Annex Research IT Services Heptathlon 2002 (May 21, 2002)

But Gains a Tie with Accenture for Overall “Gold;” EDS, CSC tie for “Silver”

PHOENIX, May 21 - In his Apr. 24 speech to IBM employees, Sam Palmisano, the IBM CEO, had this to say about IBM’s market share in the IT services business:

We have got to continue gaining share. We've done it. When our competitors' first quarter results roll in, you will see we have held or gained share again. We would like to have gained more, but we didn't lose.

Well, IBM competitors’ results have “rolled in” now. And guess what? Palmisano was wrong. IBM, or IBM Global Services (IGS) to be precise, not its competitors, lost market share in 2001 (see the chart below). IGS, not its competitors, is continuing to LOSE market share.

Undaunted, Palmisano repeated the lie during his speech to Wall Street analysts after the competitors’ results were in, attributing it to two market research firms (see “No New News at IBM,” May 15).

As Arnold Bennett (1867-1931) put it about a century ago, “journalists say a thing they know isn’t true in the hope that, if they keep on saying it long enough, it will become true.”

Well, the 21^st century rendition of that quote appears to fit some panic-stricken CEOs better than the media. No wonder Palmisano also issued, what we called, a “corporate SOS signal” to his troops in that same Apr. 24 speech:

[...] Go do something that generates short-term revenue. So that's my suggestion. If you find you have more free time, don't take up golf lessons. Go help somebody help us gain share.

Annex Ed.: “Go do something that generates short-term revenue!?” And that’s a sound business strategy? Sounds to us more like a corporate SOS (distress) signal.

(Annex Bulletin 2002-13, May 6)

What did happen to IT services market shares in 2001? Take a look at the chart below.

Among the top five competitors, IBM lost 1.4 points in 2001, CSC stayed even, Accenture, Cap Gemini Ernst & Young (CGEY) and EDS gained 0.6, 0.5 and 0.3 points respectively.

In the U.S., for example, EDS has now regained the top spot from IBM (see the chart), fulfilling a part of a promise the EDS CEO, Dick Brown, made when he took over in 1999:

Flashing back to the NYSE boardroom Brown summed up his end objective back in April 1999 by saying, "we won't be satisfied until we regain the leadership position in the industry we founded."

But it was Accenture, the No. 3 vendor with 14% of the top 5 global revenues, that gained the biggest share (1.3 points) in the U.S. market (see the other charts in our hardcopy edition).

Nor was this some sort of a geographic anomaly, caused by the Sep. 11 events. The same picture - IBM losing market share - is repeated in EVERY major world region. Only the rates of the Big Blue demise varied. The trend was the same - down (see other market share charts at the end of the hardcopy edition of this report).

No wonder “Yin Yang Sam” sounded that Apr. 24 SOS to IBM employees while talking out of both sides of his mouth.

But the 2001 market share analysis was only one of the seven categories

in which we compared the top 5 players in the global IT services market to each other in the Annex Research IT services Heptathlon 2002. As in the previous years, we also did it in two revenue categories, two profit competitions, and in one expense and one sales productivity measurements. And by the time all scores were tallied, the IGS market share trouble turned out to be an exception, rather than the rule.

Although winning only one “gold” medal in individual competitions (for net profit margin), IGS won four “silver” medals and one “bronze,” ending in a tie for first place with Accenture at 11 points each.

Just to recap for our new readers the IT Services Heptathlon scoring… the overall medal standings are determined by awarding three points for a gold, two points for a silver, and one point for a bronze medal in each of the seven competition categories.

There were ties galore in this year’s Annex Research Global IT services Heptathlon. As a result of the ties for both the “gold” and the “silver” medals in 2002 Heptathlon (based on business results in 2001), each of the top five competitors has won a medal in the overall competition. It is the first time something like that has happened in the history of Annex Research IT services Heptathlons. Which means that 2002 can be rightly dubbed - the “Year of the Tie.” J

For two years in a row now, CGEY has taken the “gold” in the latest year growth competition. Accenture placed second and EDS was third. In the 10-year growth category, CSC won the top honors, with IGS and Accenture claiming the “silver” and the “bronze” respectively.

The top five global IT services leaders’ combined revenue growth during the 1991-2001 decade was 17%, making this industry segment one of the fastest growing areas in the IT industry. But this also reflects a slowdown from last year’s 10-year moving average of 18%.

Furthermore, the five-year annual growth was only 13%, while last year’s increase was even lower - 11%. Based on everything we’ve been hearing from the IT services vendors, this year (2002) is likely to be the first year ever that the top 5 composite growth drops into single digits.

For that, the IT services vendors have only themselves to blame. Yes, it is easy to say that the field is getting more saturated as the traditional (large) customers are cutting back on capital spending. But we’ve been saying that would happen at least since 1996 (see “Louis XIX of Armonk,” Aug. 1996). Strike “saying.” Make it shouting!

But it is human nature to sit by a familiar cash cow and keep milking her for as long as the udder keeps dripping, instead of going out and seeking some new ones. Scant few of the top IT services vendors have heeded our advice to expand their range and reach deeper down in the marketplace, to small and medium size businesses.

Well, looks like they will have no choice now if they want to continue growing. The big fat cash cow called Big Business has all but dried up. And there are no Big Bulls in sight to give her a new lease on life, and fill her udder with milk for new offspring.

So the choice now is not “how do we grow even faster than the 20%+ growth rates” that were prevalent in the 1990s? Now a more existential question is, “what do we need to do to stop shriveling up?”

As already noted in the introduction, IBM was the big loser in the market share game. But who was the winner? Well, this year’s market share “gold” goes to Accenture, which posted a 0.6 points gain. CGEY won the “silver” and EDS the “bronze” with gains of 0.5 and 0.3 points respectively.

For more details on how the top 5 fared in various geographic markets, refer to the charts at the end of this Annex Bulletin.

Accenture again won easily the gross margin “gold,” followed by IGS and CGEY which claimed the “silver” and the “bronze.”

Accenture would have probably won the “best in show” award for its net margin, too, and thus the undisputed overall Heptathlon 2002 title, were it not for a multitude of charges and adjustments related to its IPO last summer. In light of those, it became very difficult to figure out just which net margin to consider as fair and representative.

In the end, we opted for 4.2%, which earned Accenture a “bronze” in this category. IGS won the “gold” with a 7.8% net margin, while EDS claimed the “silver” with 6.3%.

EDS continues to be the reigning champion of frugality (lowest operating expense-to-revenue ratio). In 2001, its 9.3% operating expense margin earned it the “gold” by a wide margin. IGS, the “silver” medal winner checked in with 13%, while CSC won the “bronze” with a 15.4% operating expense ratio.

The top honors in the sales productivity competition went to CSC this year for its $186,600 revenue per capita ratio. IGS was second with $163,900, while Accenture placed third with $152,600 per employee.

Overall, 2001 was the year in which a slowdown in the rates of growth of the top 5 IT services vendors continued. We’ve seen in IBM’s case in the last two quarters, that we are no longer talking about just a slowdown; we are seeing a contraction of its once stellar “crown jewel” - IGS.

So the party is over. Most of the low-hanging fruit on the Big Business tree has been picked. The challenge from now on is not just climbing faster to get to the higher fruit before the competition does, but also planting some new trees. Both strategies will be needed if one is to sustain both the short-term and the long-term growth goals.

Meanwhile, the IT services segment continues to be the top of the industry’s food chain, and its fastest rising segment despite its slowing growth rates. If in doubt, just take a look at some hardware or software vendors’ financials.

The universe is unfolding as it should, albeit maybe not the way some hardware or software vendors had hoped… (see “Industry Stratification,” Mar. 1990).