Also now available at http://hotviews.blogspot.com/
to Indian metrics
I’ve just spent a worthwhile morning at
the Software & Systems Quality Conference to pick up on what’s
happening in the Testing Services scene. The most useful part (for me,
anyway) was meeting the various vendors to get a feel for what impact the
current stormy conditions are having in a segment I thought should have
been fairly weatherproof. The answer seems to be more a case of
‘sunshine and showers’. Some of the vendors I spoke to see little
impact on their business, but I was told by one European major of a
€500K testing services deal that the client has now “deferred to
1/2Q09” (and we all know what that means). So it seems that however
sensible the business case may be, even with testing, the spending freeze
is brutal. My sense is that testing projects already underway are not
being curtailed. But new projects are coming under the same scrutiny as
any other IT project and subject to the same due diligence – i.e. if it
doesn’t pay back (and more) this year, it ain’t going to fly.
I had expected a better turn-out from the Indian players than just Cognizant
and lesser-known Zensar, given that testing is one of the
Indian SIs’ fastest growing service lines. Cognizant reckons it’s the
king of the castle, with some 10,000 employees in its global testing
services business. Well, Wipro may have something to say
about that, but it does sound close. Zensar, in which Fujitsu
Services used to have a stake, is much smaller (some 5,000
employees all up, with about 300 in testing) but has some top client
brands in the UK, such as John Lewis, Marks & Spencer and National
Grid. Zensar aims to have 1,000 heads in testing by 2011 and is on the
acquisition trail. First stop is likely to be Germany – watch this
But it was great to meet a couple of ‘Little British Battlers’ very
much holding their own in this segment. Grid-Tools
is a tiny software outfit that has developed what appears to be a unique
testing data generator product highly sought after by the major SIs. One
sure sign that they have something a little special is that almost every
one of the top Indian SIs has been beating a path to its door to
incorporate G-T’s products in their testing proposition. On the services
side, SDLC Solutions
claims to be the UK’s largest independent testing house. It’s £9.5m
revenues are a mile away from market leader SQS Systems’ (see SQS
tests India – and a lot more besides) but SDLC is UK-owned and
based. While they increasingly deal direct with corporate and government,
they have partner relationships with the likes of Accenture,
EDS, Capgemini and (now here’s a name
you don’t hear much of) Hitachi Data Systems.
Of course, how long Grid-Tools and SDLC choose to remain independent,
given the high interest in the testing services segment by major SIs,
becomes an interesting question.
Innovation issues profits warning
Shares in the Innovation Group
crashed this morning - down 35% at 7.5p at 9.00am) on the back of a
significant profits warning. This was occasioned by delayed decisions in a
number of major US BPO
contracts - caused, in the main my the uncertainty created by the current
sector troubles. Also, settlement in the AIG
contract termination caused a £2m write off. George O'Connor (Panmure
Gordon) translates this into profits reduction of c£4.6m against consensus
On the positive side though, double-digit organic growth is reported in
Europe and Asia together with new
contract win announcements with IBM at "a leading UK
insurer" (£4.7m over 2 years) and CIS
Back in May 08, Chairman Geoff
Squire bought 10m TiG
shares at 21.5p - thus doubling his stake. Since then TiG
shares have crashed by 65%. Put another way, Geoff has lost nearly £3m.
Mind you, as you can see in the chart above, TiG
was trading at around 35p 12 months ago.
well be suffering the after effects of the dreaded 'Acquisition
Indigestion'. It clearly needs to do much to restore investor confidence.
We ought to be writing reports that TiG
is a company ' in the right place at the right time' - saving
insurance and other financial services companies money in these difficult
times. But it clearly needs to get its act together - or maybe it
would be better as part of another, larger organisation?
Good times coming to an end
After I had completed my Revolution
or Evolution presentation last Thursday, I was waiting
for the lift to whisk me to dinner on the 34th floor of the BT Tower, when
the CEO of one of the very largest IT services companies operating in the
UK market approached me. He whispered “You are absolutely right
Richard. Something changed when people came back from their holidays at
the end of August. The mood amongst our sales people and our customers has
changed. Decision delays are the order of the day. We think we are in for
a really tough period”.
I know that I have a reputation for being gloomy. I think that reputation
is unfair as I think I’ve often not been gloomy enough! Certainly I now
think that the downturn is going to be even deeper than I have been
predicting in UKHotViews for the last year. As I said last Thursday, I do
think that our industry gives more marks to researchers who tell them what
they want to hear rather than those that tell
them how it is (or is going to be) “warts and all”.
Over the course of the dinner, I revised one opinion at least. I had
accused our industry of “Living in Denial”. I think they were…but
not any more. That dose of reality can only be good.
However, it’s one thing telling that to your peers around a boozy dinner
table where the codes of confidentiality mean that I’d never ‘name
names’. It’s quite another telling it to investors in an RNS
announcement. Q3 ends on Tuesday night. The day of reckoning
Footnote – I promised a review of my Revolution
or Evolution presentation on Monday. I actually posted it on
Friday. Anyway, for those that missed it you can read it in pdf form by
following the link Click
HCL counter bids for Axon
We wondered whether Infosys’s bid for
Axon would tempt other predators out of their lairs (see Infosys
to acquire Axon and related articles) and so it came to pass late on
Friday afternoon. Much smaller rival HCL Technologies declared its hand
with a 650p per share bid, trumping Infosys by 50p. Infosys (or another
bidder) has till Monday to raise or bust. On the concall, HCL management
put forward what it felt were the many compelling reasons why Axon was a
great fit and, to their great credit, refused to diss Infosys, leaving it
to shareholders to decide.
Although HCL is much smaller than Infosys, it is possibly better known in
the UK, having won high profile deals such as with BT and Dixons Stores
Group, and, more recently, acquired the financial services arm of UK BPO
player, Liberata (see HCL
buys Liberata’s Life & Pensions BPO operations and related
articles). Frankly, I could get into a very deep and meaningful analysis
as to whether Infosys or HCL is the better home for Axon. I have followed
the fortunes of the major Indian players for several years and paid
special interest to their enterprise applications services (EAS)
practices, and can wax lyrical on the subject. But why bother, as in the
end we should expect Axon’s shareholders to go with the highest bidder.
But I will say this. Infosys and HCL are very different companies with
very different strengths. HCL's strong suits are BPO and Infrastructure
Management, these two comprising 27% of total revenues, compared to 12% at
Infosys. On the other hand, Infosys trumps HCL’s EAS revenues five times
over. Indeed, HCL management admitted back in April that they had the
wrong EAS strategy and were going to fix the problem. This is a heck of a
fix! In fact, both HCL and Infosys would benefit immensely from taking on
Axon (and look at the revenue and profit per head in the table!). In
HCL’s case the acquisition would look more like a reverse take over of
its EAS practice, which is roughly half the size of Axon’s business. And
HCL will be borrowing most of the cash if they win the deal, whereas
Infosys still has plenty of cash headroom for a much higher bid should it
choose (though the company is not known for rash moves, especially in
No bets on who will win the prize. Some analysts are talking about a
bidding war up to 900p (Axon’s shares jumped 8% to 682p on Friday) but
we wouldn’t presume to predict the outcome. It’s certainly going to be
an interesting week!
UK mars Accenture
had a pretty fine finish to its fiscal year (to 31st August) – indeed a
pretty good year all round – despite the turmoil in financial markets
and beyond (see the results release here).
The notable exception was EMEA region, which saw Q4 revenues grow 6% in
local currency against a 10% average across the company. In contrast,
Accenture’s North American business grew 14% in the quarter and
Asia/Pacific 12% (both local currency).
It was the UK that let the side down. Management didn’t give the numbers
but called out both Financial Services and Public Sector as the
weak spots. In the rest of Europe, Italy, France and Spain were “very
strong” whereas Germany and Nordics were “holding their
own”. Management reckoned the problems will take some time to sort
out. This bodes ill for Logica in particular, for which
Nordics is its largest regional market (28% of revenues) and Public Sector
represents 57% of UK revenues, though Financial Services is just 8%.
Together, Nordics, Germany and UK comprises 54% of Logica’s total
business, so we await with interest CEO Andy Green’s next trading update
on 14th November.
Meanwhile, Accenture guided a pretty bullish FY09 outlook, expecting 9-12%
local currency growth and 10-40 basis point margin expansion. The
latter trick is to be done by “improving contract economics”
which we read as higher pricing (they instituted price increases in June)
and more offshore delivery. Indeed, global delivery headcount has reached
83,000 of their total 186,000 employees, i.e. 45% of the workforce. We
believe about half of these are in India. Management intends to keep
headcount relatively flat this year, so with attrition currently at 15%
(down from 18% this time last year) they’ll still need to hire some
30,000 people. We would expect most of these will be in low-cost
If Accenture really can grow the 9-12% they are forecasting, this would be
a quite astounding performance given our expectations of a shrinking IT
services market in ’09 in real terms (low single-digit growth including
inflation). They seem to have the combination of consulting and
outsourcing services pitched near to perfection and a global delivery
model that makes them very competitive even against the Indians. It’s no
wonder other players aspire to be just like them when they grow up
Revolution or Evolution
night 60 of the top CEOs in the UK tech sector met to hear my “State of
the ICT Nation” at the BT Tower followed by a Dinner atop the Tower. It
was all sponsored by BT Group and some £65,000was raised for the
Prince’s Trust where I am the current Chairman of its Technology
I have written a paper on my talk, together with the slides used. You can
download this in pdf form at Revolution
25th Sept 08. Beware it is c5mb.
Ascribe acquires WCI healthcare division
Ascribe has acquired WCI
Consulting's healthcare division which provides
consultancy and implementation resource to the NHS. Their c30 staff are
currently working with Connecting for Health and BT, as well as having
contracts with local NHS Trusts.
Under the terms of the agreement, Ascribe has acquired the trade and
assets of WCI Healthcare for a cash consideration of £650k payable on
completion with a further £300k deferred consideration paid in twelve
months subject to certain performance criteria. For the year ended 31
December 2007, WCI Healthcare delivered a pre-tax profit of approximately
£263K, on sales of approximately £3.5m.
Note - I declare an interest in this piece as Regent,
where i am a non-executive director, acted for WCI in this transaction.
Computacenter "2009 is going to be tough"
You may be interested in this from my
friend George O'Connor's (Panmure Gordon) morning email.
Computacenter CEO Mike Norris was in morose form as he
addressed the inaugural CRN Reseller Leadership Forum event at the Four
Seasons Hotel in Hampshire. Mr Norris stated that “2009 is going to
be tough. I think 2008 is a good year. I am expecting it to get worse in
2009, particularly for the IT market. I hope I'm wrong. We at
Computacenter continually try and drive costs out of the business, and I
am expecting our headcount to reduce."
Ex-Wipro exec resurfaces
a pleasant surprise to bump into Sudip Banerjee at the IoD yesterday.
Until recently, Sudip was President of Enterprise Solutions at Wipro,
one of CEO Azim Premji's top team and a co-founder of the Indian IT giant.
After an unpublicised departure from Wipro (read into that what you wish),
Sudip has resurfaced as CEO of L&T
Infotech. L&T who? They're the IT services arm of Larsen
& Toubro, the Indian technology, engineering, manufacturing and
construction conglomerate, and apparently the largest privately-held IT
services player in India. We'll be meeting up with Sudip in coming weeks
and will let you know a lot more about this little-understood player and
what they're doing here in the UK. Of course, this is not good news for
Wipro, which has suffered a number of senior executive defections as Mr
Premji retains his iron grip (and some 80% of the equity) on the company.
TCS makes its mark on infrastructure outsourcing
I’ve just got back from a fascinating
session at TCS where they talked about what they are
doing in the UK with Infrastructure Management (IM). Globally, TCS
generated some $400m from IM these past 12 months and the service line is
one of its fastest growing, at over 60% yoy. The UK is TCS’s largest
market for IM outside of the US and I reckon they’ll break the £100m
barrier here this year. OK, still small fry compared to the likes of EDS,
IBM and CSC, but at those growth rates
it may not take TCS too long to catch up.
Just a few years ago, most people doubted that Indian SIs would ever be
able to make a mark in traditional infrastructure outsourcing. After all,
“they won’t take on assets or people, and customers don’t want their
kit operated from India”. Wrong on all points. Here in the UK, TCS will
sometimes take on assets (or help the customer get them off the books) and
nearly always takes on customer staff, of course under the UK’s
stringent TUPE regulations. As a result, TCS has won a string of
modest-sized deals with some well known brands such as Centrica, VW (UK)
and Somerfield. TCS’s sweet spot is for IM deals between, say, £3m-£12m
p.a. but don’t forget this is at blended (offshore/onshore) rates. Given
that typically 70% of IM services can be delivered offshore – and for
some activities, even 100% - you could argue that these deals would have
been worth £5m-£50m for a traditional onshore vendor. This strikes at
the very heartland of the big US and European players.
Of course, most of the usual suspects have built their own offshore and
nearshore delivery centres, and compete vigorously for this business.
TCS’s Indian peers are also firmly in the frame, and it’s a moot
question whether TCS or Wipro has the highest IM market
share in the UK among the major Indian SIs. But TCS’s long-standing
relationships in the UK (they’ve been here 20 years) is proving fertile
ground. With few of its UK accounts yet to take its IM services, we think
TCS will move up the UK’s leading infrastructure outsourcer rankings
sooner rather than later.
And now for a competition!
Here’s how one of TCS’s UK clients described the various responses to
its very detailed RFP to take over its IT operations (a deal which TCS
won, you may presume). See if you can guess which vendor the client might
be referring to in each instance:
(1) “they had all the energy of a dead parrot”
(2) “they wanted to see the CEO”
(3) “they wanted to do an investigation so they could tell us what we really
(4) “they nearly had a stand-up fight with their UK bid partner
(5) “they couldn’t even match our in-house costs let alone show any
A mention in despatches for the winner – but don’t expect us to
publish the right answers too
Tonight's the Night
Tonight I present my annual “State of
the ICT Nation” talk for the Prince’s Trust Technology
Leadership Group (TLG) where I was both a founder and the current
Chairman. It's entitled Revolution or Evolution.
The 60 places have been sold out for months and, at £1250 a place and BT
covering all the dinner costs and providing the BT Tower, we will raise
around £65,000 for the Trust. Indeed, this is the 10th such presentation
I have done for the Prince’s Trust which have now raised over £700,000
in total contributing towards the £7m that the TLG has raised since its
inception in 2002. Thank you for all those who are attending tonight (and
in the past) and therefore have contributed towards this amazing total.
I’d like to think that guests come just to hear me. But I know that the
real draw is the unrivalled networking. Tonight is no exception with such
industry luminaries as Ian Livingston (CEO BT), Guy Hains (CEO EMEA CSC),
David Courtley (CEO Fujitsu Services), John Suffolk (HM Government CIO),
Steve Gill (CEO HP UK), Mike Dalton (CEO EMEA McAfee), Gordon Frazer (MD
Microsoft UK), John Brigden (SVP EMEA Symantec) amongst the exclusively
I'll post a full review of my presentation in Monday's UKHotViews.
IBM joins shorting ban
Yesterday IBM was added to
the list of US stocks where shorting was banned. See FT 25th Sept 08 Click
here. "Like other computer hardware groups, IBM has a finance
arm that helps customers finance big IT purchases. IBM said it met the
requirements for inclusion on the short selling list and being included
was in the “best interests” of the company and its shareholders".
I gave my views on Shorting
in my 18th Sept 08 posting. All the emails I got - except one
- in response agreed with my stand. The one against was from my partner in
TechMarketView - Anthony Miller - who couldn't object to my stand at that
point because we hadn't launched the firm.
Anyway, Anthony wrote to me at the time saying:
"As for the ban on short selling,
maybe we have to agree to disagree. I think shorting is a perfectly
acceptable part of healthy capital markets; after all, if you are allowed
to bet on shares going up, then you should be allowed to bet on shares
going down. What’s not right – and I’m happy for this to be illegal
if not already so – is to spread unsubstantiated rumours that is likely
to affect a company’s stock – either down or up (gosh, how many times
have we heard of rumours that are meant to push up share prices!). At
best, I’d support a ban on naked shorting (where you don’t even borrow
Anyway, the ban on shorting banks etc is
a bit of a band-aid measure. How long will it be before companies
find creative ways to declare themselves banks (e.g. any IT vendor that
provides financing to is customers – and this includes for example
Computacenter as well as the very big boys with their own financial
service arms by the way) to gain protection from shorting? The
FSA will be mired down in requests for protection and probably take its
eye off the bigger ball.
I come back to my initial premise. The root cause of the problem is that
the regulators permitted traders to use fantasy financials to create paper
profits on dodgy debts. This is the problem that must be fixed."
So, Anthony was (as ever) pretty prophetic. If you accept IBM's
definition, we will see Sun, HP, Computacenter etal added to the 'no
shorting' list soon.
Autonomy and its fanclub
OK, let me admit that I am rather biased
right now towards Autonomy as they have just agreed to become
a Patron of the Prince's Trust Technology Leadership Group (where I
was a founder and serve as the current Chairman) As readers will also know
I have long
thought that Autonomy is in the 'right place at the right time'
with its unstructured search products. I was overjoyed when they (re)entered
earlier this month. Their share price growth has defied all the gloom as
aspects of the financial crisis actually adds to the need for their
Autonomy has made yet another, but this time highly significant,
partnership announcement. I'll leave it to my friend George O'Connor at Panmure
Gordon to explain:
"Yesterday we noted a very strong OEM
announcement - Autonomy announced that Adobe Systems has
integrated IDOL into the new Adobe Creative Suite. Creative Suite is a pre-
and post production toolset
used for video and audio editing, still and motion graphics, visual
effects, and interactive media design, then delivery for film, broadcast,
and DVD as well as Blu-ray
disc and mobile authoring. So users would look to Autonomy to search an
audio stream or speaker information in seven languages and could index
spoken dialog. So that then they could in turn identify speakers, as well
as align multiple takes of content around a script, and conceptually
identify similar audio content (if you imagine – pose the question –
in what quarterly call did the CE state that he would grow revenue by 15%
- say in my context – clearly though the application would be used in a
post-production environment to find the right part of the right clip
quickly some kind of (say) news mash-up.
The announcement illustrates :
1 - Autonomy at the heart of the industry
looking to introduce new functionality
2 - non financial services revenue
3- continued progress with the OEM
4 - Autonomy used in the context of
driving customer efficiency savings."
OK, George is a fan too!
Please remember us in your 2009 budgets
Firstly, can we say a BIG THANKYOU
for the fantastic
response you have given to the launch this week of TechMarketView
have been overwhelmed with messages of support.
We have also had several requests for TechMarketView
pricing for the subscription services when they are launched at the end of
2008. The first report - MarketView
- will provide our sizings
and forecasts for the UK SITS market. So it's a pretty crucial report for
most of our readers! We intend to issue MarketView
at least twice per year. We also intend to publish a series of
research and analysis reports including our famed UK SITS rankings in CompanyView,
M&A, effect of offshoring
etc. Of course, many of you are currently preparing
your 2009 budgets. Please remember to include us in those budgets!
If you want an idea on pricing, then please drop us a line on email@example.com
or contact Richard or Anthony directly.
Touchstone for sale
Yet another UK AIM quoted SITS company
(albeit a tiddler with a market value of c£8m) seems destined to be sold
after Touchstone Chairman David Thompson told its AGM
yesterday that they had appointed advisers "to assist in various
aspects of a review of options that could lead to an improvement in
overall shareholder value". Thompson also said "As
regards current trading, overall performance continues to be mixed with
some divisions and sectors faring better than others. The Board is also
mindful of the wider economic situation and is monitoring Group-wide
overheads to ensure that they are appropriate to any change in future
Touchstone has a suite of ERP-type business software and also provides
consultancy services. They had revenues of £31.4m and PBT of £1.7m in
year to 31st March 08. So the current valuation is a PSR of c0.25 - pretty
low for a company with some IPR.
Not all doom and gloom in the financial services sector
In amongst all the financial services gloom
and doom it’s good to see a couple of bright spots shining through,
especially when it’s from two tiny UK players.
Monitise (MONI.L), the spin-off from troubled
reseller-cum-services player, Morse, announced that
LloydsTSB has become the eighth UK bank to launch a mobile banking service
using its Monilink service (see RNS here).
Monitise does barely £1.5m in revenues (and of course is still
loss-making) but is clearly making a mark with its platform. Apparently
they have 38 US financial institutions using the service too, so they are
a great ambassador for UK innovation. Monitise listed on AIM last June at
22p but perhaps not surprisingly their stock’s off nearly 60%. Whether a
listing was the best approach to do the fund-raising for such a small
company I’m not so sure. Anyway, you’ve got to wonder how long they
can remain independent.
The other ‘little British battler’ that’s ‘done good’ is
financial services software player, Focus Solutions (FSG.L),
which has just signed a £4.9m contract with HSBC Bank (see RNS here).
Much of this contract will be invoiced this FY, which will make a huge
difference to the P&L, given that last year’s revenues were under £9m
(but they were profitable!). Like Monitise, Focus’ stock has taken a
hammering, losing 20% so far this year.
Anyway, small and niche can still survive and prosper. Good luck to them,
Brand new CSC reveals
We went along yesterday to the launch of CSC’s
impressive new customer briefing centre at the Gherkin, where they
unveiled their new ‘brand’ and logo. While the analyst community’s
response to the new logo was, shall we say, muted (“in the box
thinking” was one of the less complimentary comments we overheard),
we were far more interested in hearing what management had to say about
In that regard, both Guy Hains (CEO, Europe) and Nick Wilson (CEO, UK)
were very bullish. Though management is coy about country numbers, we got
the sense that CSC UK is on track for some 10% (organic) growth this year,
which would mean winning share if achieved. Wilson sees huge opportunity
in UK public sector, figuring there’s $10-12bn of megadeals to be
competed for in the next couple of years, including the DWP re-let.
CSC also seems to be holding up very well in Financial Services (FS), both
in the UK and in Europe. The UK drives about 30% of CSC Europe’s $1.2bn
FS revenues, with marquee clients such as Schroders, Barclays and JP
Morgan Chase (the outsourcing vestige of the long-defunct Pinnacle
Alliance). What’s helped CSC’s UK FS business is that about 80% comes
from the insurance sector, so its exposure to banking in general and
capital markets in particular is pretty small. In any event, about 70% of
CSC UK’s FS business comes from traditional infrastructure outsourcing,
which is a great place to be when project work is drying up. Not that CSC
is immune from that; about 15% of its outsourcing business is project
work, and we understand this has been hit in the current downturn.
Where CSC has to take care is that while infrastructure outsourcing is a
great place to be in current market conditions, it is also a target for
spending cuts. We think it is inevitable that customers will push CSC to
give “more for less”, which invariably means moving some of the
infrastructure management offshore. CSC may not be badly positioned for
that, with Covansys now fully integrated into CSC India, but we have yet
to investigate its delivery capabilities (we will report on that in later
Although management seems pretty clear in its strategy for the ‘new’
CSC, one area where it is still ambivalent, at least in the UK, is BPO. It
sounds to us that BPO is, at best, a “definite may be” and I
don’t think that’s a good place to be. It’s ironic that it was CSC
that launched insurance BPO in the UK in the mid-90’s and after firmly
grabbing the ball with both hands, proceeded to lob it to Capita.
The rest, as they say, is history. At least CSC sells the software that is
the platform for many insurance BPO deals, but we think they have to make
up their minds whether this is a market they are going to chase or not. To
be honest, I don’t really know what the right answer is as yet. The UK
BPO market is arguably the most varied and vigorous in the world and,
depending on which analyst’s figures you care to believe, is barely 10%
penetrated – and perhaps much less. Capita currently rules the roost and
the Indians are desperate to get their fair share. How should CSC fit in?
We’ll come back to this again.
Meanwhile, well done to the CSC team – we hope they can meet the high
expectations they have clearly set!
Digital exclusion revisited
Yesterday the Government announced plans to
help over 1m families get online. They have earmarked £300m for vouchers
for a range of services from broadband connections to laptops. See
Computer Weekly – Government
earmarks £300m for laptops and broadband for poorest families.
I haven’t found too much Governmemt policy to agree with or praise of
late, but readers will know that this has been a major priority for me for
In June this year I wrote several articles about Digital
I hope you will forgive me if I repeat the points I made in those articles
as they are of great relevance to the current announcement.
Digital Exclusion - 18th June 08
After reading the latest Ofcom Child
and Adult Literacy Audits. I was so intrigued by this that I
asked Ofcom to provide me with more detailed ‘granularity’ on the use
of the internet by children in the various socio-economic groupings. I am
particularly interested in this because of my involvement with the Prince’s
Trust (where I chair the Technology Leadership Group) which helps
young disadvantaged people get a start in life.
The Ofcom research is about as disturbing as
you can get. 76% of youngsters aged 8-11 in the ABC1 socio-economic group
have access to the internet compared with just 52% in the C2DE group. It
gets worse in the even more important 12-15 age group (ie just coming up
to the start of their GCSEs) where 88% of ABC1s have internet access
compared with 67% of C2DEs.
Put round the other way, only 12% of ABC1s
have no internet access compared with 33% - or nearly three times the
number – in the C2DE group. I’m sure that a comparison between ABs
(probably nearly 100% having internet access) compared with DEs (probably
less than half) would be even worse.
Bluntly, how any youngster can progress at
school nowadays without internet access – preferably via their own PC at
home – is beyond me. It is the equivalent of a house without a book or
Not having access to a PC also means that the
rapid growth in popularity of social networking (like Facebook) is not
available to the very poor. Does this matter? Let me quote from an article
by Mary Ann Sieghart in The Times of 12th June. It is a good read –
about how social mobility has got worse under Labour and
how we now have “to act to reverse this shameful trend”.
Sieghart says “The working classes on
the whole have smaller (though often closer) networks of friends. The
middle classes tend to have wider (if shallower) circle of acquaintances
from whom they get the best advice on schools, universities and jobs, and
with whom they can place their children on work experience. They can
afford to buy houses in better catchment areas. They have broadband access
at home, shelves of books and quiet places for their children to study.
They can even “help” with coursework.”
I happen to believe that social networking
could assist social mobility. Even at its most basic level, I’d rather
have youngsters socialising on the net than in groups on street corners.
If the net can help them broaden their minds and circles too – what a
real bonus that would be!
I remember a calculation in 2000 that the
money spent building the Millennium Dome could have equipped every
youngster in the UK with a laptop. Today the cost would be even less.
Frankly I think that every UK youngster should have a PC and a broadband
connection ‘as a right’.
Many of the ills of this country are down to
us going backwards in terms of social mobility. I was extremely lucky to
have lived in an age where grammar schools allowed working class lads like
me to progress. Generation M could find the same social mobility via
digital media. But clearly the very poor are being excluded - Digital
Exclusion this time. We really should do something about this before we
lose a whole generation – a terrible price to be paid by all
Well, yesterday HM Government did "do something" .
Although long overdue, I applaud that action.
Yesterday I had my normal day full of
meetings with people at the very heart of our sector. Except it wasn’t
‘normal’. It was the first day after the momentous events of last
week. As I have said countless times before, since this whole credit
crunch debacle became public in Aug 07, most of the SITS sector has been
‘Living in Denial’. “It won’t affect us”, “We are
seeing no evidence of any downturn” etc. The SITS sector went on
its annual break in August. At least, when they returned, their eyes were
opened and they started facing reality at last.
Without naming names, let me just summarise some of the things that were
said to me yesterday.
The UK CEO of a Top Ten provider of SITS to the UK market told me that
orders “had fallen off a cliff” in the last quarter.
Customers were delaying decisions. “Let’s revisit this in 3 months
The manager of one of the larger Private Equity funds active in the UK
SITS market told me that they had institutional pressure to sell holdings.
They were having run-ins with management who thought this was a lousy time
to sell - which it is. But if cash offers were on the table, they
would force a sale.
The CEO of a small quoted SITS company told me “I did the rounds of
our investors over the last couple of weeks. Almost without exception they
were more interested in whether we would be able to survive a sustained
downturn, than in this or next year’s profits.”
The fund manager of one of the largest Global Tech Funds confirmed to me
that their end user research indicated that users were “cutting
budget and deferring decisions”. Consumer tech spend was slowing
down – from TVs, to smart phones, to gaming systems to PCs. Even Apple
iPhone sales had slowed. The emphasis, even in the tech companies
themselves, was how to reduce internal IT spend. Ie the vendors were
applying the tech spending brakes just like their customers.
On the markets, any company admitting a slowdown saw their share priced
I could go on, but I hope this gives an impression of the reality
that is setting in right now.
The problem is that if you look at the graph above of UK SITS stocks (as
measured by the FTSE SCS Index) compared with the FTSE100, you might be
excused for feeling that nothing was wrong. The FTSE SCS Index is pretty
much unaltered YTD (down 1.7%) compared with a 18% decline in the FTSE100.
But that’s before Q3 results to 30th Sept 08 are announced. I now have
little doubt that many results will not meet expectations and most will
give extremely cautious outlook statements.
How long will the downturn last?
Nobody I talked to expected any upturn this year. The debate centred on
whether a nadir would be reached in the middle or end of 2009. My own
view veers towards the latter.
Batten down the hatches. There is a real
New Bond model stains margins
Recruitment/HR software player Bond
International’s thinly-veiled profit warning in its interim
results announcement highlights the especially tough plight for small
vendors in the current spending downturn. Unfortunately, Bond has been hit
by a bit of a ‘double whammy’, having been caught in the transition
from the traditional ‘upfront licence fee + maintenance’ revenue model
to a monthly rental/ASP model just when new licence
sales are drying up. Indeed, chairman Martin Baldwin signalled “the
first signs of caution from our prospects in both Europe and the USA”
– which comprise over 95% of Bond’s business (around £30m last year)
– hardly surprising when corporates are laying off staff rather than
Martin Baldwin’s observations on the change in business model
demonstrate the quandary that software firms face with this transition,
i.e. “greatly beneficial in the mid- to long-term … for earnings
visibility and margins … but an adverse effect on margins in the short
term”. Catch 22. But I think the salient point he also makes is
that ASP software delivery (i.e. SaaS) makes the product more affordable
for small and medium sized companies, whereas Bond’s larger customers
– such as Michael Page and Adecco –
seem to be sticking to traditional ‘on premise’ software. And isn’t
it just as well for Bond that Adecco’s pitch for Michael Page came to
naught (for now, at least) else that could have been another major licence
sale to fall foul of industry consolidation.
I must also add that the chairman’s closing comment, expressing
“confidence” about Bond’s 2009 prospects, reminds us of the similar
statements so many companies made at the last downturn. Unfortunately
that confidence was tragically misplaced.
SQS tests India
We met up last week with Rudolf van Megen
and Rene Gawron, CEO and CFO respectively of Cologne-based and AIM-listed
independent testing services company SQS
Software Quality Systems AG. Although only a
small player in the grand scheme of things (FY07 revs c. €121m) there
were three aspects of SQS that really piqued our interest.
First, it’s that SQS is a testing services pure-play. Now, it also
claims to be the “global leader in independent software testing and
quality management services”, though it’s not actually the
largest software testing business globally (we think that honour belongs
to Wipro, with some $400m in testing revenues over the
past 12 months). But, we don’t know of any other pure-play that comes
close. You might already know my views on testing services (see my 'opening
rant'!) – that this is a great, but little understood, service line
which is attracting more attention as CIOs lean more towards ‘making do
and mending’ legacy applications rather than buying replacement
software. Quality players attract predators, sometimes from unlikely
quarters (remember when Capita bought Mission
Testing back in 2002?), and we can’t believe that most of the
‘usual suspects’ wouldn’t have designs on SQS.
The second aspect of SQS that intrigued us was its firm belief in using
earn-outs as a key incentive in its reasonably prolific acquisition
strategy. We’ve been stimulating a lively debate of late (see Earn-outs?)
on this topic, but it’s very clear which camp SQS belongs to. They find
that an unambiguous profit-based earn-out with a two (or sometimes three)
year time frame not only helps to retain top people, but also bridges the
gap between the seller’s (often aspirational!) asking price and the
SQS’s view on valuation. It’s helped that in most cases, SQS has
acquired to open new markets (or, as in the UK with Cresta,
a reverse-take-over), so the issue of integration isn’t so acute. We
think integration will become more of a challenge as SQS relies
increasingly on offshore delivery (see below), but it sounds to us like
van Megen and Gawron are already on the case.
The third aspect about SQS that we think is a model other S/ITS companies
should pay close attention to is its June acquisition of a majority stake
in Indian firm, VeriSoft. Prior, SQS used Egypt (for
German and French speaking resources!) and South Africa for low-cost
service delivery, but the numbers were small (200 among some 1,400 total
employees). VeriSoft brought access to 150 India-based testing
professionals to add to the mix. SQS management reckons the
‘sweet-spot’ offshore/onshore effort for testing services is around 3
offshore for every 1 onshore - you don’t need to do the sums to see
where SQS will be growing headcount fastest! To be honest, we do wonder
whether 3:1 is aggressive enough – most of the Indian SIs can reach 90%
offshore mix on mature testing projects. But Gawron makes the legitimate
point that packaged software product testing (a staple service for many
Indian SIs) lends itself to a higher offshore mix than enterprise
application testing, SQS’s domain. Nonetheless, 75% offshore is very
good if SQS can get there, and is around the average mix Indian SIs
achieve across their broad range of IT service lines.
So despite its modest size, we think many players in the S/ITS sector
could learn a lot from SQS, and we will certainly let you know how their
ambitious growth plans – both organic and acquisitive – take shape.
TechMarketView LLP Launched
In what some have described as one of the
industry’s worst kept secrets, we are delighted to announce the launch
today of TechMarketView LLP – a new research and
analysis firm formed by Richard
Holway and Anthony
Miller. (see links to our new website for detailed biographies)
As many readers will know, Anthony Miller, then an experienced
analyst with IDC, was the first analyst to join Richard Holway Ltd in 1997
and became an essential part of the ‘Holway team’ during its most
vital years in the run up to Y2K and the bursting of the dot.com bubble.
Together they developed an analysis style which was provocative and
interesting. It helped greatly that they were also right in
their forecasts over the period too! Indeed they are widely
credited for their accurate forecasting of the industry – even though,
like most prophets, they were not initially appreciated!
The ‘Richard and Anthony Show’ (as their annual presentation for the
CSSA/Intellect was known) continued with Ovum Holway after Richard Holway
Ltd was acquired by Ovum in Nov 2000, and only ended when Anthony left to
join equity research boutique, Arete, in 2004.
Now the best known and most widely respected team in the UK software and
IT sector is back together again.
It would be too simplistic to describe TechMarketView LLP as “Holway
2.0”. Of course, it will resurrect some of the best elements of the old
firm but with a whole new approach.
TechMarketView – or TMV for short – will initially concentrate on all
aspects that affect and interest Software and IT Services companies -
their advisers, investors and partners - operating in the UK market. That
could just as easily be a ‘foreign-owned’ player like HP/EDS,
Capgemini or Infosys or a ‘UK’ company like Logica or the SITS
division of a larger player like BAE Systems or Thales or a private
company like Liberata or COA. TMV will cover corporate news – like
company results, M&A, private equity fund raising, stock market
performance etc. TMV will cover all the important issues like offshoring,
BPO, public sector contracting etc. TMV will cover the important industry
trends like Cloud Computing, SaaS, the move to MIDs. But what makes TMV
different is that it covers these areas from the viewpoint of how this
will affect the players corporately.
Indeed, the aim of TMV is to cover all the aspects that would be
of interest to any CEO or senior director in the sector and in a manner
that they will understand. It will be presented in their language
– which we also hope will be stimulating and even humorous where
As in the past, all research and analysis is only as good as the
people supplying it. Richard and Anthony have developed what many describe
as the best network of senior executives in the sector. Working
relationships based on mutual trust which go back decades, in some cases,
mean that they get insights that few others can obtain. Often these are
given ‘in confidence’ but can be used to flavour the insightful
comment that readers have come to expect from Richard and Anthony.
From today, Holway’s HotViews will morph into UKHotViews.
If you are one of the many thousand current HotViews readers you need do
nothing. Your access is unaltered and the email version will be sent to
you as normal. Of course you will notice some differences – not
least that Anthony will be contributing in his own name – although
many of you will have spotted Anthony’s inimitable style in some
articles published this month! We intend that UKHotviews will continue to
be free and we will be looking for sponsors at a later date.
TMV will launch a range of subscriber research in a few months time
starting with MarketView which
will carry our own market sizing and forecasts for UK SITS. Obviously
these will be fee-based services and we will inform you how you can be a
subscriber nearer the launch date at the end of 2008.
In addition, TMV will be happy to look at any ‘bespoke’ analysis and
consultancy requirements you might have. And you never know, we might even
look at reviving the ‘Richard and Anthony Show’!
You can access UKHotViews on (surprise, surprise) http://www.ukhotviews.com/.
Full details of TMV are on our new website http://www.techmarketview.com/
which will carry the subscriber research at a later date. You can
pre-register your interest in becoming a subscriber or a sponsor of
UKHotViews by emailing Register@TechMarketView.com.
This is a real landmark day for both of us and, we’d like to think, for
the UK SITS sector too.
Some may question setting up a new research and analysis firm in the midst
of the worst financial crisis in decades. But that’s exactly when the
old models change. Exactly when companies and their executives need the
very best insights from the very best analysts with the best experience
and track records. None come better than Richard and Anthony at
TechMarketView. We helped you through the last major turbulence to hit the
sector. We intend to do the same for you now.
A personal message from Anthony Miller
I can’t tell you how good it is to be
back where I belong after four years ‘on the dark side’ as an equity
analyst. Given the current market conditions, some might say, “perfect
I certainly learned a lot about the way institutional investors and hedge
funds view software and IT services companies; indeed this is why I moved
into equity research in the first place. I hope you’ll see some of this
new-found knowledge reflected in my commentary – though without the
stock recommendations of course! Perhaps the most important lesson I had
to learn very early on in the piece may seem to you to be a statement of
the ‘bleeding obvious’. But I can assure you that what I am about to
share with you is rarely appreciated by the traditional industry analyst
community when trying to make sense of company share price movements. It
is simply this. To an investor, a company is not a company – it is a
stock. In other words, an investment proposition. I told you it was
obvious. But it goes a long way to explaining why even ‘quality’
software and IT services (S/ITS) companies are suffering in the current
financial market turmoil. It doesn’t matter if you have contracts going
so far out you need a telescope (e.g. Capita), or cast-iron recurring
revenues (e.g. Sage), or margins to die for (e.g. Infosys), it all comes
down to how investors see their best chance of making money from the stock
– which, as I’m sure you know, can come from a downward bet as well as
upwards. As TechMarketView is neither authorised nor regulated by the FSA,
we have to be very careful not to cross the line where we might be seen to
be giving investment advice. However, I will try to give you some insight
into investor thinking where I can.
But my prime focus is exactly what it says on our website – the things
that really matter in the UK IT sector, and in particular, the S/ITS
scene. Richard has already talked about some of the ‘big issues’ we
think are shaping the UK S/ITS market. I want to draw your attention to
two that interest me in particular: “offshoring” and “software as a
service (SaaS)”. Let me make it clear; this isn’t ‘one for IT
services players and one for software players’. Both these themes play
to each segment. Sure, having low-cost delivery is frankly a matter of
survival now for IT services companies, and I will hammer on about this
endlessly. But, with perhaps 20% or more of software products firms’
revenues invested in research and development, moving some of this
offshore can make a huge difference to margins. And as for SaaS, well,
you’ll have to forgive me for not banging this drum quite as loudly,
perhaps, as Richard. Of course, I can see many places where SaaS is a
great proposition but, frankly, I am yet to be convinced that it will turn
out to be the future of large-scale enterprise application delivery. I
also wonder how you make real money from SaaS? As you will see, Richard
and I will be not always be in perfect harmony!
There are many other themes I will pick up too, such as Service
Industrialisation. You thought the Indian proposition was all about labour
arbitrage? Think again. Some of you have heard me say this before but let
me say it again … and again. The really clever thing about the Indian
SIs is that they have refined a way of disaggregating IT service lines
into ‘elemental’ activities which can be industrialised, deskilled
and, in many cases, moved offshore. Then they knit them back together
again into a near-seamless service which is now low-cost, repeatable,
scalable, and needs fewer ‘rocket scientists’ to deliver. Neat, eh?
Nothing, I repeat, nothing, is impossible to industrialise in this way,
including consulting! By the way, there’s no reason why UK players
can’t do this too – and they certainly should.
I’ll also be talking about poorly understood – and highly underrated
– services, such as Testing/Quality Assurance. Testing is one of the
fastest growing IT service segments, and as much as 90% of the work can be
done offshore. I rather see Testing as a ‘hidden jewel in the IT
services crown’. Far from being a ‘discretionary’ activity, testing
is even more critical in the current ‘make do and mend’ climate. And
Testing Services are a great way to open new ’logos’ – as the
Indians are proving, by the way.
There’s so much more to talk about which is really important, and you
can be sure Richard and I will be trying to guide you through it. Please
give us your feedback too (positive or negative) – but we know you’re
not shy in doing that!
Shorting and Mary Poppins
As you will see above, we've dedicated
today's issue to our own news of the launch of TechMarketView LLP. Normal
service will be resumed shortly!
However, I couldn't resist this message from
Jon Cross at Anite in response to the Shorting
article last week.
Reading your blog on Shorting - an entertaining observation was made to
me yesterday highlighting the salutary song from Mary Poppins. I am sure
you recall that in the film the father was a director of a bank, and at
one point bursts into song to declaim the virtues of sound banking -
something along the lines of:
A British bank is run with precision
A British bank demands nothing less
Tradition, discipline, and rules must be the tools
them - disorder, chaos, moral disintegration
we have a ghastly mess!
Sums current events up quite nicely I think. Maybe Mary Poppins has
something to teach the financial industry !
Private equity bid for Informa collapses
If you want evidence of the fallout of the
current financial crisis on PE backed M&A, the collapse today of the
consortia bid for Informa is a pretty substantial example. More details
see FT 18th Sept 08 - Consortium
move on Informa collapses
There are two reasons for my interest in this:
- Informa had bought Datamonitor which had bought Ovum which had bought
Richard Holway Ltd. So I guess there is a tiny bit of me, and some 'Holway
People' that I feel a duty of care for, still lingering somewhere in
- as a director of a tech M&A company, this shows how the current
crisis is having a serious affect on the mechanics of doing deals. PE
houses were the mainstay of the tech M&A market in recent years. Looks
like they can't do big deals anymore. Trade buyers, likewise, have
difficulty raising the funds required (see Misys and Allscripts)
A healthy M&A Market, just like a healthy IPO market, is pretty vital
in creating a healthy overal tech market. More reason for the gloom, I'm
Applications tarnish Oracle's excellent Q1 results
Though Oracle turned in a
pretty good set of 1Q09 results last night (click here)
– indeed its best operating margins on record – this certainly
wasn’t the case for its applications revenues and especially so in EMEA.
Although new software licence revenues company-wide grew 10% (in constant
currency – ccy), new applications licence revenues declined 14% ccy,
masked by the impressive 23% ccy growth in Oracle’s database and
middleware new licence revenues. EMEA proved Oracle’s most difficult
applications market, with new licence revenues down 26%. Even in Americas
region – which you’d think would show the most pain – new
application licence revenues “only” dropped 10% ccy.
These results seem consistent with our ‘make do and mend’ view on IT
spending, i.e. CIOs reining back on non-discretionary software (new
applications) but maintaining spend in non-discretionary areas like
maintenance, or cost-saving areas like middleware (i.e. squeezing more
useful business information from existing databases). It’s just as well
Oracle’s database and middleware business is twice the size of its
applications business as we think it’s going to remain tough out there
for applications vendors for some time yet.
So which forecasts do you want? The optimistic or the realistic ones?
For nine months now, since the end of 2007,
I’ve been warning readers that our sector is in for a downturn. I’ve
warned of no real growth in 2008 and a real decline in 2009. For almost
all of that time I seem to have been a lone voice amongst analysts.
Indeed, yet again, I’ve been branded ‘too gloomy’. Those same
critics have short memories. They accused me of being ‘too gloomy’ in
the run up to the last downturn. As it turned out I was not gloomy enough.
It seems a shame that my critics do not look at my track record. Risking
being accused of 'blowing my own trumpet' (again) I think my trend
forecasting record as an analyst is second to none.
It almost seems as if people want to believe the most optimistic forecast
– regardless of the track record of the forecaster.
Getting market forecasts right really is a matter of life and death. As I
have said before, people die on the fells here in the Lake District when
they ignore the weather forecast and go out unprepared for the changing
conditions. Likewise I have seen IT companies go bust simply because they
ignore market forecasts, increaseing overheads (property, staff etc.) and
then running out of cash when the market conditions turned against them.
Any trip down the M4 will give witness to the still vacant tech parks
built in the late 1990s in anticipation that the Y2K and dot.com boom
would continue unfettered.
I won’t repeat all my warnings yet again. I won’t even repeat my lists
of the type of companies that will fare badly – and, of course, the
companies which will actually benefit from these chastened conditions. You
can re-read them in the HotViews archives anytime you want.
What, I suppose, really does ‘get me’ is that it would seem that so
many others observers seem to have suddenly caught up with this thinking.
If you read Businessweek 16th Sept 08 Tech
no safe haven or the FT 17th Sept 08 Tech
industry faces tough times (both excellent articles, by the way!) you
might be forgiven in thinking that the forecast downturn has only occurred
in the last week. Of course the Lehman collapse etc has had a detrimental
effect. As George O’Connor from Panmure Gordon reported yesterday “Matt
Bienfang, senior research director of TowerGroup estimates that “Between
Bear, Lehman and Merrill you’re talking about 4-5% of the entire
industry spend on technology."” But the downturn was pretty
clear well before that happened.
You may remember that I had a very public ‘disagreement’ with a
presenter from Forrester at the Regent Conference in Feb 08 when he
forecast ‘double digit’ IT growth for 2009. I was prepared to take any
bet at any odds for this happening but even the guy making the forecast
wouldn’t take up the challenge! This week Forrester has reduced its 2009
forecast to ‘just’ 6.1%. I’d take bets against that happening too
and I’d strongly advise readers against basing any business decisions on
that happening either.
Sorry to say this, but if I was to revise my "2% decline in real
terms in 2009" forecast right now it would be, in the words of my
critics, to make it even more gloomy.
So the FSA has banned short selling of
financial sector stocks. About time too!
I’m sure many will disagree, but I’d ban short selling across the
board. Why can’t we return to the days when investors invested in
companies because they believed in them and expected their share price to
rise? Must admit that is the only reason why I have ever invested!
If the consequence of the financial mess we are in is a return to more
simple ways, I would welcome it. Banks raising money from investors (not
on the wholesale market) and lending directly to individuals and
businesses having checked their credit worthiness and collateral.
Investors backing growth companies. Financial institutions only using
instruments that their own investors might have a chance of understanding.
It will never happen, of course, but one can but dream.
More signs of Lehman repercussions
shares fell 11% on Tuesday. In part this was because Lehman's used Misys'
Loan IQ and Summit products. But mainly because Lehman's had been the
provider of the $305m debt facility required to pay Allscipt's
shareholders in a few weeks time. After the markets closed, Misys issued a
statement saying that all this uncertainty meant it has had to adjourn the
EGM to approve the merger set for 22nd Sept 08. It has been reconvened on
Quite where? - and more significantly at what price? - that facility will
now be forthcoming in these difficult markets is clearly giving investors
Dell - Further signs of Yech spend cutbacks
Dell today issued a statement saying that
customers were cutting back further on technology spending- See Reuters Dell
sees further signs of weak tech spending. Dell shares fell 10%
(6.30pm UK) as a result.
There are many IT bell-weathers and Dell is one of them. When tough times
beckon, IT contractors and PC/laptop purchases are usually the first to be
affected. Afterall, if you are laying off staff you hardly need to buy new
laptops. Unfortunately, you can imagine warehouses full of redundant PCs
soon. But all this works through to the rest of the IT sector in time.
Events are currently moving so fast that everyday I fear the downturn will
come sooner and be steeper than I had previously predicted. And I
should remind you it was me who was only a few months back labelled as
Adecco walks away from Michael Page
has announced it will not make an offer for Michael Page
after all. This has knocked over 22% off Michael Page’s share price
today, bringing the stock back roughly to the level in July before news of
the bid hit the market.
Worth remembering that Michael Page rejected two offers at c400p a month
back as they were too low. Today Michael Page closded at 251p.
Given the current problems in the markets, we wonder how many other
potential M&A deals are likely to fall by the wayside in coming weeks
HP/EDS - the devil is in the detail
Last night’s HP US
investor briefing shed little additional light on precisely how EDS
is to be integrated into the business, or where exactly the near-25,000
job cuts are going hit. This latter point will of course take some time to
become clear as employee and union/works council negotiations get under
way. But HP says it will replace about half that number over the next
three years “to create a global workforce that has the right blend of
services delivery capability…” so I think we can all guess which
countries are going to see the bulk of that hiring!
We’ve already thrown our support behind the deal - with appropriate
caveats (see HP
completes EDS deal). But with an acquisition of this size and scope,
the devil will truly be in the detail – country by country. The UK will
be probably HP’s most challenging market to integrate outside of the US.
EDS UK has some 16,500 employees and represents about 18% of EDS’ total
revenues, a considerable part coming from UK government. The scale and
complexity of the services that EDS delivers into the UK is likely to be
orders of magnitude greater than HP’s, which tend to centre around
hardware provision, deployment and support (witness yesterday’s $660m
contract extension with BT) rather than EDS’s highly bespoke consulting,
development, integration and outsourcing services. And all this, to be
achieved in some of the most challenging market conditions we’ve seen
This is going to be hard, painful work, but we have always believed that
consolidation at the top of the services tree was inevitable. This
transaction materially changes the shape of the UK IT services market, so
we will of course be following the story very closely
Capita's acquisition of IBS referred to OFT
acquisition of local government software player, IBS OpenSystems,
has been referred to the office of Fair Trading (OFT) to decide whether
the deal warrants a look by the Competition Commission. The acquisition
was announced in June and seemed eminently sensible to us (see Capita
to buy IBS). Both players have software for local government
authorities and housing associations, but it would probably be fair to say
that Capita has the stronger suit in Revenues & Benefits, whereas IBS
does a better job in Social Housing software.
We think the issue has only arisen because of Northgate’s recent
acquisition of Anite’s public sector business (see Anite
sells Public Sector business - at last!), potentially
over-concentrating the market for local government software. We spoke to
the OFT and it appears that a decision will be made by mid-November
whether to refer the deal to the Competition Commission. They wouldn’t
say, however, what (or who!) precisely triggered the investigation. If the
deal is referred, this could add another 6 months before the matter is
resolved, one way or the other. We understand that none of Capita’s
prior acquisitions (of which there are many!) have ever gone that far.
Meanwhile, we hear it’s pretty much ‘business as usual’ (well,
relatively speaking) for both Capita and IBS, which will continue to run
independently till then. It would be a terrible nuisance if it was
eventually decided that the deal had to be revoked, more so for IBS,
frankly, than for Capita. Let’s hope that sanity – and good market
governance – eventually prevail.
Footnote - In the same vein, the OFT cleared BAE
Systems acquisition of Detica yesterday - which
seemed somewhat of a 'no-brainer' anyway.
The repercussions of Lehman's
filing for bankruptcy protection are still being felt on stock markets
today with worst hit (at least in the S/ITS sector) being the Indian SIs (TCS,
Infosys, et al). Yesterday saw their stocks hammered down
by up to 10% on the Mumbai exchange, but that pales in comparison to the
beating they got on US markets, with Satyam’s American
depository receipt (ADR) down over 14% and Patni’s down
over 11%. No respite today, either, with the Mumbai stocks falling another
5-6% as we write and this likely to be amplified when US markets open
later. The pain was felt on the LSE too, of course, with most of the
leading UK S/ITS players losing some ground, with the notable exception of
Capita, which ended yesterday over 2% higher and Morse
(much smaller scale of course) up nearly 6%. Sage dropped
nearly 3% and Misys – whose fortunes are most directly
linked to the UK banking sector – was down nearly 5%.
As we well know, but is well worth repeating, the ramifications of a major
bank failing permeate through the economy in a most insidious way. You
start with the banks and other counterparties that Lehman does (did?)
business with; those transactions are thrown into disarray, further
reducing financial market liquidity. Then there’s Lehman’s corporate
clients and its suppliers (including, of course, the IT industry), all of
whom rely on the bank for business in one shape or form. Add in the
thousands of highly paid Lehman’s employees about to be made redundant,
removing huge spending power from consumer markets. Finally, to complete
the vicious circle, the negative effect all of this has on market
sentiment, bringing down stock valuations pretty much across the board,
even for those companies with little direct exposure to the bank or the
sector, but nonetheless reducing these companies’ ability to raise
capital through their shares.
Anyone out there who still thinks a recovery is just around the corner
needs to think again – seriously. These events only heighten our
conviction that there is much more bad news to come from the S/ITS sector
as yet another round of belt-tightening causes more 'discretionary' (and
we use the term loosely) projects get deferred or shelved and CIOs become
even more myopically focused on costs. It becomes self-evident that the
'winners' (relatively speaking) in the traditional IT services market will
be those firms with lowest cost delivery, i.e. highest offshore
capability. Software players will find themselves living off their support
contracts as customers throw new licence purchases and upgrades out of
touch unless their business simply can’t operate without them. Just as
well Sage gets some 60% of its revenues from ‘subscription’ services,
most of which are annual support contracts. Misys is not far off in terms
of ‘recurring’ revenues, but is more reliant on transaction processing
(17% of revenues), though 41% of sales derives from maintenance contracts.
So, ‘make do and mend’ will once again be the order of the day. This
does not necessarily predicate customers will stick with their incumbent
suppliers, though it has to be said that long-term relationships will
clearly help. In this sense, the software players look more secure. While,
say, a bank is unlikely to change its core processing software supplier or
a retailer is unlikely to change its ERP platform, the ongoing
(non-discretionary) application management of these systems will certainly
be up for grabs, and this will favour the low-cost, large-scale, reputable
suppliers. This of itself will not be enough to protect top-tier
suppliers’ revenues, as pricing pressure becomes more intense and more
work goes offshore at lower fee rates.
Can there really be any doubt that the UK S/ITS
Phoenix IT, Fidessa and the Lehman effect
Following on from the article above
discussing the effects of the Lehman collapse on the larger, global
players and the wider UK SITS market, two of the UK's smaller players were
Phoenix IT issued a trading statement yesterday (See
IT says trading cntract with large investmement bank continues ) which
may be the first directly related to the Lehman collapse. They have a
disaster recovery contractwith an unnamed "large investment
bank" - paid until Nov 2008. If it is with Lehman and there
doesn't get renewed, that's £4m of revenue gone/to be replaced. Phoenix
IT shares lost 8% yesrerday.
George O'Connor (Panmure Gordon) pointed out in his morning note that
"Lehmans was 2% of Fidessa
revenue. Management, which presented to Panmure sales on 20 August,
reiterated that trading was unchanged when we spoke to them yesterday. As
customers pay in advance, we are not concerned that Fidessa will be
looking for payment for services already provided. Fidessa has many
revenue drivers, which remain intact. However we have long argued that IT
is late stage - not immune - to the credit crunch and investors need to be
mindful of 2009E forecasts more than 2008E."
European sun offsets UK gloom for SThree
Leading UK (and increasingly international)
IT staff agency (ITSA) SThree's Q3 trading update (see RNS
article here) showed how smart they were to diversify the business
beyond IT and beyond the shores of our fair Isle. Rampant growth in Cont.
Europe starkly contrasted with a decline in SThree's UK IT business, which
saw contractor numbers down 16% and permanent placements down 10%. Not
unexpected but another clear sign, should we need it, that we're in for a
bleak winter. The one IT skill where demand still exceeds supply is SAP -
this is something we hear from all the SIs too - which makes it even more
of a mystery why Morse could never get the old Diagonal business motoring.
We'll talk more about SThree in future commentary as we see them as,
perhaps, one of the ITSAs better positioned to face the inclement climate.
Meltdown - in more ways than one!
Yesterday, Lord Adair Turner
addressed the Prince’s Trust Technology Leadership Group
members lunch (where I am the Chairman). Currently Lord Turner chairs the Climate
Change Committee – where I guess he is responsible for avoiding
climate meltdown. Next weekend he takes on the Chair at the FSA
– where he will be responsible for avoiding Financial Meltdown. I joked
with him whether the appointment started at the beginning or end of the
weekend – as every financial crisis seems to play out over a weekend. He
seems safe until next Monday morning!
Just before the lunch with Lord Adair Turner I read the following article
in The Times 15th Sept 08 – Google
search finds seafaring solution. I - and indeed Lord Adair Turner –
were intrigued at the thought the idea of siting Google’s datacentres on
barges 11 miles offshore. The ocean’s water acts as a coolant. Waves
provide the power. Then there are the tax advantages of being moored in
international waters. Radio Caroline reborn!
I was greatly impressed by Lord Adair Turner. His background makes him
well qualified for his new crucial role at the FSA. But what really
impressed me was his enthusiasm and drive. Something which will be well
trested in the turbulent times to come.
Sage's new North America CEO has steep mountain to climb
We went along yesterday to the grand
unveiling of Sage's new CEO for its North America (NA)
business, Sue Swenson. We have to admit we were a little
surprised about Swenson's appointment back in March, with a CV listing a
long line of US telecoms roles but seemingly little experience in packaged
software. However, to give Swenson due credit, she put on an assured
performance in front of a typically critical analyst and investor
audience, presenting herself as a 'fixer of broken businesses' no matter
what the product or service. While some may remain unconvinced, we think
it only fair to give Swenson the chance to prove her credentials.
And she'll have plenty of opportunity to do so. NA is Sage's biggest
market, representing 40% of sales but 30% of profits. Although organised
into four divisions, Sage's NA operations actually break out into three
distinct businesses: core accounting and back office packaged software (c.
60% of NA sales); healthcare products and services (the erstwhile Emdeon
Practice Services, some 30% of NA sales); and payment processing services,
the balance. It's the two biggest operations that have been causing most
grief. Sage took a bit of a beating earlier in the year when a new release
of its flagship small business accounting product, Peachtree, failed to
excite customers enough to upgrade, dragging down growth. A new version
has just been released, so hopefully that gap will be plugged.
But it's Sage's Healthcare division (SHD) that has most analysts'
attention. We'll write more on this in future commentary, but suffice it
to say for now that we struggled to understand the strategic rationale for
Sage's gigantic leap (it's biggest acquisition on record) into the
ferociously competitive and unpredictable US healthcare IT market back in
August 06. SHD has struggled ever since and is still awaiting the long
anticipated announcement of a new CEO to run the business. Sage appointed
a COO for SHD just a couple of weeks ago, and meanwhile Swenson is putting
in a disproportionate amount of her time covering the role.
In laying out her thoughts after six months in the job, perhaps we were
looking for a little more 'flesh on the bones' of Swenson's strategy to
knock Sage's NA businesses back into shape. It's pretty clear she
understands the breadth, and probably the depth, of the problems. The
solutions are not so clear cut. One of Swenson's key focus areas is to
boost cross-selling between Sage's NA divisions. Now this rather rang
warning bells for us. Not that it isn't a good and noble cause - it's just
that we've heard this story from Sage many times before, but in all
honesty have yet to really see it bear fruit. Cross-selling was an
expected key benefit from Sage's acquisition of CRM vendor Interact back
in 2001. But as good as the products are, we doubt Sage has been able to
cross-sell CRM to any material extent into its core accounting base (or
vice versa). Similarly, Sage was very hopeful that Emdeon would open the
doors to significant cross-selling opportunities, but at the moment that
division has much bigger problems to sort.
The core issue is that Sage's product and service portfolio has been
largely built through acquisition and, until relatively recently, there
has been little attempt made to integrate those that make most sense to do
so. Of course it's not just a product issue. It's the distribution
network, the sales channels (internal and external) and so many other
links in the chain that have to be reconfigured to make cross-selling
work. This has defeated many other players before, both in software and
services, so we shouldn't underestimate the scale of the mountain that
Swenson has to climb.
Obviously we want to see Swenson - and Sage - succeed. After all, Sage is
the last remaining true UK-based large-scale software vendor, and has
generally proven a stalwart stock for long-term investors. But the world
has changed for 'purveyors of point solutions' and arguably Sage was a
little late to recognise the market shift. We know management are on the
case and we will closely follow their progress.
Autonomy re-enters FTSE100
Enterprise Inns, ITV
Warehouse will leave the FTSE
100 and be replaced by mining company Fresnillo,
satellite operator Inmarsat,
software company Autonomy and transport company
I rather jumped the gun on this in my 17th
Aug post - Autonomy
to enter FTSE100!
I also wrote a short history of
UK SITS companies and the FTSE100.
Worth re-reading as a salutary
tale of what happened in the last bubble.
I do hope that Autonomy is in a different position today. Autonomy has the
right products for today's environment - helping
with their compliance issues. But they are already very richly valued and,
without wishing to be a party pooper,
Autonomy has got into the FTSE100
this time because of the considerable reduction in the values of
practically every FTSE100
constituent. One small bad news item could hit Autonomy hard. If/when
markets recover, Autonomy is going to have to go some to retain its FTSE100
Home Office fires PA Consulting
If 22nd August was not a good day for PA
Consulting – See PA
Consulting in the news for all the wrong reasons – then today was
even worse. Just in time for the lunchtime news bulletins, it was
announced by Home Secretary Jacqui Smith that PA Consulting will lose the
£1.5m, 3 year deal with the Home Office after it mislaid a computer
memory stick containing the names, addresses and expected release dates
The release said:
All PA Consulting's contracts with the
Home Office - worth £8m a year – “will be reviewed, along with those
signed with other firms”.
The Cabinet Office will also launch a review of all contracts signed by
the Government with private companies to ensure they are
"appropriate", Jacqui Smith added.
"Our investigation has demonstrated that while the information was
transmitted in an appropriately secure way to PA Consulting and fed to a
secure site, it was subsequently downloaded on to an insecure data stick
and that data stick was then lost."
Cancelling the contract will not cost the taxpayer and any expenses
incurred will have to be met by PA Consulting, she added.
Apart from the very serious effect that this will have on PA Consulting
– its reputation, finances and possible future order book – this tough
action will send shockwaves through the head offices of other IT services
players with big HM Government contracts. Indeed, I’d love to be a
fly-on-the-wall at EDS right now as they have been involved in not too
dissimilar data losses in the past.
But, at the end of the day, HM Government can hardly fire all its IT
The initial view might be that these data losses are basic, simple human
error. something akin to a Cabinet Minister leaving papers on a train. I
don't really buy that. IT advances have made it possible to put gigabytes
of data on a cheap and easily mis-placable memory stick. But IT advances
have also meant that encrypition and other basic security should be the
But, let's not be too ‘holier-than-thou’ either. How easy would it
really be for an employee in your company to take important data from your
computer systems? I’ve witnessed many examples of employees leaving with
full contact and customer lists and copies of research.
Intellect Industry lunch 7th Oct 08
My dear friend Tina at Intellect has asked
me to mention their up-coming Industry Leadership Lunch on 7th Oct 08. The
speaker this time is John Pluthero, Executive Chairman, Cable
& Wireless Europe, Asia and US on the theme “The dark ages
are over...the Renaissance is here!More details on www.intellectuk.org/industrylunchoctober
These lunches are sponsored by M&A
specialists - Regent – where I am a director.
If you want to attend, please email Tina at firstname.lastname@example.org
Forecaster takes Reality Check
Many readers will remember how
I very publicly expounded my amazement at the presentation at the Regent
Conference in Feb 08 from Brad Holmes, VP at Forrester. He
predicted that US IT spend would be back to double digit growth in 2009
and 2010 after slipping from 6.2% in 2007 to 2.8% in 2008. In itself, the
2.8% growth in 2008 is half what Forrester was forecasting in late 2007. I
very publically challenged both Brad, and anyone else in the audience, to
a bet that double digit IT growth would NOT occur in 2009/10. Nobody was
prepared to take bet against me. See my 7th Deb 08 post Buyer
beware the forecasters.
It wasn’t the first time that Forrester has amazed me with their “Don’t
worry the sun will be out again soon”. EG in 2002 it was is "double-digit
growth will resume in 2003". The actuality was 3%. They then
predicted it would resume in 2004. That didn't come to pass either. It is
also worth looking at the forecasts they made in the late 1990s for growth
in the early years of the new millenium.
I suppose, what really bugs me is that at these times I seemed to be in
open warfare with many in the industry - when I turned 'bearish' in 1998
with my Y2K Lockdown forecasts for 1999, in 1999 for my "The
headache will not go away with the Alka Selzers on 1st Jan 00" and
again in 2002 with my "IT's all over?" speech and
You really do get the feeling that many in the industry prefer to believe
the forecasters who tell them what they want to hear –
with little regard for what is really happening or the track record of the
Anyway, it looks as if Forrester has finally taken a reality check and, I
assume, is no longer making such crazy growth forecasts for 2009. See FT
9th Sept 08 Tech
Sector. “Research released by Forrester on Tuesday found that
43% of large global companies have cut IT budgets this year, adding to
mounting gloom…. A recovery in the sector will not come until demand
shows clear signs of reviving. Historical trends suggest that may not be
before the second half of 2009 at the earliest.” A more detailed
review of the Forrester research from Marketwatch Impact
of economic downturn in IT spending should you still think their
research has any credibility.
"Reports of my death are greatly exaggerated"
God Steve Jobs came on stage on Tuesday
with "The reports of my death are greatly exaggerated"
writ large on the screen behind him. If the health of one company and its
CEO were intricately
connected, so it is with Jobs and Apple.
Unfortunately, although Jobs had some nice product evolutions to
announce - thinner iPod
Touch, new iPod
rainbow colours and a much cheaper iPod
shuffle, the announcements didn't have any killer qualities. Apple shares
declined 4% by the time Jobs got off the stage. That makes a 25% fall YTD,
showing that (see Monday post) "Eventually
even Apples fall" in these difficult economic times.
still aims for 7.2% margins
"disappointing" FY08 results (for the full text of the
results announcement from Morse Click
here) were little surprise following recent profit warnings, and serve
to highlight the tremendous challenge facing Executive Chairman, Kevin
Loosemore, to restructure the business to reach its elusive 7.2%
medium-term margin target (see our 8th July comment Morse
restructures … for sale?). Indeed, with just a couple of months in
the hot seat, Loosemore gave a very frank assessment on Morse's prospects,
commenting “I don't know what we can deliver”. Nevertheless,
he and newly appointed CFO, Mike Phillips (ex-Microgen) are sticking to
the 7.2% margin target, though they see it more as a milestone than a
Frankly, the number is now mainly symbolic as Morse is most unlikely to
remain a mini-conglomerate of disconnected SITS businesses for too long.
Loosemore’s job is to knock the individual businesses into shape and get
the best possible price for each of them as, frankly, they're not likely
to go as a “job lot”. Restructuring Morse into five divisions is
probably only a first step. If the aim of the exercise is to create
focused, healthy niche businesses, then the starting point for each could
best be described as 'small but imperfectly formed'. For example,
Business Application Services (BAS) (essentially, ex-Diagonal) is itself
five different services businesses operating in multiple geographies, with
seemingly little in common – and all this to generate <£50m in sales
with, to all intents and purposes, zero profit. Loosemore has a steep hill
to climb to bring Morse to 7.2% margins. Here's some 'back of a fag
packet' estimates you can try at home. Suppose Morse was already a
7.2% margin business. On its c. £250m of revenues we'd be looking at £18m
OP. Let's say Morse's revenues split roughly 50/50 between products and
services (for the pedantic, actually it’s 53/47). Now, management
doesn't disclose product operating margins, so what would you like to use?
How about 1%? After all, Computacenter's total operating margin is around
1% and that includes services. That leaves nearly £17m of OP to be
generated from Morse's services, or a 13.4% margin. This is more or less
the margin for Morse's investment management consulting business alone,
which by the way is only 7% of group revenues. Even if they double product
margins (dream on), they'd need to generate an average 12.4% margin from
the services businesses to reach the 7.2% group average. This is
Capita-land margins, not reseller-land. Obviously, the “7.2% Morse”
that Loosemore has in mind will have a very different structure than
We have respect for both Loosemore and Phillips and wait with great
anticipation for the next steps.
Footnote – Back in 2004, when Mike Phillips was FD at
Microgen, there was a fight to buy SAP consultancy, Diagonal.
Morse ‘won’ with a £50.2m cash and shares bid. Morse’s share price
then was 134p. Today Morse’s share price is 38p and the whole of Morse
is ‘worth’ just £51m. Conversely, Microgen (which hasn’t managed
any big acquisitions since) has seen a more modest decline in its share
price from 60p in mid 2004 to 49p today. To put both those declines into
context, FTSE SCS Index is 13% higher today than in mid-2004. Probably a
futile game to play the “What if Microgen had won and Morse had
lost…?” One suspects the acquisition would have been a poisoned
chalice for both companies.
for BPO acquisitions to be tested again
The news that US banking software and
services player, Metavante, is to sell its 20% stake in
Indian BPO, Firstsource (see FT 8th Sept 08 - Firstsource
sale may spark sector shake-up ) should reveal an interesting insight
into the appetite for BPO acquisitions by private equity firms and
(particularly) Indian SIs alike. The stake, currently worth some $80m
(before any M&A premium), would be small change for these players,
though pales in contrast to the mooted $800m that BT has
valued its stake in Indian BPO, Tech Mahindra (see
Reuters 8th Sept 08 - PE Firms
eye BT's stake in Indian outsourcer). Firstsource generated just under
$300m in sales last year (to 31/3/08) with 11% margins and gets nearly 30%
of its revenues from the UK, though this was around 45% a year ago.
Among the PE 'likely suspects' FT put in the frame for Metavante's stake
are General Atlantic, Blackstone and Warburg
Pincus. The most prolific BPO investor among these is GA, with
stakes in ex-GE Indian captive, Genpact, India SI Patni,
"our very own" Liberata and Xchanging,
US-based HR players, Hewett and TriNet,
and Emdeon Business Services, the firm providing
transaction processing services for Sage's healthcare division (the
erstwhile Emdeon Practice Services). Blackstone holds a stake in
India-based Intelenet and WP in WNS, the
ex-BA captive which recently scooped a $1bn megadeal with UK insurer,
Aviva. We would fully expect the top-tier Indian SIs to be sniffing around
Firstsource too, though they'd have some work to do on the margins, which
vary between the players, but can top 20% (e.g. Infosys, HCL).
Both these players have made BPO acquisitions, Infosys taking out Philip's
F&A captive, and more recently, HCL buying Liberata's financial
The question we'd ask is what the PE firms really hope to gain from their
BPO stakes over and above investments they could make in other sectors?
There's little sign of any integration plays (i.e. knock a few of them
together and make a mega-player) so they must be relying on value
appreciation, which in the current environment could be a long time
coming. We'll take a closer look at this issue in future commentary.
Whatever happens to the Metavante stake, we see little to concern UK BPO
leader, Capita. It's interesting, isn't it, that Capita,
with still relatively little offshore delivery, regularly delivers 12-13%
margins, so you'd have to ask what is Firstsource (and some of the other
Indian BPOs) doing wrong?
Footnote - Any difference readers might detect in the
'style' of the article above will become apparent in a couple of weeks
Race for MyTop wide open
When I wrote – Chrome
– Another brick in the Wall – last Wednesday, I had merely read
the announcements but I hadn’t downloaded Chrome or used it.
I now have and, not only am I disappointed, but I’d actually not advise
any readers to change browsers –
well, not yet anyway. Installing Chrome is simple and quick. The
display of thumbnails for your ten most visited sites
looks very pretty. But, in practice, I’ve got hundreds of bookmarks all
arranged into various topics. Chrome doesn’t handle that whereas as
Internet Explorer does.
When I viewed a video using Chrome I got a ‘juddering’ replay –
something I don’t normally get. The
other downside I found is that one of the stated benefits of Chrome is
that it keeps the sites you have visited open so that you can immediately
switch back to any of them. But, if those sites use Flash they will all be
operating even though you are not looking at them; which really can start
to slow your system down.
The one thing I was really looking forward to was the Web services launch
facility – Google Gears. But all it does is put a shortcut on your
desktop – not within the Chrome webtop. For apps, I’ve been putting
shortcuts on my desktop for years. I suppose it is a progress to now do it
for Gmail, Facebook etc…but it’s hardly the mega advance I expected
towards the achievement of my Mytop
I was also very interested to read all the comments about the upcoming
launch of Google Android (which shares the same engine as
Chrome) by T-Mobile on an HTC handset next month. “They will land
with a fizzle rather than a bang”. See FT 6th Sept 08 - Google’s
Android fails to connect with critics and Phone
will launch with big goals but the buzz is missing. I’d hoped that
Android might be a step towards Mobitop
– where MyTop meets is Martini Moment.
I believe that the biggest prize up for grabs is for the company
who creates the most effective Mytop and goes on to apply this to
all devices, including Mobile Internet Devices (MobiTop), TVs, smartphones,
Microsoft won the Desktop. Google won the WebTop. But the race for
the prize for winning MyTop is still wide open. I agree with
Steve Ballmer of Microsoft here "The real question is not
what’s going to happen but who’s going to win and how it’s going to
Footnote - There are many articles this weekend
celebrating Google's Tenth Birthday. Google
spins world wide web in the Sunday Times is as good as it gets. Any
reader of HotViews over the last few years will recognise the themes and
sentiment! Comments like " this brave new world of cloud
computing will mean all your stuff will be accessible all the
time, everywhere. Updates will be automatic and free. It’s a revolution
Just remember you heard it all here first!
"Eventually even Apple's fall"
A year ago I introduced you to the Beer
Syndrome. The Beer Syndrome is where, when consumers cut down on
expenditure like eating out, holidays etc, they maintain (even increase)
their expenditure on their entertainment (ie consumer electronics) at
home. It was hailed as the reason why Tech would be a safe haven
in the gathering storm.
However, I made the point in Nov 07 that the theory only worked if the
downturn was ‘mild’. Putting it cruelly, I said that you could only
stay home watching the 50inch plasma if you still had a home to go home
Last December I wrote a piece entitled Be
Worried, Very Worried. I reiterated that it was consumer tech that had
been driving the tech sector ever upwards. Not just Apple and the iPod or
Nintendo and the Wii, but everything that surrounds, supports and carries
such consumer tech. Cisco would be a good example of a
company heavily dependent on what consumers do . I warned that, if
consumers stop buying tech, our whole industry was in for a seriously bad
I had little evidence to back up the concerns I expressed nine months ago.
But the evidence now is pretty overwhelming. Results last week from DSG
(Owners of Currys, Dixons and PC World) indicate Declining
demand across Europe and a marked slowdown across the whole consumer
electronics board. PC sales were particularly badly hit and this was
reemphasised by Dell last week too.
Then on Friday came perhaps the biggest (because it was relatively
unexpected. See Nokia
warning surprises investors) warning of all from Nokia which wiped 10%
off their share price.
Let me quote from the Lex Column in FT (6th Sept 08) – Nokia’s
message - which concludes as follows:
"This is just the latest sign of a broader slowdown in consumer
technology spending that investors had imagined would not happen. It
began in the US, spread to Europe and, post-Olympics, has hit Asia. It
has also spread up the food chain - from computer chip makers to
computer makers themselves, and now handsets. In tough times, perhaps
that new touch-screen gizmo, or even that new iPhone, is not so
essential after all. Eventually, even Apples fall."
I am increasingly concerned that the industry I know and love is Living
in Denial…again. I’m a keen fell walker. Fell
walking is not dangerous but some people die doing it – like the poor
lady who died when she fell off Sharp Edge last weekend. They normally
come a cropper because they either ignore or don’t even look at the
weather forecast. They die because they are ill-prepared and
I feel our industry is like the couple I met on FairField a few weeks
ago dressed only in trainers and a T-shirt with no map. It was sunny
when they had started out but now it was raining and the mist had come
down. They were lost and actually in some danger.
In the next 12 months (at least) I am now pretty certain that the
weather is going to be horrid. You can survive but only if you are well
prepared and equipped. Please don’t – like too many people I talk to
- venture out believing that the sun will forever shine on you.
New appointment at Alcatel-Lucent
to have been a day for me reporting new appointments (see below)
Ben Verwaayen has been appointed as the new CEO of Alcatel-Lucent
three months after he stepped down as CEO of BT.
I got to know Verwaayen well at BT and liked him. We had some very
'robust' conversations which is exactly the way I like them. He was a keen
reader of my musings and I often got a comment from his Blackberry if he
disagreed with any of my comments. I had missed him!
Verwaayen is well qualified for the role as he originally joined BT from
Lucent. Alcatel-Lucent faces the same kind of problems that Verwaayen
faced when he took on BT - except I think Alcatel-Lucent is probably an
even greater challenge.
Very good profile Ben Verwaayen profile in today's FT - Verwaayen
has track record in enforcing change.
Chrome - Another brick in the wall
will, undoubtedly, see many articles about Google's
launch of Chrome. It is not my intention, or indeed job,
to duplicate the details of the product. But I do think it is another
really important step on the way towards how we will all ultimately use
IT. That is the main theme of my 'Revolution'
presentation at the end of this month.
Readers will already know that it is my contention that ultimately all
software will be SaaS,
Cloud Computing will be ubiquitous
as will the use of Mobile Internet Devices (MIDs).
Whether the delivery mechanism for entertainment and information is satellite,
land line, WiFi,
3G or whatever or whether
the access device is a conventional TV, PC, laptop or MID will be
irrelevant to consumers. A very personalised 'YourIT'
will be the expected norm as will the MobiTop
that I expounded last year. See my December 2007 post - MobiTop
experiences its Martini Moment.
Up to a decade ago the Enterprise was the driving force. Now it's the
consumer. What the consumer uses personally will be demanded by those
consumers in their work environment. We have already seen consumers
driving the way IT is used in Enterprises. Many Enterprise suppliers,
particularly the software vendors, don't really like SaaS
and the other advances I have outlined as it changes their historic
financial model and increases
churn. But the trend is unstoppable.
Google Chrome is another step along the road
I have outlined above. Chrome is far more than an internet
browser. It is much more of a new operating system for the IT environment
I have outlined above. Even more significantly it is the same engine as
that used in Android, Google's
platform for MIDs.
Readers will also know that I was against the Microsoft/Yahoo linkup from
the very start. Mainly because it did not address the real threat to the
future of Microsoft. The real threat comes from the trends I have outlined
above. In no way am I forecasting the demise of Microsoft - I'm too old
and canny an analyst to do that. But I have to say that they seem to be
constantly playing 'catchup' right now with rivals like Google and Apple
leading the way forward.
Microsoft can hardly claim that they have been caught unawares. After
predicted that SaaS
would overtake conventional licence sales at the 1996 Regent Conference.
The only thing I got wrong was the date - I had forecast "within
Let me leave you with a quote I found;
"Within the next five to seven years there will be no one
left in the software business whose applications haven't transformed into
a service". Sounds like Holway
again doesn't it? But you'd be wrong.
It was Steve Ballmer
(now CEO at Microsoft) speaking at the Gartner
Group Conference in October 1999.
Not a good day for Liberata
Bob Gogel, the CEO of Liberata
who also happens to sit on the Prince's Trust Technology Leadership Group
committee that I chair, probably would not rank today as one of his best.
Last year Liberata displaced Capita to win the £80m/5
year contract to administer the Education Maintenance Allowance (EMA) paid
to students. "New software that was supposed to replace paper
application forms with an online system but this had to be abandoned
because it was too slow" Source BBC News. Telephone problems
also meant that applicants could not get hold of anyone. Liberata, is to
meet all the costs of dealing with the delays and would be hit with a
penalty for late delivery of the project.
It's yet more misery for HM Government and Ed Balls in particular who had
to deal with the SATs debacle only last month. But, yet again, the IT
industry's image is tarnished in the eyes of the public - in this case
Liberata is majority-owned by Private Equity firm General Atlantic. In
sold their Financial Services BPO operations to Indian HCL. Liberata
reported revenues of c£207m in the year to 31st Aug 07 – which would
put their continuing non Financial Services revenues on around £180m. In
the BPO world that is pretty small so problems on one of, if not their,
biggest BPO contracts will really hurt. As I said at the time "The
sale to HCL probably increases the chances of a sale of the rest of
Liberata. Failing that they will need to ‘bulk up’ pretty quickly –
which not be the easiest of things to do right now."
New appointment at Unisys
You may remember that I reported back in
June - Logica
fills McKenna's shoes - that Unisys Europe head
Jean-Marc Lazzari was to replace outgoing ex-COO, Jim McKenna as head of
its new Outsourcing Services division. I'm afraid I wasn't too kind about
Unisys' outsourcing record and Lazzari was kind enough to comment giving
I've just been informed that Matti Viljo has been appointed to fill
Lazzari's shoes as head of Unisys Europe and will be based in
Schiphol-Rijk, Netherlands. Matti joins Unisys from TietoEnator where he
was executive vice president and president of Banking and Insurance. Viljo
also spent eight years with Oracle as MD of Oracle Finland.
Share Indices in Aug 08
It was yet another positive month for UK
quoted SITS companies. The FTSE
rose by 6.2% which means that we are in 'positive territory' to the tune
of 3.7% for the YTD.
with a near 13% decline in the FTSE100
and an 11% decline in the NASDAQ YTD. As you can see from the table below,
sector has shared in the gains - for once -albeit in a much more modest
manner. Even Europe was positive.
It was, of course, acquisition activity which, yet again, boosted the UK
SITS stocks with Netstore
and Axon both recording 30%+ gains as a result of bids.
Although, to be fair, Logica
wasn't too far behind with an excellent c25% gain on positive reaction to
Although it really is great to see the sector bucking the trends, I do
have an increasing feeling of unease. M&A is a 'one-off' benefit. It
will be much more difficult to repeat when all the good candidates have
gone! I also have a feeling that directors and analysts alike are 'Living
in Denial'. There seems to be an accepted view that SITS will
buck the recessionary
trends - I do not buy that. Although I do believe that the sector is much
better positioned than in previous downturns and that some SITS companies
might actually benefit in a slowdown, if Alastair Darling's outlook comes
to pass (for once I agree with his views...) then SITS just must be
affected too. It will suffer all the more if companies are complacent and
Share Indices in Aug 08 - Table