Sector bellwethers Accenture, IBM Global Services and Computer Sciences Corp all experienced marked financial improvements over the course of the last 12 months, and it appears that the workforce culls that swept through the industry are now largely out of the way. Outsourcing and business process outsourcing (BPO) remain the two hot beds of activity in the market, although the IT consulting and systems integration markets remain tough.
Accenture, the largest independent player in the IT consulting market, experienced flat revenue growth in consulting revenue at $1.87bn in its fourth quarter to August 31, and in the full-year period, consulting sales fell 10% to $7.92bn. In contrast, its outsourcing sales took off, with revenue soaring 41% to $1.04bn in the fourth quarter, and up 37% at $3.57bn in the full year.
The year 2003 will also be noted for the first real signs of a backlash against the offshore delivery model. After several years of huge growth in demand, offshore software services firms like Tata Consultancy Services (TCS), Infosys and Wipro Technologies began to attract negative attention in the US and UK, as high profile companies such as HSBC and Bank of America publicized the extent to which they planned to source IT and back office skills from India.
The most notable example came in November, when the Governor of the US state of Indiana succumbed to massive pressure from local media and workers’ unions, and pulled the plug on a $15.4m IT services contract with India’s largest services firm TCS. The value of the contract is relatively small compared to the large number of $100m IT services deals signed this year, but the state’s decision could have a significant impact on the growth of the offshore model within the government sector, with other local and state authorities like New Jersey and Washington, attempting to enforce anti-offshore legislation.
Merger and acquisition (M&A) activity has also proved a catalyst for improved business performance for some in 2003. ComputerWire has tracked a far greater number of mergers in the sector this year than either 2001 or 2002 – a total of 130 takeovers since the start of the year, compared to 117 deals in the whole of 2002 and 111 in 2001. Overall we have tracked three mergers with a value greater than $1bn, of which the two largest have been in the US defense sector. In September, Lockheed Martin snapped up smaller rival firm Titan Corp for $2.4bn, which was preceded in June by General Dynamics’ takeover of Veridian Corp for $1.3bn. The only other $1bn merger was in Europe, with French IT services provider Atos Origin buying the majority of US-based SchlumbergerSema for $1.47bn. We expect at least a similar level of M&A activity in 2004. Fragmented markets such as the US defense and government sectors will continue to consolidate, as well as in continental Europe led by the French services market, where there is significant over-capacity.
The overall picture for the IT services market looks far brighter for 2004 than it has for the past two years. 2002 was the first year the IT services market had ever actually shrunk, while 2003 remained more or less flat. But we believe that it will start to grow again in 2004, and that companies focused on the growth areas of IT outsourcing and BPO will gain a clear lead over rivals that remained focused on consulting and systems integration.
This article is based on material originally produced by ComputerWire.
