It’s estimated European businesses currently spend 35% of their annual IT budget with computing services providers making for a market that’s going to be worth around $220bn in 1999. And whichever way you look at it, the trend for external service provision is upward. Gartner Group calculates that at the moment some 35% of all Fortune 2000 companies use computing services providers for more than 50% of their IT activities. By 2003 that measure will have risen to more than 60% of firms. IDC is more cautious. It too predicts an surge in the uptake of services, but not quite to the extent outlined by Gartner. But it’s one nevertheless that is expected to show a 14% compound annual growth rate (CAGR) through to 2002 – outstripping growth in any other technology segment. And interestingly, the sector seems safe whatever the economic cycle. Outsourcing thrives both in economies that are poor and in those that are healthy. Future health of global service providers could be damaged by some emerging trends in the sector however, says Credit Suisse First Boston in a report on Global IT Services. Mega-outsourcing deals have led to margin declines. The arrival of non-traditional competition, notably from some of the big telecoms companies, has brought added competition and signals future pricing pressure. And a move to multi-vendor co-sourcing and so-called ‘partnership consortium’ deals has brought additional risk and complexity for vendors managing these highly visible, often billion dollar service contracts. Are service providers a safe haven for technology investors? There are certain attractions. They are not capital expensive. Their largest asset is the payroll, some working capital and associated intangibles. Their recurrent revenue streams and contractual backlog offer clear visibility of forward revenues. And unlike hardware, software or networking stocks, they are technology neutral. Service companies are less susceptible to downturns due to technical obsolescence or acceptance of a specific solution. All they have to do in order to benefit from some change in market preference is to stay ahead of the curve. From the investor’s standpoint, CSFB says the surest way of valuing a service provider is by the size of its gross margin. In a market where implementation know-how is highly prized, where skills are in short supply and where technology products are becoming commoditized then gross margin reflects the perceived value of a provider’s service across its customer base. There’s every sign that the services sector in Europe will go the same way as business in the US. EDS and others have suffered in the US as the fashion for large single-source contracts ebbed in favor of multiple contracts with smaller regional players and specialist single service shops like Sapient. In Europe there is still a strong preference for vendors with a country-specific focus and this doesn’t always suit the full service operators of IBM Global Services, EDS, CSC, Andersen Consulting, CapGemini or PriceWaterhouseCoopers. While Cambridge Technology Partners, Technology Solutions Corporation, Digital and Unisys play in many of the same market spaces and are global in scope, CSFB argues that these players offer their services to well-targeted specific niches. Elsewhere, going head to head for contracts are regional/multinationals such as Atos, Sema, Groupe Bull, WM-data, CMG or Origin who do most of their business in Europe. They are spread geographically but tend to focus their efforts in their host regions. Here these come against the small specialist boutiques and exclusively country-focused operators such as Ordina, Tieto, Enator and Merkantildata. Going forward, services earmarked as strong growth areas include ERP consulting and integration services which will shown an estimated CAGR of 23% through 2002, with Italy producing a particularly strong market. How competition in this space will play out over this time frame is far from clear at the moment with consulting firms, systems integrators and application software houses all chasing a part. Another factor adds uncertainty to the mix. The high ratio of professional services attached to an ERP implementation (at least 2.5 times the base software cost and perhaps 45% of the total spend in an ERP project) could push the preference for ‘virtual ERP’. Here a business accesses third-party hosted ERP applications via Internet and pays the software supplier or ISV on a per user basis. This would, CSFB warns, reduce integration bills and could all but eliminate the need for professional skills during implementation, maintenance and upgrades.
This article is part of ComputerWire’s European Computer Services information service. Some articles from the service are being provided to ComputerGram subscribers for a trial period only.
