W

(By Richard Holway 2.00pm 17th May 09) So far this year I have written about U, L and even Y-shaped economic downturns and recoveries. In all those articles I was referring to the UK economy in general and the UK SITS market in particular. I’ve been totally consistent for over a year now in believing that we won’t see growth returning until the middle of 2010. Nothing I have read from the BoE or the IMF this week would make me change my mind.

It has been interesting to see how Eurozone countries – Germany in particular – are being even harder hit that the UK. “We all drink out of the same soup bowl”. Germany might well have avoided the excesses of our own financial services sector. But it was those self-same evil city dealers that bought the BMWs and Porches that are the mainstay of the German manufacturing sector.

But as my colleague Anthony Miller keeps reminding me, stock markets are different to markets in general. Stocks are different to companies. As I have been reporting each month this year, the FTSE UK SCS Index has just consistently powered ahead; possibly anticipating a recovery somewhat faster than me, the BoE or the IMF. Indeed it is still up 29% YTD. Conversely, the FTSE100 fell like a stone in the first two months of 2009 – it was 20% lower YTD by 6th March 09 – before staging a pretty remarkable recovery – up 25% since. But the FTSE100 is still down 2% YTD.

Many observers are now suggesting that this was just a ‘Bear Rally’ and that what we are seeing is a “Classic W”.

Last week the FTSE100 fell 3.4% and the FTSE SCS Index was down 1.3%. NASDAQ also fell 2.5%. All adding to the view that we could well be in the middle of the W.

Fortunately it is not our job to forecast where either indices are now headed. But I will repeat the conclusion from IndustryViews published a couple of weeks back (available only to subscribers). Over the medium to long term, the FTSE100 and the FTSE SCS Indices perform together. So far this YTD, for the first time since Q1 2000, they have gone quite separate ways. I am not suggesting a tech crash like we saw in 2000. But, if historic trends are correct, we will see some convergence in the Indices by the end of the year.

Footnote – Having written this article, I’ve just read How to profit whatever the shape of the recovery in today’s Sunday Times. It has V, W, double-W, U and L-shaped recovery scenarios!

Informa puts Robbins-Gioia up for sale

(By Richard Holway 6.00pm 17th May 09) As readers might know Richard Holway Ltd was bought by Ovum in 2000 which was bought by Datamonitor in late 2006 which was bought by Informa in 2007. Hence my interest in the announcement that Informa had appointed Greenhill to run an auction for the sale of their US IT programme management operation – Robbins-Gioia. Customers include GM (hope they get paid...), Johnson & Johnson and Merrill Lynch.

£70m is expected from the sale. Bit of a drop in the ocean compared to Informa’s £1.3b debt. Maybe they’d accept an offer for Ovum? Any backers out there for such a move?

Fujitsu Services closes its final salary pension scheme to existing members

(By Richard Holway 2.00pm 17th May 09) The Financial Times reported on Friday that Fujitsu Services “is to be the first large employer in nearly two years to close its defined benefit pension scheme to existing workers”. See Fujitsu shuts its final salary pension scheme.

To be fair, the fact that Fujitsu still had a final salary pension scheme came as a surprise, both to us and some people working at Fujitsu, as it closed to new members in 2000 and therefore “only 4,000 of its 14,500 workers in the UK and Ireland are still earning final salary pension benefits". Fujitsu confirmed the move, but said: “It is a regrettable but prudent decision on our part,” adding that the scheme is currently running a deficit of about £1bn. “We are not the first to do this and I don’t suppose we will be the last.”

Fujitsu plans to offer affected workers membership of the company’s defined contribution scheme.

Is AIM missing the target?

(By Anthony Miller – Friday 15th March 2009 9:30am). A trading update from AIM-listed medical imaging software supplier, Medicsight, highlights again the question of who should list on public markets and who shouldn’t.

Medicsight listed on AIM in June 2007 when its parent, MGT Capital Investments, placed 29m shares at £1.10 raising net £30m. This valued the company at £171m. Not bad for a business with zero revenues and £5m losses! US-based MGT is a publicly quoted technology holding company that invests in the global healthcare IT market.

Medicsight’s results today show Q1 revenues of £43k (thousand) and £2.5m (million) losses. As I write, Medicsight’s shares are worth 8.5p. All I can say is that must have been one hell of a roadshow back then!

RM – No, not the comfy chair!

(By Anthony Miller – Friday 15th March 2009 8:30am). You know, sometimes I really struggle with how companies design their ‘knitting’ patterns. RM basically started out as a supplier of software and IT services to the UK education market, but their ambitions have taken them much further and wider. I raised concerns earlier this week that they are spreading themselves a bit too thin (see RM – worthy cause deserves worthy profit). Today’s acquisition of furniture supplier Isis Concepts (see here) does nothing to allay my worries.

This is not RM’s first move outside of software and IT services. Indeed, they have made 16 other acquisitions since 2000, of which at least half-a-dozen have been in ‘education resources’. The most recent was just last month, Pisces Arts, which provides arts & crafts materials and specialist stationery to schools and local authorities across the UK.

I’m sorry, but I just think plots are being lost here. How can a company with annualised revenues under £300m at 5% operating margin (FY08) expect to be ‘all things’ to education departments in multiple countries? Where’s the focus?

RM’s core software is brilliant. This is its knitting. Why not stick to it?

By the way, can someone please offer RM some help with their website? The home page looks like it was designed by the cast of the Tellytubbies. Thank you.

BT Global Services - Part 7

(By Richard Holway 10.00pm 14th May 09) Further to our report this morning on BT’s Q4 FY09 results - BT FY09 results (Part 1) – I guess our readers are most interested in BT Global Services.

As we anticipated in BT Global Services – Part 6, further write-offs on the NHS and Reuters contracts exceeded £1b - £1.2b to be exact. Another £100m related to other contracts and you then add the £340m announced previously to get £1.64b. Most of this relates to “contract costs which had been previously capitalised on the balance sheet” so has no further cash effect.

At the top line BT Global Services revenue increased by 6% to £2,366m in Q4 mainly due to foreign exchange gains (11%) and acquisitions (3%). Without those, revenues declined 6% to £2,103m. Revenues grew 25% outside the UK but the UK declined 4% “before contract review adjustments”

BT Global Services reported “longer sales lead times as customers delay decisions on major projects in the current economic environment. In addition, price erosion and substitution (often to other BT products) continues.”

BT Global Services also announced a new operating model and structure. The full details of this will be announced next week but we do know that, under CEO Hanif Lalani, BT Global Services will be structured into three divisions

UK Domestic – mainly the existing public sector business, including the NHS contracts, with revenues of c£2.5b. The ‘acting’ head here is Mark Quatermaine who has headed up BT GS Public Sector (excl NHS) for some time

Multi National Corporations (MNC) – I understand that most of the BT’s UK financial services network management business eg Lloyds, RBS, Credit Suisse etc – will now reside in MNC, not UK domestic. As will other MNCs like Unilever. The division will be headed by Michael Boustridge, who currently runs BT US & Asia Pac, and has revenues of c£3.5b.

Global Services Enterprises is a ragbag of businesses that BT has acquired in recent years outside of the UK. Together they have revenues of c£2.8b and will be headed by Luis Alvarez. I do get the feeling that this is a bin for businesses that don’t really fit into BT's grand design anymore and are likely to be sold if and when ‘the price is right’.

Eagled-eyed readers will immediately say “But where is Royston Hoggarth?” who was appointed as CEO of BT Global Services UK only last Sept 08? See New appointment at BT Global Services. Looks as though the well-respected Royston has done himself out of a job! It is a bit difficult to see any role other than ‘advisory’ for him in this new structure.

View?
I have asked many times over many years “What is BT Global Services for?” Is it a full line IT Services house in the mould of CSC, Capgemini, EDS? Or is it a network management company there to support BT’s core telecommunications business as it competes with AT&T and Verizon? Bluntly, I’ve gone past caring what the answer is – I just want an answer. Because only then can the solution to BT’s ills be addressed.

Cynically, perhaps the new structure does go some way to address this. MNC is the network management business that BT really needs longterm to support its core. Enterprises contains the bits BT can sell and UK Domestic is all the stuff that BT only does in the UK market for UK-only customers/not globally.

So now the issue is ‘What does it do with UK Domestic?” That’s not an easy one as even here the retention/renewal of BT’s telecomms contracts with several major central government agencies - a significant number of which are up for renewal in 2011 - are intertwined with other activities. UK Domestic is the most profitable part of the whole of BT GS. Looks even better if the NHS contracts have finally been ‘tamed’. But winning contracts in the public sector – eg shared services in local government (where UK Domestic has been quite successful) – require much upfront cash investment. BT really has lost the taste (and ability) to do that anymore.

My view is the same now as ever. BT is NOT, and never was, an IT services operator. BT has rightly abandoned any ambition to be such globally. UK Domestic therefore really doesn’t fit into BT's new model. Hence it is being ring-fenced. Medium term I expect it to be sold. However, selling at the nadir in both the market and its own fortunes, would only garner garage sale valuations.

So, my advice would be; put the house in order, show some decent profits and sell in a couple of years time.

Smart Meter madness (Part 3)

(By Anthony Miller – Thursday 14th May 2009 8:00pm). My latest posting (see Smart Meter madness (Part 2)) on the government’s proposal to install ‘smart meters’ in all 25m UK households (and, by the way, in businesses too) has generated a lot of reader comment, both for and against.

For example, Pete Foster at Market Focus accentuated the positives:

“I think you’re missing the bigger picture on smart grids. Smart meters are widely recognised as being an essential step to better management of electricity, giving consumers better insight into energy use and how to limit it (as well as better enabling consumers to feed back their own generated power into the grid). If we are going to reach the emissions reduction targets that are now enshrined in law then a smart grid is going to be an essential part.

Secondly, smart meters and grids represent an enormous opportunity for ICT companies (Ed: a view echoed by industry association, Intellect director general, John Higgins, in an interview for Computing - see here). There are a lot of vendors developing additional devices, software and solutions based on the technology, with some fortunes riding on its adoption.

This is not just another potentially disastrous public sector IT project, it’s a technology that is being introduced globally to better manage energy and help fight climate change and will inevitably come to the UK (probably sooner rather than later).”

Alex van Someren raised the privacy issue, also reflected in comments from a ‘vox pop’ on the BBC website (see here):

“You might be interested to know there is some evidence that micro-metering of electricity demand allows very interesting insights into people's domestic activity too. One can tell from the time and power profile which blip is the lights going on, which is the washing machine, how long you stay in the (electric) shower, etc. There are therefore some complex intelligence/privacy issues in the resulting information flow which I am sure the Government has not yet considered its responses to...but will soon have to.”

Andrew Hall at Haywood Hall took the pragmatic view:

“Smart meters are already here & for most energy companies have been for some time – they are the same as 'dumb' meters & they simply need customers (like you & me) to be able to read the meter & key the data into a web-site or a telephone key pad. Very efficient for the companies & hardly an inconvenience for the consumer.”

I have yet to plough through all 40 pages of the government consultation paper (see here) and the multiple supporting documents. However, one paragraph jumped out at me on a first skim-through:

“There are exemplars on a smaller scale elsewhere in the world from which we can learn. But Britain’s programme will be bigger and more comprehensive than any so far undertaken. Government, regulators and industry will need to work together, and with the wider community of stakeholders, to ensure the roll out is effectively planned, prepared and delivered.”

Merits to the proposals there may be, especially for the case for 'Smart Grids' (and see our comment in Deloitte TMT Trends for 2009). Whether they will exceed the costs and justify the risks is yet to be seen. But the thought that, once again, we are going to embark on the world’s biggest and most complex commercial technology roll out strikes fear in my heart.

By the way, with precision timing, a press release from Steria landed on my desk announcing it is to manage the deployment of some 35m smart meters in France. The new meters will be tested in 2010 and then rolled out between 2012-2016. Well, if the French are doing it, then it must be OK.