IT Services: European IT Services Slowdown Myth

Computergram International, April 22, 1999

IT services are blowing hot and cold globally but the likelihood of a European slowdown is slim according to investment analysts Goldman Sachs. Its upbeat assessment in a Technology Computer Services report, just out, based its analysis on a dozen pure bred European IT services firms including Cap Gemini, Tieto, WM-data and Getronics. Between them the 12 vendors (Atos, CMG, Computacenter, Druid, Enator, Merkantildata, Sema and Logica were the other eight) tracked by Goldman Sachs realized record revenues touching $3bn in 1998 and added more than 23,000 staff. One worry had been that the labour squeeze in 1998 would dampen growth, however major recruitment drives at many of the companies seems to have been successful. The average increase in the number of employees at the companies being tracked stood at 27% for 1998.

Within this Cap Gemini led headcount growth with a 7,250 jump (representing a 23% increase) in its numbers. Getronics meanwhile increased its ranks by 54% with a further 4,375 additional staff, although around half of these were made as a result of acquisitions. Growth through acquisition was also the story at Logica with the UK-based IT consultancy increasing its workforce by around 2,000. Recruiting staff is one thing, holding on to them another. Getronics strategy is to increase its training budget by 90%, or 6% of total staff costs. Tieto and WM-data handed out employee convertible warrants while Computacenter gave out free shares to staff approaching its flotation. Looking ahead, Goldman Sachs identifies six main areas as being key to future growth in the European IT services market beyond 2000: customer relationship management; post-2000 mainframe outsourcing; consumer adoption of the Euro; e-commerce; applications management; and the automated enterprise. Within customer relationship management for example, the UK has some 7,000 call centers with as many as 200,000 agent seats. A call center with between 30 and 100 seats demands an average IT budget in excess of $1m according to Datamonitor. With growth in the market for call centers estimated to be about 25% to 30% per year there's clearly a large market for IT services companies to play for. Most of the major providers have built competence in this area, Goldman Sachs states in its report. In the applications management arena, Goldman identifies a trend towards alternative methods of charging for software. With each successive software upgrade the business imperative is to ensure rapid migration of end-users. This creates an opportunity that IT services firms are well placed to take advantage of in terms of application hosting and handling. There is also a backdoor opportunity here for entry to the IT services market for major software vendors offering hosted ERP applications over the internet with Oracle, Peoplesoft and JD Edwards already offering variations on the service bureau hosted application theme. Goldman Sachs reports that the sky failed to fall on the ERP market following the 10% drop in software license sales for the major ERP vendors in the fourth quarter 1998. Quoted companies such as Druid, CMG and Cap Gemini all were reported to have full order books for ERP implementation work with numerous proposals and are feeling very little pricing pressure, according to the report. However, it does caution that a minor downturn in ERP work may emerge as pre-millennium work comes to a close. Within this space we've seen the transformation of former Y2K offshore software engineering companies such as Infosys, Cognizant and Wipro. Each of these deliver significant cost advantages by exploiting significant salary differentials and time zone differences between European sites and state-of-the-art development centers in India that enable projects to be worked on 24x7. Although relatively small at present they all boast major blue-chip clients and partnerships with large IT service vendors. Goldman Sachs is also predicting a post-2000 mainframe-outsourcing boom. WM-data, Getronics, Sema and Atos are out in front here but will face stiff competition from the large global players of EDS, CSC and Unisys who see the area as a convenient entry point into the European IT services market. The new Euro currency may prove to be a significant factor here. As consumers begin to use the new currency further changes to systems will have to be made in retail outlets. There may too, be a potentially large market in the UK, Denmark, Sweden and Greece who have yet to enter into the single currency. Overall the future as painted by Goldman Sachs looks rosy. Cessation of Y2K work does not appear to be a big issue, it states. But with a real downturn in ERP markets it is perhaps being a little too optimistic.