Friday, 7 August 2009

Logica's UK margin challenge

(By Anthony Miller – Friday 7th August 2009 8:30am). It’s good to see the UK at the top of the charts at Logica, at least in terms of growth and margin. Against an overall 2% pro forma 1H09 revenue decline to £1,876m, UK grew 7% to £379m, 20% of the group. UK tied with Nordics region on ‘adjusted’ operating margin at 7.6%, up 1.3 pts. Group margins held steady at 6.8%. Indeed, UK was Logica's only major region to expand margins. Having said that, the UK improvement was mainly due to property rationalisation and lay-offs, which raises the question as to what Logica has to do to push UK margins further.

The UK also tops Logica’s rankings in both Public Sector exposure (61% of revenues) and outsourcing (49%). Outsourcing (mainly AM and IM with a dash of BPO) across the group grew 10% and is now 36% of total revenues. As both Atos and Capgemini also find (see Atos and Capgemini UK update), outsourcing and Public Sector are good places to be. Indeed, the UK was the best performing region for both French players, with Atos recording 6.4% organic growth and 8.2% margin, and Capgemini speeding ahead with 12.7% organic growth and 8.1% margin. As I say, this is indicative of Logica’s UK margin challenge.

It’s a little difficult to get under the covers of Logica’s offshore headcount, but the total number of ‘offshore and nearshore’ FTEs only nudged up 100 heads this half, to 5,100, “slower than expected”. Offshore take-up is highest in the UK (now above the 25% target) and around 5-10% elsewhere. I do wonder whether Logica is pushing blended delivery hard enough, especially in the UK. Sure, the UK is Public Sector heavy, but other players have shown this work does not all have to be onshore. With half its UK business coming from outsourcing, there should be a bigger opportunity for Logica to move more work offshore – and I struggle to see how else Logica could protect let alone expand margins otherwise.

Anyway, I will bring you more after the briefing and after I have spoken with UK management.

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