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]
  

658 subscribers BACK ISSUES:
32	Slowdown+Cloud
31	2Q Results
30	PCs + Services
29	CapEx→OpEx
28	Net & Services
27	Realigning
26	Decline
25	Consolidation
24	Transactions
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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