IT industry analysis—2009 Week 34—on one page

Catch up on the past week's analysis

UK PUBLIC SECTOR

• The UK government has thrown increasingly large sums of money at public sector IT, yet civil service productivity is declining. Spending on public sector IT grew to over £16bn in 2007/08, but over the same period the Office of National Statistics found that the productivity of the public sector—the vertical's total output divided by the resources put in—fell by 0.3% per annum. In response, the government CIO says that the £16bn is only 4.6% of total public sector spending, compared to an average of 5.9% for governments across the world, according to Gartner. [1]
  

HARDWARE

• EMEA revenues fell 12% in HP's latest quarterly results, which also showed the USA growing by 8%. Server revenues fell 23% and PC revenues dropped 18%. Thanks to the acquisition of EDS, services were the only growth area for HP. But with HP now viewed as a barometer for the IT industry (because of the breadth of its product range), one investment analyst was sufficiently encouraged to say that "It definitely looks like the worst is behind us". Many pundits now believe the server market is stabilising, and CEO Mark Hurd was optimistic that HP would benefit from the replacement of the ageing installed server base. [2] [3]
  
• Reseller Morse says that all takeover talks have ended. Last month it was forced to reveal an approach from a potential acquirer after a sudden change in its share price. But the offer has now been rejected because it "significantly undervalued" the company. [4]
  

SOFTWARE

• Accenture has published a couple of papers which state the almost obvious:
  
  • Software development is moving towards Asia and Eastern Europe—driven by growth markets, cheaper labour and the need to reduce risk by operating from multiple locations.
    
  • The availability of software developers is declining in the developed nations.
    
  • But in some parts of these mature countries, there may be a high-skill, low-cost pool of labour. Some firms may want to help out local, disadvantaged workers.
    
  • In mature markets such as the USA, ISVs will make more money from maintenance than from new software sales.
    
  • ISVs should ensure they collect the licence fees they are owed. But be careful about demanding cash during these hard times.
    
  • SaaS might enable ISVs to gain more customers, though it also might erode the revenue earned per customer.
    
  • As the Facebook generation enters the workforce (assuming that not all graduate recruitment schemes have been terminated), firms will be obliged to implement Web 2.0 technologies.
    
  • When it comes to hitting revenue targets, indirect channels could be useful. [5]
    
  
  

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SERVICES

• Dell has started to roll out, into the UK and Europe, its modular services offering which consists of three services towers: consulting (ProConsulting), managed services (ProManaged) and support (ProSupport). Although they can be sold and delivered in conjunction with partners, Dell retains a strong element of its direct model. Modular Services provide a menu of options that can be both ordered direct from the Web and delivered via the Web, using SaaS management tools. Ovum says that Dell is still slow to 'localise' its services, particularly for non-English-speaking customers. And these services are only for x86 —not legacy systems. [6]
  
• McKinsey seems no better than Accenture in the depth of its insight. Asked to predict the state of the offshoring market in 2020, a McKinsey executive in Mumbai forecasted that:
  
  • India may lose market share, if the communication skills of its graduates don't improve.
    
  • China and Russia are likely to gain share, with China particularly strong in engineering, design and infrastructure services for North Asia, while Russia is 'outstanding' for software product development.
    
  • But for the USA and the UK, India will continue to be the offshore country of choice.
    
  • In Latin America, only Brazil has a sufficiently large and skilled population.
    
  • Eastern Europe is, apparently, more fragmented by language than both China and India.
    
  • Both Vietnam and Egypt are receiving a lot of government support to promote their offshore capability.
    
  • A few of the Indian top-tier outsourcers will make it into the world's top 10, if their current growth rates continue.
    
  • McKinsey is 'excited' about offshoring by government and healthcare.[7]
    
  
  

EMPLOYMENT

• Accenture is to make 336, or about 7% of its 4,800 senior executives, redundant, and will take a charge of $128m—i.e.$381,000 per executive—to cover the cost. [8] [9]
  
• BT has scrapped its graduate recruitment scheme for next year. BT said it is committed to this year’s graduate intake. Last year BT received 4,800 applications for 130 jobs. The move will leave more graduates fighting over fewer places.[10]
  
• Deutsche Telekom will cut approximately 3,000 jobs (from a 45,000 headcount) at its IT subsidiary T-Systems. The company said that all remaining T-Systems staff will receive a guarantee of employment until the middle of 2012. In its most recent quarter, T-Systems reported a 3% decline in revenue to €2.2bn. [11]
  
• Due to the pain of data leaks by employees, 38% of large US companies now have staff whose main job is to monitor the outgoing email of colleagues, according to a new survey. A year ago, this figure was just 15%. 8% of firms had fired employees because of leaks through social networks such as LinkedIn, Facebook and MySpace. [12]
  

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IT industry analysis—2009 Week 33—on one page

Catch up on the past week's analysis

ECONOMY

• Ecommerce spending has fallen for only the second time in recorded history. Sales fell 1% in 2Q09 to $20bn. "The reality of nearly 10% unemployment and rising gas prices, coupled with an increased savings rate, continues to hold down consumers’ discretionary spending," said the US-based internet metrics firm. [1]
  

SERVICES

• The 50 biggest IT outsourcing companies grew their combined share to 56% of the market in Europe last year, according to IDC. IDC says the industry consolidation will continue, with the merger of Oracle and Sun, and the joining of Fujitsu Services and Fujitsu Siemens under a single brand. The three fastest-growing companies last year were Gruppo Engineering, Steria and Wipro. TCS was the first offshore provider to break into the top 20. [2] [3]
  

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24	Transactions
23	Cost-cutting
compiled by:	Gavin Wilson

• According to PAC, this year the UK will see a 4% drop in software spending and a 6% decrease in project services. The sectors that will cut software and services investment the most severely are retail, services and manufacturing. [4]
  
• CSC declared a 22% revenue decline (to $0.8bn) in its commercial outsourcing division and an 18% fall (to $1.6bn) for its managed services arm in its latest quarterly results. Commentators say that CSC faces a number of major challenges:
  
  • It is late in its verticalization strategy.
    
  • Its sales organization is not used to selling commercial outsourcing offerings.
    
  • The company has limited experience in emerging markets or outside the U.K. and Denmark in dealing with mid-sized organizations.
    
  • It lags its main competitors in global delivery capabilities. [5]
    
  
  
• HP has told EDS workers worried about 30% salary cuts and lay-offs not to talk to the media. A senior VP said that "if we have to get the feeling that everything that we do will show up in the newspapers tomorrow, you'll get whitewashed statements." But EDS employees said they feel information is already being whitewashed for themselves, as well as customers and potential clients. They said the warning against speaking to the news media is intended to keep issues of morale and the potential impact on customers quiet. EDS employees say morale is low, anxiety is high and productivity is down as many workers spend part of their days on the task of searching for new employment. Workers said they fear every day that they will receive a tap on the shoulder—or an e-mail—informing them their services are no longer required. [6]
  

OFFSHORE

• Shareholders and directors have been hit harder than employees by the economic downturn, according to a study of 750 Indian companies. Directors took an average 4% cut in total remuneration in the year ended March, whereas the employee wage bill rose 20%, and net sales increased by 19%. The problem for directors was that profits remained flat, which affected their bonuses. But with results for the quarter ending June showing signs of improvement, directors could expect another year of multi-crore bonuses. [7]
  
• The larger Indian firms sense an impending increase in demand. TCS, Wipro and Infosys are changing their product offerings and focusing on allegedly ‘recession-proof’ sectors such as pharmaceuticals, healthcare, education, telecom and utilities to tide over the dip in volumes.
  
  • Wipro expects a few outsourcing deals worth more than $100m in the third quarter, in areas such as services, consulting, remote management and BPO.
    
  • Infosys is pursuing 12 to 15 deals worth a total of $1bn.
    
  • TCS is tweaking its product offerings for SMEs. [8]
    
  
  
• When BT announced it was bringing back its back-office operations from India to the UK, its customers probably didn't realise that BT would continue the contract with its Indian supplier. But that is what will happen. Tech Mahindra is simply moving its processes and some of its people from India to the UK. [9]
  
• Infosys is considered the most admired Indian company, according to Wall Street Journal survey. TCS came second. The survey took into account factors such as financial management, vision, corporate reputation, quality and innovation. [10]
  

SOFTWARE

• Google has announced the availability of a tool to migrate Lotus Notes email, calendar and contact information to Google Apps. A rapid move of the enterprise Notes installed base to Google Apps is not expected—there are too many business-critical and business-specific applications within many enterprises and government departments. [11]
  
• A judge in Texas has issued an injunction preventing Microsoft from selling its Word software in the USA after ruling the company’s software violated a patent owned by i4i, and obliging it to pay fines of almost $300m. Not surprisingly, Microsoft has filed an emergency motion to block the order. [12] [13]
  
• In an interview with the New York Times, SAP CEO Leo Apotheker disagrees that customers want to deal with fewer suppliers: "I have never, ever heard a customer expressing the faintest wish for having everything delivered out of one hand." But the NYT is unsure that SAP has a firm grip on what customers really want, either. The company has fallen well behind rivals in building a cloud computing service. Although SAP remains well ahead of Oracle in the $88bn business applications market (with a 10% share in 2007 compared to Oracle’s 7%), Oracle may put SAP at a disadvantage if it can quickly put together a complete solution which uses Sun's hardware. [14]
  

FUTURES

• Gartner forecasts a number of potentially transformational technologies that will hit the mainstream in less than five years, including: Web 2.0, cloud computing, internet TV, virtual worlds and SOA. Beyond the five-year horizon: Gartner predicts that RFID, 3-D printing, context-delivery architectures, mobile robots, and human augmentation could also be transformational. [15]
  

ODDS AND ENDS

• Twitter is being used to send out commands to malicious botnets. A security researcher discovered a botnet which used a Twitter account to send out status updates containing what appears to be a single line of indecipherable text. Once decoded, the text actually points to links where the infected botnet machines can download more malicious code. The account has now been shut down by Twitter. In many ways Twitter is the perfect platform from which to control botnets, as it is able to withstand requests from hundreds of thousands of PCs. Because no legitimate users followed this account, no-one was likely to complain. The only PCs looking for these instructions were the infected PCs. [16]
  

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IT industry analysis—2009 Week 32—on one page

Catch up on the past week's analysis

DEMAND-SIDE EVIDENCE

• As the recession continues to hit the UK's high streets, CIOs are seeing their budgets shrinking dramatically. IT budgets in the retail sector have fallen by around 20% over the past year.[1]
  
• Wipro is expecting a decline in the R&D budgets of its telco clients. [2]
  
• But Infosys has just secured a five-year finance and accounting contract with T-Mobile UK. Infosys says its continued focus on process excellence and operational scalability has been key to forging this strategic partnership with T-Mobile: "Our strong F&A capabilities combined with our understanding of the telecom industry helps us successfully transform businesses of our clients." [3]
  
• Northampton-based Phoenix IT Group has warned that revenue fell 5% in its financial first quarter and its order book 7%. It blames a sharp decline in product sales and associated professional services in the mid-market. [4]
  
• German IT services player Lufthansa Systems said that in 2Q09 its total revenues fell by 5% to €0.15bn, but its external revenues within that total fell by 9%. Its external customers are largely in the aviation industry, which has been badly affected by a sharp drop in passenger volumes, especially in the non-budget traveller segment. [5]
  

Andy Green

• Logica announced first-half revenues down 2% on a constant-currency basis to £1.9bn. UK revenues were up 8%. An improvement in the UK's operating margin was mainly due to property rationalization and the redundancy programme. Logica has also cut its subcontractors by 20%. UK public sector revenue was up an impressive 16%, but Logica is unlikely to sustain this level of growth in 2010 given the general election unless it positions itself better to win local government outsourcing opportunities. Logica has been criticised in the past for not following through with outsourcing deals after finishing consulting projects, but now Logica's outsourcing orders are up 18%. A key problem for Logica is the Netherlands, where revenue fell 13% to £0.3bn due to the troubled banking and manufacturing sectors. Investors have long worried about CEO Andy Green's optimism. Mr Green had a poor track record for margin guidance when he ran BT’s troubled Global Services division. He consistently targeted a 15% operating margin despite significant scepticism from analysts. (Those doubts proved well-founded when BT was forced to write down the value of its IT contracts by more than £1bn.) [6] [7] [8] [9]
  
• But UK software and IT services firms have improved their ability to forecast their financial results. In 2Q08, nine software and services firms issued profit warnings; a year later, that figure is down to three. According to Ernst & Young, IT companies experienced a spending slowdown earlier than firms in other sectors, and they responded earlier too. There is greater stability now. [10]
  

COPING WITH THE SLOWDOWN ON THE SUPPLY SIDE

• Microscope spoke to several channel players to discover how they are coping with the IT recession:
  
  • One reseller is basing its philosophy on one book—Good to Great: Why Some Companies Make the Leap ... and Others Don’t—whose principal advice is to work out what you should not be doing and what business processes you should get rid of. Projects should either be fully funded or not at all. Rather than cutting prices, the firm tends to provide customers with additional services for the same fee when their contract comes up for renewal.
    
  • Another is focussing on boosting cash flow and marketing the right products to the right people. It incents staff with a financial reward if they hit a 45-day target for accounts receivable. It has also been successful by creating 'call-out' days. This involves developing marketing materials such as e-shots, mailers and banner advertisements and sending them out to prospects in specific target verticals. This activity is followed up by sending sales staff to a reseller for a day to help it generate leads. [11]
    
  
  
• The slowdown is hitting India too. Some techies are leaving their jobs and going back to college to enhance their qualifications—by getting an MBA, for example. Said one: "In normal circumstances, we would have got a 20% wage hike every year. But now, increments won't come in the next two or three years." Optimistically, the Indian IT sector believes these ex-employees will return: it will need more skilled manpower if, as it hopes, it is flooded with complex outsourcing jobs, post-recession. Others believe these better-qualified ex-employees could go for superior jobs in the Indian public sector. [12]
  
• The Unite union is asking its 2,000 members working for Fujitsu Services to vote on strike action over closure of the pension scheme. Fujitsu staff are being asked to sign new contracts in September which are identical except for the pension provisions. The union believes the changes to pensions equate to a 15% cut for each employee. [13]
  
• HP is imposing massive pay cuts—some as much as 30%—on EDS staff in order to bring their pay into line with HP salaries. One unhappy EDS employee said: "I know that my career with this company is coming to an end. I can't survive after this kind of hit." [14]
  

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32	Slowdown+Cloud
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28	Net & Services
27	Realigning
26	Decline
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23	Cost-cutting
compiled by:	Gavin Wilson

• Unemployment in the UK's IT and telecoms industry has hit a five-year high, according to e-skills. In the first quarter of this year, the unemployment rate among ICT workers hit 5%—its highest level since 1Q04. IT strategy and planning workers could be hardest hit, with a 7% fall in employment rates. ICT job ads declined significantly in 1Q09, with situations vacant down by 27%. But those currently in ICT work are apparently faring well, earning an average of £730 per week: up 4% year-on-year and 40% higher than the national average. [15]
  

AMBITIONS

• PricewaterhouseCoopers, the UK’s largest professional services firm, plans to treble its fees from management consulting to more than £1.3bn within the next four years and hire 2,000 staff, including more than 100 partners. Three of the Big Four accounting firms—Ernst & Young, KPMG and PwC—sold their consultancy arms at the start of the decade over potential conflicts of interest. Although the accounting firms still derive most of their fees from traditional auditing and tax work, there is little room to grow in those practices. The Management Consultancies Association said that the industry generated £9bn in revenue last year, and employed 55,000 people. The consulting market is predicted to shrink next year by 5% as companies spend less on capital-intensive projects. [16]
  
• It has been said for some time that Siemens wants to sell off its services unit. Last week it was announced that Wincor Nixdorf, a leading provider of hardware, software and services technology to banks and retailers, had acquired Siemens' Information Technology Products and Services division. The deal made sense for its keep-it-in-Germany characteristics. But it turns out that this acquisition only affects their subsidiaries in the Philippines. Perhaps the global deal will come eventually. [17]
  
• SAP is considering bidding for US software firm Tibco, according to German reports. Tibco specializes in middleware products aimed at integrating programmes from various software providers. At the end of 2008, Tibco presented its products to SAP management at its headquarters in Walldorf, with the initial idea of selling Tibco products through SAP marketing channels. This proposal has now, allegedly, mutated into a possible takeover offer. [18]
  

CLOUD COMPUTING

• 28% of IT executives with high-performance computing responsibilities are planning to deploy private clouds, according to a new survey, in response to demand for cost reduction and increasing application workloads. 67% plan to run simulation and other modelling applications on these clouds. But 76% of IT executives said that their business did not understand the potential of private clouds. [19]
  
• Many governments believe cloud computing represents as more of a threat than an opportunity. Previously nations have benefited from the growth of global ICT companies, because they have helped establish vibrant domestic ICT industries of channel and services partners. However, cloud computing creates the potential for more complete encapsulation and offshoring of ICT software, platforms and infrastructure than previously possible. This could encourage an unprecedented accumulation of ICT services by US-based global cloud providers, says Ovum. It must be in each country's national interest to have commercially robust onshore clouds, whether achieved through alliances with global providers or through the creation of major national clouds. [20]
  
• Microsoft is the new owner of the office.com domain. The previous owner had been holding onto it for a long time, perhaps aware that Microsoft wants to put its Office software onto the Web. [21]
  

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IT industry analysis—2009 Week 31—on one page

Catch up on the past week's analysis

[edit]

INDIA

• Tech Mahindra has announced revenue growth of 2% at constant currency to $0.23bn for calendar 2Q09. Tech Mahindra is now dependent on BT for 52% of its revenues, down from 63% a year ago. The firm also admitted it has "not yet found the bottom", in its investigation of Satyam's true financials, or in terms of client attrition. Tech Mahindra is using BT to help it revive Satyam: BT is meeting Satyam's clients and improving its cooperation with multinational software groups. [1]
  
• Infosys declared a 3% sequential drop in revenues to $1.1bn. Its utilisation rate, currently at 70%, continues to fall, and a very high proportion (62%) of revenues come from time & materials contracts. BT is both Tech Mahindra's and Infosys's largest client, and the telco now accounts for 4.5% of Infosys's revenues, down from 7.9%. Analysts wonder why Infosys has not cracked the largest public sector in the world (by headcount), namely its home country, India. Its failure to acquire Axon last year points to its innate conservatism, but has left it with a war-chest of over $2bn.
  
• Wipro says it is seeing an increase in demand for shared services for software application management, in which implementation resources are shared across multiple clients. Wipro claims this reduces the cost of application management by 20-25%. Wipro currently has 300 people working for this business, known as FlexDelivery, which is currently available for only one package. [2]
  
• Wipro has reported IT services revenues up 2% (in constant currency) to $1.0bn for calendar 2Q09.
  
• Nasscom, India's software industry body, says that India’s software and services sector is likely to experience single-digit growth in 2009-10, a new low for the $60bn industry that grew 16% last year despite the global economic downturn. High domestic demand is not enough to offset the fall in exports. Driving the decline is lower global spending on BPO and the shortage of mega-deals in the USA and Europe. [3]
  

SERVICES

• Atos Origin posted first half revenues of €2.6bn, down 10%. The UK was up 6% to €0.45bn. NelsonHall forecast that its occupational health business in the UK is likely to grow this year. [4]
  
• BT Global Services posted revenue growth of 4% to £2.1bn for calendar 2Q09. The division made a loss of £0.12bn, despite a large number of senior managers being axed. [5]
  
• Capgemini announced 1H06 revenues of €4.4bn, down 2.2% on a like-for-like basis. Consulting and technology services saw the biggest sales drops, down 13% and 3% respectively. UK and Ireland was down 2% to €0.97bn. Its strength in the public sector—e.g. through the Aspire contract at the HMRC—means that Capgemini is less exposed to the recession. [6] [7]
  
• Capita has announced organic growth of 8% to £1.3bn for 1H09. Its medium-term future is very secure: it has a bid pipeline of £3bn, and none of its contracts is due for renewal before 2012. [8]
  
• Getronics announced external revenues down 2% to €0.50bn in 2Q09. Revenues from Holland were up 3% despite difficult market conditions. Getronics has completed most of its headcount reduction of 1,400 full-time equivalents. Its Dutch parent, said it is assessing the future of the Getronics business in the UK. Having already sold its Spanish and Australian businesses, Getronics managing director said: "The UK market remains our most exposed part of the international business." However Getronics UK itself reaffirmed its commitment to the UK— its customers include Barclays, Deutsche Bank and Dell, it has 2,000 employees and annual turnover of around €250m. [9]
  

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• Unisys declared worldwide revenues of $1.1bn, down 16% on a year ago. EMEA was down 28% to $0.34bn. Unisys's management focussed on cost-cutting on its call, leaving analysts with little idea how it would increase revenues once the market recovers. [10]
  

e-BUSINESS

• Amazon’s online sales grew more than 14% in the quarter to $4.7bn, but analysts were worried that Amazon refused to break out the revenues of its cloud business, Elastic Computing Cloud (EC2). EC2 is aimed at the lower end of the market, but so far the majority of SMEs prefer terra firma—i.e. in-house operations—for their IT.
  
• Shares in Yahoo! slumped 12% after the company agreed to outsource its search business to Microsoft. Previously its CEO, Carol Bartz, had said she would only sell Yahoo’s search unit for “boatloads” of money. Now she has struck an agreement that didn’t include any up-front payment. Yahoo will use Microsoft's Bing search engine rather than its own, and it will keep 88% of the revenue from ads on its own sites for the first five years of the 10-year partnership. Microsoft CEO Steve Ballmer said that, in Internet search, "scale drives knowledge" which, in turn, fuels innovation. He said there is a particularly powerful feedback loop in search advertising. The Microsoft-Yahoo partnership will now have nearly 30% of the search market. In Microsoft’s thinking, that figure has been significant, as it gets the company into the top three of any market. But by handing over a large portion of its business to Microsoft, Yahoo! risks seeing much of its infrastructure disappear, and losing key employees and properties. [11][12] [13]
  

SOFTWARE

• IBM is to acquire, for $1.2bn in cash, SPSS, the developer of predictive analytics software. Founded 41 years ago, Chicago-based SPSS originally created basic statistics-crunching software that was widely-used by students. Evolving into a cutting-edge data-mining vendor, SPSS coined the phrase 'predictive analytics'. Where BI software answers the historical questions of what happened and why, predictive analytics is focused on taking that information to predict future trends. (A key driver of demand for predictive analytics is the global recession. Companies need to reduce risks and drive business.) Buying SPSS, which had 14% of the predictive analytics/data mining market segment, will enable IBM to leap from 13th to 2nd place, behind only SAS, which dominates the segment with a 33% market share. IDC believes some segments of this market are growing by more than 25%. IBM already has a reseller and OEM relationship with SPSS, so the real test is what IBM will do with the SPSS technology. SAP said that the partnership between SAP and SPSS has been good, and the firm doesn't expect that to change under IBM's ownership. SAP will continue to partner with IBM, it said. [14] [15] [16] [17] [18]
  
• SAP announced 2Q09 revenues of €2.6bn, down 10% on a year ago. SAP now predicts that its software-related revenues are likely to fall by up to 6% this year. [19]
  
• Sage announced a revenue increase of 17% to £0.8bn for the six months to 31st March. Sage's CEO said that its proven business model and large, geographically diverse, customer base gave the company confidence that it is well-positioned for the current economic difficulties and the eventual market recovery. [20]
  

HARDWARE

• Having been overtaken by both Dell and Acer in the UK PC market, HP's interim head of the UK Personal Systems Group says HP will not use price reductions to regain the No. 1 spot in the UK PC market. [21]
  
• Ingram Micro, the world’s largest IT distributor, has admitted its sales are declining faster in the UK and EMEA than its competitors' but has vowed to reverse that trend. Ingram saw EMEA sales fall 32% in calendar 2Q09. [22]
  

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