<%@ LANGUAGE=VBScript %> <% Set asplObj=Server.CreateObject("ASPL.Login") asplObj.Protect Set asplObj=Nothing %> Global IT services Octathlon 2006 results (Apr 24, 2006)

Annex Bulletin 2006-16                               April 24, 2006

A CONFIDENTIAL Client Edition

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INDUSTRY TRENDS

Updated 4/25/06, 8:30AM PDT, adds Summary

Annex Research 2006 Global IT Services Octathlon

Accenture Wins “Gold” Again

HP Gets the “Silver;” IBM the "Bronze"; Top 7 Face "The Growth Problem"

SCOTTSDALE, Apr 24 - Accenture won the “gold” in our 2006 annual global IT services Octathlon for a second year in a row, its fifth outright title to go with two ties for the "gold" in the last 11 years.   Hewlett Packard Services (HPS) and IBM Global Services (IGS) got the “silver" and the "bronze" respectively.  This year, however, Accenture's margin of victory was narrower (13 vs. 12 points for HPS and eight for IGS).   

Just to recap quickly for our new readers the IT Services Octathlon 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” in each of the eight competitions of the top global IT services vendors.

The eight categories are:

1. Revenue Growth – current year

2.                        "           "            …and 5-year

3. Market Share Gain/Loss

4. Net Margin

5. Gross Margin

6. Frugality

7. Sales Productivity

8. New Contract Sales

All these figures are for the prior calendar year results, 2005 in this case.  We also wish to remind our readers that the only competitors among the Top 7 that don’t publish their new contract sales are HPS and Fujitsu.  As a result, we treated them as  “no shows” in this Octathlon category.

And now, here’s a “play-by-play” report from this year’s competition.

1.-2. Revenue Growth (2 Medals)

The “gold” medal for the best revenue growth in 2005 went to HPS (up 12.3% over 2004).  Accenture won the “silver” with a 11.5% jump, while CSC earned the “bronze” with a 4% increase.  Meanwhile, two the Top 7 competitors experienced revenue declines last year (EDS and Fujitsu, the latter mostly due to foreign currency translations - the weakness of the yen against the U.S. dollar).

As with previous Octathlons, all revenue figures used in this year’s competition were either the reported numbers for companies whose fiscal year-end ends Dec 31, or were our estimates of other competitors’ calendar year 2005 results.

The “gold” for long-term growth (last five years) went to HPS (up 22% per year during 2000-2005).  Accenture won the “silver” with a 10% compound annual growth rate, while IGS got the “bronze” with a 7.4% rise in 2000-2005.

It should be noted that most revenue growth medal winners grew by acquisitions.  CSC acquired DynCorp (2003), HP acquired Compaq (2002), while IBM acquired PwCC (2002).  Lacking any major acquisitions in 2005, revenue growth of the Top 7 contenders slowed down to a trickle (less than 2%).  So once one of the fastest growing industry segments, the top of the global IT services market is now showing sub-par performance.

Growth by acquisitions is true of all revenue medal winners except for Accenture.  As we also noted in 2003, Accenture is the only company among the Top 7 whose growth has been mostly organic (internal).  The only exception was its last year's acquisition of Capgemini's North American healthcare operation.  But the purchase of a $170 million revenue-unit (based on 2004 results) was a relatively minor move on Accenture scale of things that did not have a material impact on the company's growth rates.

3. Market Share (1 Medal)

HP, Accenture and CSC were the market share gainers among the Top 7 in a year that did not see much movement in this competition category.  HP and Accenture gained 1.1 and 1.0 points respectively, while CSC added 0.3 of a point to its worldwide total.  EDS and Fujitsu lost market share, dropping 0.5 and 1.7 points respectively.

In the U.S. market, HP, IBM, Accenture and CSC gained share, while EDS, Fujitsu and Capgemini lost it.  

In Europe, Accenture, HP and CSC were the big gainers, Capgemini treaded water, while the rest lost share.  In 2004, Capgemini and Accenture surpassed EDS, dropping the former “Euro star” to the fourth place.  But this may change now that EDS has won the big British defense contract.

In the Asia/Pacific market, Fujitsu and EDS lost share, while rest of the competitors gained share ranging from 0.2% to 1.4% (see the chart).

4.-5. Profitability (2 Medals)

Accenture again won easily the gross margin “gold,” followed by IGS and Capgemini, which claimed the “silver” and the “bronze” respectively.  All three companies also won the profitability medals last year.

The net margin “gold” again went to IGS this year, while Accenture and HPS claimed the “silver” and the “bronze” respectively.

6. Frugality (1 Medal)

Just as Accenture seems to be pre-subscribed to profitability medals, EDS has been a perennial winner of the frugality competitions.  One of the most beleaguered competitors in the last two years, EDS still continued its unfettered grip on the “gold” for the lowest operating expenses.  At 9.2% of revenues (down from 9.8% the year before), EDS’ 2005 operating expenses were by far the lowest among the Top 7 competitors.

The “silver” medal winner CSC came in at 12.5% of revenues, while the third place finisher HPS clocked in at 13.9%, up from 13% a year ago.  IGS came fourth with a 14.5% ratio.  It is essentially the same lineup of medal winners as last year. 

EDS’ successive “gold’s” for frugality made it all the more ironic that Wall Street was expecting cost cuts from the new EDS management team that took over in 2003, instead of focusing on the top line growth and gross margin improvements.  As you saw, the latter are some of the areas in which EDS is lagging behind its top competitors. 

Well, EDS seems to have had a wake-up call last year.  Following the release of its final 2004 results, its chairman and CEO declared that from now on, "our focus is revenue, revenue, revenue" (see “EDS: A $6 to $9 Stock?,” Feb 2005).  Well, given the decline in the company's 2005 revenues, it appears that the EDS' chairman's declaration was more bark than bite.

7. Sales Productivity (1 Medal)

Fujitsu again won its first and the only “gold” in the sales productivity category (revenue per capita), while the “silver” and the “bronze” went to IGS and HPS respectively.  It was the same lineup of medal winners as in last year's Octathlon.  The aggregate average sales productivity of the Top 7 competitors declined 4% in 2005.

8. New Contract Sales (1 Medal)

EDS won the "gold" in new contract sales in 2005 with a 38% improvement over the dismal 2004 results ($20.5 billion vs. $14.9 billion).   Accenture got the "silver" with a 17% surge, while IGS earned a "bronze" with a 9% increase ($47.1 billion vs. $43.1 billion).

Overall, the new contract sales of the companies that report them were virtually flat in 2005 at $112 billion.

As we pointed out in our last year's Octathlon report, we think that monitoring the changes in the IT services vendors’ backlog would be a more accurate way of gauging their net sales performance.  Alas, only IBM publishes its backlog.  So we’ve settled for the next best thing – measuring the change in gross new bookings.

Summary: The Growth Problem

Most of the largest global IT services companies suffer from the same ailment.  It's called the growth problem.  And it's a chronic condition.  The five-year annual growth rates have dropped from 17% to 8%.  And things are getting progressively worse.  

In 2005, for example, the average revenue growth rate of the Top 7 competitors dropped to just 2.5%.  Yet only two years ago, it was 12.7% (mostly thanks to IBM's PwCC acquisition, not indigenous growth).  Two competitors actually shrank in size (EDS and Fujitsu).  Only two companies reported double digit growth (Accenture and HPS).  

Clearly, unless some radical steps are taken to change the current situation, the largest IT services companies will remain mired in a slow or no growth market.

Break Up and Diversify

So what should be done?  Break up and diversify.  Break up in order to growth faster (see "amoeba syndrome" in "Break Up, IBM!", Mar 1996).  Diversify so as to open up new markets (SMB and emerging countries).

But that's evidently easier said than done.  We have been recommending these two things for over 10 years now.  But IBM, for example, only broke up IGS last year, started to push SMB three years ago, and the emerging markets two years ago.  Other big IT services companies are yet to follow IBM's lead and even do that much.

Once major shareholders and investors start to hold the executive feet to the fire, and they usually do it by selling off their shares, urgency may replace complacency.  

In Big Blue's case, we may have already reached that stage.  The IBM Board today (Apr 25) boosted the dividend by 50% in an effort to try to bolster the listless stock, the AP has just reported from the company's annual meeting in Tulsa, Oklahoma.  The move will transfer to shareholders an additional $1.9 billion per year.  The Board also authorized an additional $4 billion for stock buybacks.

Alas, neither move will do anything to help grow the revenue and profits.  Big Blue is merely redistributing its wealth and letting Wall Street (i.e., its major shareholders) invest its money.  No wonder the stock market shrugged off both IBM Board actions.  The stock barely moved on the news.

Back to break and and diversify...

Happy bargain hunting

Bob Djurdjevic

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Volume XXII, Annex Bulletin 2006-16
April 24, 2006

Bob Djurdjevic, Editor
(c) Copyright 2006 by Annex Research, Inc. All rights reserved.
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