Annex Bulletin 2007-12                              March 19, 2007

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INDUSTRY TRENDS

Updated 3/19/07, 7:30AM PDT, adds Tables and charts...

Annex Research's 2007 Global IT Services Octathlon

HPS, Capgemini Tie for Overall "Gold"

EDS Wins "Bronze" after Delivering Real Turnaround

BEIJING, China, Mar 19 - It seems only appropriate that this year's annual2008_Olympics_GreatWall.JPG (89545 bytes) Octathlon results should come to you from the city that will be hosting the next Olympic Games - Beijing, China.   The 2008 Olympic signs were already everywhere even during my last visit here, including near the Great Wall (see right photo).  The winners of our annual Global IT Services Octathlon may not rate as much pomp and ceremony as the Olympic sports stars, but their Octathlon medals are certainly worth a lot more money.

[charts here]

The two companies whose stars shone the most brightly in the 2006 global IT services arena were Hewlett Packard Services (HPS) and Capgemini.  By the time all the scores were in, they ended up in a tie for Octathlon "gold" with 11 points each (see the chart and table).  HPS won three gold medals in individual competitions, along with one silver.  Capgemini, on the other hand, earned its 11 points with two gold, two silver and one bronze medal (click on the right chart). 

A much-improved EDS won the "bronze" with nine points.  It was the first time since 2003 that the second largest company in the IT services business earned an Octathlon medal.

Octathlon Scoring 

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, 2006 in this report.  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 revenue growth in 2006 went to Capgemini (with a 21% surge; up 10% in constant currency - right chart).  Just like last year, Accenture won the “silver” with a 5.2% increase, while EDS earned the “bronze” with a 4% rise.

[snip]

Slow Growth: A Chronic Problem 

It should be noted that most revenue growth medal winners grew by acquisitions (except for Accenture).  Among some major deals, CSC acquired DynCorp (2003), HP acquired Compaq (2002), while IBM acquired PwCC (2002).  Lacking any major acquisitions in 2006, revenue growth of the Top 7 contenders slowed down to 4%.  So once one of the fastest growing industry segments, the top of the global IT services market is now showing sub-par performance.

[snip]

3. Market Share (1 Medal)

Capgemini, EDS and Accenture were the market share gainers among the Top 7 in a year that did not see much movement in this Octathlon category.  None of the competitors won or lost more than a point of market share in 2006.  

[snip]

4.-5. Profitability (2 Medals)

Just like in the last two years, Accenture again won easily the gross margin “gold,” followed by IGS and Capgemini, which claimed the “silver” and the “bronze” respectively.

[snip]

6. Frugality (1 Medal)

Just as Accenture seems to be pre-subscribed to profitability medals, EDS has been a perennial winner of frugality competitions.  One of the most beleaguered competitors in the 2002-2005 time frame, EDS still continued its unfettered grip on the “gold” for the lowest operating expenses.  At 8.7% of revenues (down from 9.2% the year before), EDS’ 2006 operating expenses were by far the lowest among the Top 7 competitors.

[snip]

7. Sales Productivity (1 Medal)

HPS edged out Fujitsu and IBM by a nose in 2006  to win the “gold” in the sales productivity category (revenue per capita).  The “silver” and the “bronze" medal winners were virtually in a dead heat.  It was the same lineup of medal winners as in last year's Octathlon.  

[snip]

8. New Contract Sales (1 Medal)

EDS won the "gold" in new contract sales in 2005 with a 38% improvement (to $20.5 billion) over the dismal 2004 results.   And in repeated that feat last year with a 29% surge to $26.5 billion despite, what Wall Street calls, a "difficult comparison."   Capgemini got the "silver" with a 21% jump, while CSC earned a "bronze" with an 18% increase.

[snip]

Summary: The Growth Problem

As you have seen, 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 4%.  

If this sounds like a deja vu conclusion, it is.  It is pretty much the same thing we said a year ago about the Octathlon 2006 results.  So what's to be done?

[snip]

Break Up and Diversify

Our next piece of advice to the IT services industry leaders (especially the biggest, IBM Global Services), will again sound like a broken record: Break up and diversify.  We have been recommending these two things for over 11 years now.

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, emerging countries).

[snip]

Click here for detailed tables and charts (Annex clients only)

[snip]

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Volume XXIII, Annex Bulletin 2007-12
March 19, 2007

Bob Djurdjevic, Editor
(c) Copyright 2007 by Annex Research, Inc. All rights reserved.
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