Industry news

Last week IBM announced a strong set of Q3 results, with no apparent big blues from the combined chill of the credit crunch and the downturn – despite the company's exposure to the financial services sector.

Net income was up 20% to $2.8 billion, and revenues by five percent to $25.3 billion. The services and outsourcing sectors of its business seem strong, but the key lessons are the diversification, spread, and visibility of its business.

“This is a tough environment, but we were ready for it,” said IBM's chief finance officer (CFO) Mark Loughidge. “We are executing a play that we called some time ago. It has two major elements. First, we have been investing to capture opportunities in the emerging markets. You can see the benefit in our results again this quarter with double-digit revenue growth and good returns.

“Second, in the more established markets our goal has been to drive productivity. We’ve been systematically attacking our spending base, taking out infrastructure costs, reducing our cost and expense levels, and improving our efficiency.”

Because of this, IBM claims to have a more efficient structure than many of its competitors, and than it had before. “In the third quarter, when the revenue growth in the major markets slowed, we had great margin performance and hit our profit objectives,” confirmed Loughridge.

As many analysts have pointed out, IBM has also struck a balance between annuity and transaction-type businesses, with the former including its outsourcing, maintenance, and most of its software deals. As a result, the company has the two ingredients missing from many companies' balance sheets as the credit markets have dried up: long-term visibility and liquidity.

Its geographic spread has also inured it to the westerly depression of the past 12-18 months. Europe had the strongest performance, up four percent at constant currency, while the Americas was up two percent, and Asia Pacific up one percent.

“In the more established markets that we address through our major markets organization we are uniquely positioned to assist enterprise clients with high value transformational projects as they retool for efficiency and cost savings,” continued Loughridge.

“Now in the emerging markets, we’ve been investing heavily to capture opportunities to build out public and private infrastructures. Our growth markets organization grew 13% as reported and 10% at constant currency, representing 19% of IBM’s geographic revenue in the quarter.

"The BRIC countries, a subset of our growth markets, grew 19% as reported and 12% at constant currency with strong double-digit growth in Brazil, Russia and India. However, our results in China slowed to three percent growth, down four percent at constant currency.”

With the public sector and industrial components of its business doing well, Loughridge turned his attention to financial services, which just a fortnight before had seen many analysts forecasting doom and gloom for IBM's Q3 figures – the result of the short-term, muddy and alarmist thinking that stalks many a downturn and contributes to hysteria.

“I’ll remind you that about 60% of our financial services revenue is in annuity businesses,” said Loughridge. “US revenue was down one percent, slightly better than our second quarter performance. However, outside the US, where we generate over 75% of our business, revenue was up 10%, or four percent at constant currency. Globally, we had growth in banking and insurance but financial markets revenue was down at constant currency.”

Loughridge then pointed to a New York Times (Bloomberg informed) timeline of buyout and takeover activities of major financial institutions in the US and Europe since the middle of last year. The amount of revenue IBM generates from the 21 institutions listed, he said, represents only about one percent of IBM’s total revenue.

“Let me tell you what we’re seeing in the marketplace,” said a bullish Loughridge. “There are a lot of enterprises dealing with a tough environment, looking for ways to reduce costs, conserve capital, and in some cases just to survive so there’s a lot of good services opportunity out there. But frankly, there are also many deals that have very unattractive economics, and while these may be interesting to some of our competitors, they’re not to us.

"It’s not hard to drive revenue in a services business on a weak book of business. But we’ve built a strong and profitable business and we’re not going to put that at risk just to show a higher level of signings.”

Eclipse Aviation, a manufacturer of super-light jet aeroplanes, has signed a new IT outsourcing contract with CSC. The new agreement has a five-year base period and three one-year options, bringing the estimated total eight-year contract value to $106 million.

Under the contract terms, CSC will manage Eclipse Aviation’s applications development and maintenance, and IT infrastructure including, midrange computers and desktops, help desk operations, IT security, engineering computing, voice and video telecommunications, servers, and local- and wide-area networks. CSC will provide these services for Eclipse Aviation’s operations globally.

CSC is one of the world’s largest IT outsourcing companies and it’s the leader in the aerospace industry,” said Ray Barratt, chief information officer of Eclipse Aviation. “Eclipse needed an IT company that is global and has a plethora of SAP resources to support our company growth and effective use of IT. CSC came out on top both from a technology and a partnering viewpoint.”

Indian technology companies are on the acquisition trail and are looking for British IT businesses to help them gain a foothold in Europe, according to advisers Clearwater Corporate Finance.

The company, specialists in the outsourcing industry, is currently conducting M&A research in the country following last week’s £441m bid by HCL for British Axon.

The Clearwater research will encompass all the big names including Infosys, Wipro, TCS, Mindtree and Patni amongst others.

Clearwater’s technology analyst Emma Leathley says: “Over the past couple of years we have heard repeated assertions that Indian technology businesses were on their way over to the UK but the mass landing has so far failed to materialise. We have seen big acquisitions in pharmaceuticals, automotive and steel but not in the technology sector.

“All that is about to change. Prices have returned to more realistic levels and Indian companies are keen to take advantage of this to acquire British IT firms that can expand in the European market in line with their long-term growth plans. The HCL Technologies deal could be the first of many.”

The number of new outsourcing contracts awarded was down significantly for Q3 2008, according to TPI’s quarterly Index. And, while the third quarter is usually the weakest for new contract signings, the number of ITO contracts awarded fell dramatically compared to the first two quarters.

The index, which reflects commercial outsourcing contracts valued greater than US$25million, also indicated a quarter-on-quarter decline in total contract value (TCV) and annualised contract value (ACV) for the first two quarters of the year.

Q3 also only saw one mega deal (contracts with TCV greater than $1 billion) signing, there was also a dearth of new mega relationships (contracts in which the ACV is $100 million or greater).

However, in spite of softness in the third quarter of this year, the 2008 year-to-date numbers and values of outsourcing contract awards are exceeding metrics of 2007. Compared with last year at this point, the number of contracts awarded has risen almost 5 percent and TCV has grown nearly 19 percent.

“What we are seeing in the third quarter and year-to-date metrics represents the results of outsourcing initiatives begun in more stable times – compared to the anxiety of recent weeks,” stated Brian Smith, Partner and Managing Director, Financial Services Operations, TPI North America. “The continued softness of those numbers reflects early recessionary indicators seen in the beginning of the year. But the uncertainty and unrest of today’s global economic climate has yet to fully affect the outsourcing industry that serves the Financial Services sector.”

In the third quarter, 128 outsourcing contracts valued at $14.4 billion in TCV and $2.8 billion in ACV were signed in the broader market. Compared to the second quarter of 2008, the number of contracts dropped 22 percent. The TCV and ACV both dropped 50 percent quarter-on-quarter. While third quarters are typically the weakest quarter of a year, the third quarter of 2008 was lower than historical average by almost 20 percent.

As I write the credit crunch seems to be tipping over into a near-global recession, with perhaps only China and – ironically – Iraq escaping the worst of its effects. In China growth has fallen by 40%, but that is from several years of double-digit expansion.

Despite all this, business process outsourcing (BPO) analysts NelsonHall says that BPO total contract value (TCV) has grown by 28 percent in the past twelve months.

While Q2 2008 was less profitable year on year, there was an overall 13 percent increase in contract signings in commercial and civil government sectors for the first 9 months of 2008, says the company.

Other findings were also mixed. The number of new BPO contracts has declined, but BPO contracts valued at over $100 million have increased in number, while the average value of the top 20-50 deals has increased by over one third, partly driven by large deals in the insurance sector.

BPO contract value in emerging economies has grown faster, at 31 percent, than the BPO contract value in mature economies (28 percent). However, while BPO is becoming increasingly important to support domestic activity in growth markets, it remains a small portion of overall BPO activity.

The two sectors that usually dominate new contract activity, financial services and government, have increased their share of TCV from 62 percent to 72 percent. Unsurprisingly, government BPO activity in both the US and the UK has overtaken the financial services sector, where insurance remains a strong growth area, but banking BPO has fallen off significantly.

At the moment, the banking sector needs more dramatic remedies than BPO can provide,says NelsonHall. However, BPO is likely to be an increasing part of the solution in the medium-term.

Elsewhere, the telecom sector has been very active in BPO recently and activity is up in both transportation and healthcare.

The manufacturing and retail sectors have recently seen lower levels of BPO activity. These sectors, like the banking sector, face some immediate rethinking of their wider strategies but, similarly, are likely to turn to greater use of BPO in the medium term.

The Paris Chamber of Commerce and Industry (CCIP) has chosen Atos Origin, a leading IT outsourcing provider, and Selligent, a CRM provider, to redesign its Customer Relationship Management (CRM) system.

This strategic project is designed to support the CCIP’s efforts to improve its response to the needs of the companies in its region. The new CCIP system will help to serve the 380,000 companies in the Paris, Hauts-de-Seine, Seine-Saint-Denis and Val-de-Marne départements.

Under the terms of the contract, Atos Origin will manage: implementation of the application; implementation of CRM governance; formalisation of internal processes; change management; implementation monitoring; training of the 650 users; post-development maintenance; transference of skills to the CCIP team on completion of the development.

Guy Scheidt, Deputy Project Manager at CCIP, commented: “In considering the performance and quality of the services offered by the CCIP, we realised the need to focus our efforts on our customers’ expectations. Atos Origin and Selligent demonstrated their ability to listen and analyse and to provide us with a very competitive response, in terms of services (consulting, training, implementation as well as operational maintenance of the future CRM solution) and a rational and progressive implementation according to the requirements expressed.”

Financial terms of the deal and length of contract were not disclosed.

The Indian Government’s Ministry of External Affairs (MEA) has a signed a deal with TCS to deliver its Passport Automation Project - the largest mission-critical E-governance project valued at over Rs 10,000 million (almost £12 million).

Under the terms of the agreement, TCS will be responsible for the digitization of passport services including: online filing of applications and intelligent character recognition; biometric capture; photography, payment and verification and issue of passports. A call center will also be established to help applicants in the process of dealing with a passport transaction.

On completion of the project, the Ministry expects the process of issuing a new passport to be completed in three working days, while passports issued under the Tatkal scheme will be dispatched on the same day.

Shivshankar Menon, Foreign Secretary, Ministry of External Affairs, commented: “The Passport Seva Project, based on a public-private partnership model, aims to provide passport-related services to Indian citizens in a speedy, convenient and transparent manner. The sovereign and fiduciary function of granting and issuing passport remains with MEA and TCS will be our technology and operations partner in this project.”

But it TCS expects to have the system ready for pilot operation within 19 months. The countrywide roll-out of the Passport Automation Project will take place within six years and the Government will open 77 Passport Filing Centers across the country in a phased manner. TCS will have end-to-end responsibility of implementing this project.

Telstra, Australia’s largest telecommunications provider, has awarded Accenture five-year, multi-million-dollar IT outsourcing contract to maintain its customer care and billing platform, which Accenture helped design and deploy.

Under terms of the contract, Accenture will be responsible for the ongoing management of the platform and ensuring that it operates effectively through further migrations and software releases.

Steve Willis, managing director of Accenture’s Communications & High Tech practice in Australia, said, “Telstra has a relentless focus on customer service and required care, and its new billing platform will provide the company with a competitive advantage now and in the future. This agreement is the opportunity for us to continue our work as a key transformation partner with Telstra, helping introduce new products, training techniques and advanced technologies.”

Accenture led the development and implementation of the customer care and billing platform as part of Telstra’s business transformation program. Telstra has migrated more than 5 million consumer customers and 8.5 million services to a new platform, processing hundreds of thousands of orders and millions of bills, with no increase in complaint volumes.

Co-operators General Insurance Company, the largest Canadian-owned private sector property insurer, has extended its data centre outsourcing contract with CGI until 2015. The seven-year contract is valued at approximately US$110 million.

Under the contract, CGI will continue to provide data center services which include help desk support and application hosting services for applications critical to The Co-operators. CGI has served Co-operators General since 1997 and provides a number of services and solutions to several companies within The Co-operators group, including The Sovereign General, l’Union Canadienne, and HB Group Insurance Management Ltd.

“CGI has worked closely with The Co-operators for more than a decade to develop a responsive and flexible relationship to meet our evolving needs,” said Vivien Fong, Senior Vice-President and Chief Information Officer, The Co-operators Group. “ The renewal of this relationship represents a commitment by both organizations to work collaboratively in the spirit of partnership to achieve our mutual objectives.”

Infosys will not submit a revised offer for Axon, the SAP consultancy group. Infosys' bid currently stands at 600 pence per share but it is competing for the company against a 650 pence per share offer from HCL, a competing ITO provider.

In light of HCL's more attractive offer a statement was released from Axon announcing the withdrawal of its recommendation of Infosys’ offer and its intent to unanimously recommend the higher offer when made.

Infosys replied with its own announcement stating that "After careful consideration, the Board of Infosys has concluded that it will not increase the price of its original offer," The statement continued, "Infosys has a fast-growing and profitable SAP - led business transformation practice. The company is confident that its decision will have no material impact on its strategic plans."