That’s a c25% reduction on the $6.6b achieved in the quarter a year back.

For our views on the latest results, see our 29th June post – Accenture – Eight years on.
Basically Accenture demonstrates that most things related to consulting and project work is still in the doldrums. “We see no green shoots”. Conversely outsourcing – particularly where related to ‘cost-saving’ measures – is still the place to be. Accenture ‘plays’ in both camps but has more emphasis in the former than many of its larger competitors. This is demonstrated by Accenture’s share price performance. On Friday Accenture was down 2.4% making a 8% gain YTD. This contrasts with a 43% YTD gain for CSC and 38% gain at HP (EDS).

NHS IT

(By Richard Holway 6.00pm Sunday 23rd Aug 09) For the many HotViews readers interested in (indeed involved in!) the NHS IT project, there was a very good article in the FT on 20th Aug – NHS Project on the critical list – which follows on from the Conservative pledge to scrap the central patient records database. We covered this likelihood in our The Effect of a Conservative Government on UK SITS AnalystView a few months back.

The FT article is a good description of what went wrong. We were pleased that the article also highlighted some of its successes (most notable being Picture Archiving) Unwinding the contractual side of the central database is going to be extremely expensive and we, the taxpayers, will have nothing to show from that bit.

On the other hand, this will be a major opportunity for the many local suppliers to the NHS – an opportunity already recognised by the irrepressible Vin Murria at ACS.

Smartphones rule as Dell enters the market

(By Richard Holway 6.00pm Sunday 23rd Aug 09) In my ‘state of the ICT Nation’ speech four years ago when I introduced ‘MyTop’ and the following year when I morphed the concept into ‘MobiTop’, this was based on a world increasingly dominated by what I referred to as Mobile Internet Devices (MIDs).

A lot has happened since then and the prediction looks a lot more certain. Indeed the two hottest sectors in ‘tech hardware’ – netbooks and smartphones – are both based around the MID phenomenon.
Last week Gartner (see Gartner Press Release) issued research showing that sales of smartphones surged 27% in Q2 with a 30% YOY growth forecast for 2009 as a whole. This is set against a 6.2% decline in mobile handsets as in Q2 – the 3rd consecutive quarterly decline . But let’s put this in proportion. There were 286m mobile handsets sold in Q2 of which only 41m were smartphones. Nokia is still the smartphone market leader with a 45% share
But Gartner reckons that will quickly change. By 2012 70-75% of the mobile handsets sold in Europe will be smartphones . See Daily Telegraph 17th Aug 09 Smartphones to take 70% of the market .

This fits rather well with another bit of news last week as Dow Jones reported that Dell enters smartphone handset market through deal with China Mobile. The Dell device is the mini3i. However, as it’s 2G only and lacks any WiFi, it is a long way off being an acceptable product up against the iPhone or Blackberry. But it does show how the ‘computer’ and ‘telecomms’ markets are converging – fast. HP, Acer and other ‘computer’ makers have launched smartphones recently – and, of course, that was exactly the situation ‘pioneered’ by Apple.

Readers will be weary of my views on the subject. MIDs really will rule the world. But they will come in all manner of shapes and sizes and increasingly users will have multiple MIDs. I already have three – my iPod Touch, my Blackberry Bold and my Acer Aspire One netbook. Ten years back all our hardware was from Dell. Can’t remember when we last bought anything from them. In other words, unless the conventional computer manufacturers embrace MIDs they will be doomed.

Twitter again

(By Richard Holway 6.00pm Sunday 23rd Aug 09) My comments on Twitter last week (see Twitter’s ‘Pointless Babble’ and Twitter debate revisited) continue to provoke comment. I was taken to task by my friend Alex van Someren (the founder of nCipher) who wrote

Richard

You are still missing the point about Twitter. Of course there is a lot of fatuous stuff of no interest to anybody except the originating narcissist. However, it works very well for several novel things:

- crowdsourcing answers to questions, e.g. "My iPhone just did this: has that happened to anyone else?"

- the dissemination of items of interest on the Internet, e.g. news bulletins, product status updates, press release headlines

- most of all: for forwarding URL links to new Web content

Twitter is an opt-in "narrowcasting" medium. Like any medium it can be abused, but don't shoot the messenger and make the mistake of believing that every message is therefore worthless - you might miss something important.

Alex.

Free

(By Richard Holway 6.00pm Sunday 23rd Aug 09) In my 21st July 09 post – Music to my ears – I pressed home my argument that the music world had changed for all time. It was no good the music industry complaining about ‘free’ music when their revenues from all the associated activities – like live concerts, advertising, merchandising etc – were all growing in double figures. The music should be considered as a ‘marketing channel’ to its other revenue earning activities. So it was interesting to note in the FT 22nd Aug that EMI considers owning the T Shirt as they are considering buying Completely Independent Distribution, Europe's largest independent distributor of band-themed T-shirts as a means of diversifying away from its music distribution core.

The ‘free’ discussion took another turn last week as News International decided to close its free London newspaper thelondonpaper. (See Daily Telegraph – Murdoch to close thelondonpaper with threat to 60 jobs) There just isn’t enough advertising revenue around to support such a freebie. The ‘problem’ is that the freebies were responsible for the near death of the only paid for London paper – the Evening Standard.

I don’t believe in ‘free’. ‘Free’ must be a marketing channel to drive customers to a ‘paid for’ service offering. That’s our model here at TechMarketView LLP with UK HotViews. It is the ‘model’ that will ultimately work in the music industry – driving customers to other paid for service offerings. The newspaper industry will have to go that way too. They will have to develop hybrid service with a ‘free’ online version, with advertising, which drives users to signup for more in-depth offerings that will have to be paid for. So far, I haven’t seen any workable example of this. I suspect it will not be easy and there will be many more deaths in the process.

Entry-level IT jobs as BT abandons graduate programme

(By Richard Holway 6.00pm Sunday 23rd Aug 09) As you are no doubt aware I am closely involved with the Make BrITain Great Again IT Manifesto. The Manifesto has a wide range of aims but the one that I am most passionate about is the creation of more entry-level jobs in the UK.

Statistics issued last week show the magnitude of the problem with a record 835,000 people aged between 18 and 24 in England not in work, education or training — a year ago the figure was 730,000.

More specifically in IT, the Government and others might want us to build a high-skill economy in the UK and, indeed, there are still shortages of certain IT skills; particularly jobs requiring 10+ years experience like programme managers. But programme managers do not arrive fully formed from the womb.

At the other end of the scale, it’s no good encouraging students at all ages to take up STEM subjects if there are no tech jobs for them when they leave school or college. I would never have had my career if I hadn’t got a trainee programmer job at the age of 18 in 1966.

Today the Sunday Times announced that BT calls a halt to graduate recruitment scheme from next year. BT received 4,800 applications last year for 130 jobs, up from 3,800 just two years ago. Interestingly Hanif Lalani, the head of BT’s Global Services arm, joined as a trainee in 1983 after attending Essex University.

Contrast this with TCS which a few weeks ago announced that it was to keep with its plans to take on 25000 graduates. I asked TCS how many would be taken on in the UK and was told none. TCS makes c$1b of its $6b global revenues in the UK. If it took on graduates pro rata to its local revenues, that would be over 4000 jobs for UK graduates. Unlikely, I know – but I’m sure you get the point that zero is equally unacceptable.


The implications of this are massive. Indeed, if we do not urgently take steps to create more entry-level IT jobs in the UK, the very future of our local IT industry will be in doubt.

Out-of-Office - Catch up on what you missed on UKHotViews

(By Richard Holway 6.00-m Sunday 23rd Aug 09) I’ve been on a ‘bucket and spade’ beach holiday to St Ives with my family's growing band of ‘little people’. Judging by the crowds, the forecasts of ‘Staycation Britain’ were correct! Indeed, if we could guarantee the same weather as we had last week, we’d stay in the Britain every year!

A year ago, I wrote every HotViews item myself so it wasn’t produced when I was away. This year we have Anthony and a growing team of expert analysts so we have continued to produce HotViews throughout. Mind you, I wonder how many of you were around to read it! The number of ‘Out of Office’ replies to the daily HotViews emails we got last week was staggering!

But just to remind you that all HotViews items are on the website – http://www.techmarketview.com/ - and the (searchable) archive is accessable to all our paying subscribers (email prajah@techmarketview.com to find out how to become a subscriber). So, even though you might have been on holiday, you really haven’t missed a thing!

Friday, 21 August 2009

Encouraging messages from across the water

(By Philip Carnelley, 21 Aug 2009, 09:30) No local news to report on this morning, but several things from the US of note. First, Salesforce.com reported its 2Q results, which showed bookings up 16% year on year, and revenue of $316m, up 20% year on year. Europe was 18% of total sales ($56m). Revenues and profits were above expectations, and the company raised guidance for the year (both earnings and revenues). It also reported 3,900 net new customers during the quarter: its total customer base is now 63k, up 32% year on year.

These results can be seen as an indication that the applications market is starting to move in the right direction, although the company also claimed increased market share due to defections from other companies, particularly Oracle. It is definitely an indication that software as a service (SaaS) continues to gain ground. Interestingly, we have been hearing about the growing number of companies – both IT user companies and software developers – who are starting to build or extend applications using the Force.com application development platform. The company said 500 customers are now using Force.com, to support 123,000 custom applications. Like all proprietary software, once built, applications on a cloud platform can be very difficult to migrate away from. Coupled with the subscription/rental model of payment, this bodes well for Salesforce’s future revenue growth, and for those developing products on its platform. Salesforce is encouraging uptake through a “your first application hosted free” offer. Other software developers taking the SaaS route will be greatly encouraged by these results.

Also reporting last night was Intuit. The US supplier of accounting software for small businesses reported sales up 4% for the year, to $3.2bn, with a flat fourth-quarter. It did however report an increased net loss for the quarter (-$71m, up from -$62m) and forecast an increased loss (yoy) for the next quarter, too. The company generally makes a loss in the summer months due to seasonally low revenues from its tax business, but its losses were worse than expected. Its shares fell 3% after hours, despite a bullish statement on earnings and revenue growth: on revenue, it predicts growth of 4 – 8% next year.

Intuit’s UK business is small: 95% of its sales are to the US, the rest is Canada and the UK, and frankly we’re not sure why it bothers with the UK presence. But we see this as a further indication of the improving climate for software sales to small businesses generally. Sage should be quite pleased, as this shows both that the US market for financial software is stabilising, and that one of its major competitors is having some internal difficulties. The US represents 41% of Sage’s business (around $1bn), and it’s been having problems there (see Sage plugs hole in its US Channel).

Finally there was news that Oracle has received clearance from the US DoJ for its proposed takeover of Sun. It still awaits approval from the European Commission, which should come at the beginning of September. This brings us back to Salesforce.com. In its results call, CEO Marc Benioff took the opportunity to praise Dell servers, favourably comparing their performance to Sun Solaris (and describing Dell, somewhat strangely, as 'open' and 'standard') - surely a thinly-veiled swipe at Oracle. He's learned a lot from his own time at Oracle.

Thursday, 20 August 2009

HP pushes more work to Mphasis

(By Anthony Miller – Thursday 20th August 2009 9:45am). As ever, Mphasis’ quarterly results add useful ‘colour and movement’ to HP’s numbers (see HP Services miracle margins), by shedding light on the company’s India-based offshore operations. TechMarketView subscription service clients can get the background to Mphasis in our OffshoreViews note HP/EDS India – a Game of Two Halves, so I will stick to the present.

The first thing you’ll notice if you delve down into Mphasis’ report is that its ‘direct to client’ revenues are down 25% yoy and now represent 29% of the $229m quarter total. This means that over 70% of Mphasis’ business now comes from HP/EDS, compared to 55% a year ago. But it’s where the increase in HP/EDS-related revenues comes from that really caught my eye. A year ago, essentially all of Mphasis’ ‘related party’ revenues came from EDS US. Today, EDS US accounts for just 60%, with EDS UK now responsible for 16%, and other parts of HP/EDS, 24%. In other words, since acquiring EDS – and hence majority control of Mphasis – HP has been pushing work from other regions to India.

Another point you’d notice is that BPO represents about 17% of Mphasis’ revenues but is its least profitable service line, with 21% gross margins, vs 44% for IT outsourcing and 32% for AD&M. It’s BPO that HP is apparently mulling divesting (see HP 'Miracle Margins' Update).

Finally you look at Mphasis overall operating margin at 22%. Compare this to HP Services 15% (adjusted, of course). Obviously you have to take care when looking at Mphasis’ financials when the majority is ‘related party’ business, but you get the picture. So if HP really is to sustain, if not expand, services margins, Mphasis could be the key. But, with HP Services' revenues at $8.5b in the quarter, it's a very small key in a very big lock!

HP Software – shrinking fast

(By Philip Carnelley, 20 Aug 2009, 09:30) While the big story (for us) in HP’s Q3 results was in services (see HP 'Miracle Margins' Update), we shouldn’t overlook the news on HP Software. After all it is a multi-billion dollar business in its own right and ranks ninth in our UK software league table. HP’s software revenues fell a hefty 22% year on year to $847m – and now represents just 3% of the total. On the other hand, operating margins shot up 50%, to 18.1%, making it HP’s most profitable segment.

For comparison, in its most recent quarter, IBM’s software business was down 7%, with pretax margin up 8 points to 32%. Demand for IBM’s Tivoli and Rational software lines fell, but only 2%: together these are the most similar segments to HP’s BTO software subsegment, which accounts for two thirds of all HP software sales, and is down 22%. BMC (which also covers similar ground to BTO, and is of similar size) grew 3% in its last quarter and its operating margin reached 24%. So it’s not just market conditions – something’s not working very well. Perhaps HP's software managers are targeted principally on raising margins to competitive levels. They’ve certainly achieved that, just as margins were the strong point of the services business results. It is surely no coincidence that HP’s (much larger) enterprise storage and servers business also fell 23%. Yet software should have its own dynamic. It should benefit from growth in other areas (services). If HP thinks that its software business is important – and they have always said so – then they need to fix it!

Wipro Europe scoops top Fujitsu consultant

(By Anthony Miller – Thursday 20th August 2009 8:00am). Wipro has recruited Fujitsu Services Business Transformation leader, Roger Camrass, to head its own European Business Transformation practice. Camrass had been with Fujitsu since 2003 after a 5 year stint at E&Y/CGE&Y. I have met Camrass many times and rate him highly. This is a real scoop for Wipro and will add much credibility to their nascent European consulting practice.

This all came out in a meeting I had yesterday with Wipro Europe head, Ayan Mukerji. Mukerji took the post about 18 months ago and is a Wipro 'lifer' (20 years). TechMarketView subscription service clients will be able to read more about his plans for Wipro Europe in the next edition of OffshoreViews.

Wednesday, 19 August 2009

HP 'Miracle Margins' Update

(By Anthony Miller – Wednesday 19th August 2009 5:30pm). I just don’t understand why nobody on the analyst concall asked the question I asked in my post last night (see HP Services miracle margins) i.e. how much further does HP management think it can push services margins? Or even, how long do they think they can keep services margins at 15%+? The only clue we got was when CFO, Cathie Lesjak, implied that most of the 1.4 pts of services sequential margin gain came from EDS, but the 2.3 pts yoy gain was pretty much shared between Technology Services (i.e. break/fix) and EDS.

Now this is telling. Today TS comprises 28% of HP’s services business and ought to be the most profitable part. They are doing a lot of work to automate fault detection and repair, and this seems to be having the desired effect on profitability. But judging from Lesjak’s comment, it sounds like most of that work has been done, i.e. there’s not much more margin benefit to be gained.

Which leaves the ‘real’ IT services bit. This breaks up as follows: 65% is IT outsourcing, 23% is application services, and 12% is BPO. In other words, most of the rest would also be contracted revenues. They’ve already sacked 16,000 people and it seems there are another 9,000 to go. The way HP reports operating margins (as do many others, to be fair) excludes so called ‘one off’ restructuring costs (and don’t get me on that soap box again, purleez!). Therefore, HP can show immediate margin benefit the moment the sacked employees are off the books. But the contracted revenues are still, for the most part, rolling in. Hence ‘miracle margins’.

But of course to sustain these margins, the staff that are left have to continue to deliver the same service volumes at the same service levels. And then let’s not forget, customers are still demanding ‘more for less’. Even assuming that there was real ‘dead wood’ being chopped, it sounds like there are some generous assumptions being made on productivity improvements for those services employees still with jobs. Whether they can deliver will only become apparent over the next few quarters.

Pre-EDS, HP’s services margins were typically in the 10-12% bracket, when break-fix was 50% of the business. EDS’ margins were 5%. By the way, IBM’s services business hit 14.4% pre-tax margins last quarter (i.e. including any ‘nasty bits’), and they have richer mix of higher value (i.e. higher margin) services than HP.

Undoubtedly there was scope for margin improvement in the combined HP/EDS services business. But once all the restructuring is complete, and HP is no longer able to hide behind these costs to flatter its services profitability, I just cannot see how a 15%+ operating margin is sustainable. I ask again, why isn’t anyone else challenging management on this? HP Services is, after all, the biggest profit generator in absolute terms in HP’s business.

One last point. There was media speculation just prior to the Q3 results announcement that HP is thinking of selling parts of its outsourcing business, notably BPO. Frankly, it probably should. It’s one thing to host a customer’s HR or payroll application - and there’s no reason why HP shouldn’t be able to do that as well as the next IT outsourcer. Indeed, this is one way that IT outsourcers look at playing in the 'cloud'. It’s quite a different matter to optimise, perhaps re-engineer, and then take over the running of all or part of a customer’s HR function. That's real BPO. That’s not HP’s ‘knitting’. I doubt it ever will be.

All bids off the table at Morse

(By Anthony Miller – Wednesday 19th August 2009 5:15pm). No joy, at least this time round, for the parties sniffing around Morse (see Mixed news at Morse). The offer period has just closed, with the board holding its ground that 25p per share is simply not enough. Morse's shares had been languishing under 15p this year until the bids were mooted, and touched 33p in July as speculation mounted on a bidding war. But after this afternoon’s news they have dropped to 25p. So, it’s back to business for Mike Phillips and the team, with ‘in line’ numbers confirmed for FY results due in September. Surely this will not be the end of the affair.

Nokia deal underlines Kewill’s SaaS future

(By Philip Carnelley, 19 Aug 09, 10:00) We had an in-depth briefing yesterday from Paul Nichols and the senior management team at Kewill Systems, the ‘Global Trade Management’ (logistics) software company. There was a lot of information, and we’ll no doubt return to it in future notes. There were three immediate takeaways. First, we discussed the Nokia contract win announced earlier this week, which caused Kewill’s share price to jump 14%. Kewill can’t say much for contractual reasons but we did glean that it’s one of the biggest in Kewill's history, (which we guess means it's in seven figures) and will be deployed across the whole of Nokia, to support its handset repair and return operation – and that it’s entirely a software as a service (SaaS) solution.

This leads to the second point – Kewill’s clients, like Nokia, are adopting SaaS with alacrity. Most strikingly, its UK customer-base – the oldest-established part of its business – has switched almost entirely to SaaS in seven years: now 90% of clients are on SaaS contracts. Its major global logistics customers such as TNT are SaaS enthusiasts too, not least because it makes it easier to provision solutions to their customers. Last year, 47% of Kewill's software revenues (i.e. excluding services) were from SaaS contracts, and the proportion continues to rise.

Third, even in a major downturn, customers are willing to spend on software solutions where there is a clear business case. Kewill’s proposition can include reduced inventory and time to market through faster customs clearance, or higher sales through customer satisfaction and fewer product returns. They particularly cited Maersk, which signed a multi-million dollar contract with Kewill in the same week it announced a $1bn internal cost reduction programme, being convinced of the business case. Encouraging news for all our clients.

Many thanks to Paul and the team for their time and attention.

Intec – winning new business

By Philip Carnelley, 19 Aug 2009, 08:45) Intec Telecom has issued a fairly positive trading statement for its Q3. The telecoms billing systems provider said that results are in line with expectations, with the closure of two ‘strategic’ contracts announced in July, one in SE Asia and one in Eastern Europe – in “eight figures”. It also announced a new contract – also ‘multi-million pound’ – in the US. It said it is confident of its outlook for the year, and that all sales regions are performing well despite 'difficult' conditions.

As we said earlier this year (see Telecoms Software Company, 12, GSOH, Seeks Partners, Global Experience Required), Intec now has to show it can maintain its growth trajectory in the face of falling ARPUs (revenue per customer) and therefore tighter budgets from the telcos, and expected market growth half that of its own. It does have an attractive story for its clients around better cash collection and operational efficiencies, so it has the potential. The market thinks so too: after a big jump in May (following the H1 results), to 70p, the share price has continued to rise. It’s up 2% today so far, to 90p.