Critical. Authoritative. Strategic.


CBR is proudly produced & published
by Technews
Issue Date: May 2007

IT services a fragmented supplier marketplace

May 2007
Nick Mayes

The world's 50 largest IT services vendors accounted for less than half of total market expenditure last year, according to the latest rankings from ComputerWire.

The top 50 suppliers made combined revenue of $293,7bn in their most recent reported financial years, which was up 7,3% on a comparable level of $273,7bn in the previous year. The rankings painted a largely positive picture of the services sector, with most of the vendors enjoying growth driven by renewed spending on project-based services such as consulting and integration, as well as global sourcing initiatives.
According to our parent company Datamonitor, worldwide spending on IT and BPO services rose 8,3% to $557,4bn in 2006, which means that the top 50 suppliers grew at a slower rate than the overall market. However, it is misleading to generalise as individual growth rates among the top 50 varied widely, as some of the industry's established players focused on bottom-line improvement, while offshore sourcing specialists continued their rapid rise to prominence.
The top 50 vendors held a combined market share of 49%, which highlights the fragmented state of the market. M&A; activity among the top 50 players is clearly accelerating. This week Fujitsu announced plans to acquire the 44th largest vendor, GFI Informatique, while Getronics, Atos Origin, and ACS remain the subject of takeover speculation.
But John Tilley, managing director of Perot Systems' European business, does not expect the IT services industry to see the same rationalisation that has taken place in more mature supplier market places. He said: "We will only see the sort of consolidation that has happened in, for example, the motor industry, when the big suppliers really focus in on two or three specific service lines. At present, they are trying to be all things to all men, and are offering 100 plus different services in which they claim to be specialists."
IT services remains an industry where scale is important. Although a lot of clients are increasingly looking to work with a number of best-of-breed suppliers, rather than outsourcing to a single vendor, they also want their vendors to be able to provide them with the cost benefits of global sourcing and to deliver a uniform service across multiple locations.
IBM Global Services again ranked as the largest services vendor in the world, a position it has held for more than a decade as it clocked up $48bn in sales in 2006, which was more than double that of its closest competitor EDS, with $21,3bn. IBM's individual market share stood at 8,7%, so theoretically it could go out and buy its 10 main rivals and still not hold an overall monopoly position.
However, IBM's top line rose by just 1,8% last year, which reflected some slow quarters for contract signings in previous years. In contrast, some of IBM's closest competitors, notably EDS, Fujitsu, and Capgemini, reaped the benefits of successful restructuring programs during the last few years to return healthy growth rates of 7,6%, 8,3% and 10,3% respectively.
The five fastest-growing companies within the top 50 were all offshore sourcing specialists, as they rode the growing demand for low-cost, high-quality services in applications maintenance and development, and increasingly in new areas such as infrastructure management and back office administration. Cognizant was the biggest riser, growing sales 61% in 2006 to $1,42bn, the vast majority of which came through organic expansion.
The share prices of Cognizant and fellow global sourcing specialists such as TCS and Infosys continue to trade at huge premiums and despite their rapid growth, they have barely scratched the surface of the global marketplace. The combined revenue of the top five offshore suppliers: TCS, Wipro, Infosys, Satyam, and Cognizant, came to $14bn last year, which gave them a combined market share of just 2,5%.
Of the top 50 vendors, only three reported an operating loss in their most recent financial year, while of the 38 companies that report net profitability, just four made a loss. Atos Origin was hit by restructuring charges at its UK operation, while perennial strugglers Unisys, Getronics and BearingPoint all fell into the red. But compare this to our top 50 rankings in 2003 where 14 of the 44 companies reporting net profitability made a loss, and it is clear that the services vendor community is, financially at least, in a much healthier state than it was three years ago.
There was also huge variety in the operating margins reported by the top 50 vendors, with several clear groups emerging from the rankings. The top five offshore sourcing players had margins between 18% and 28%, benefiting from a relatively low cost base compared to western suppliers.
The group of six suppliers that specialise in projects for US central government and defense agencies (including Lockheed Martin and Northrop Grumman's IT divisions) all made margins of between 8% and 9%, while the three services divisions owned by telecoms operators (BT, Deutsche Telekom, and NTT) reported margins of between 2,5% and 5,2%.
Between them, the top 50 IT services vendors employed 1,7 million employees at the end of their most recent reported financial years, which represented an increase of 13% of the comparable total of 1,5 million from the previous year. Much of this growth has been driven by the major offshore sourcing suppliers, with the top five players adding 88 000 new staff last year taking their combined total headcount to 307 500. TCS, Wipro, Infosys, Satyam, and Cognizant are poised to add a further 100 000 new recruits between them in fiscal 2007, which underlines the scale of the challenge facing their human resources leadership teams.
Source: Computergram

Others who read this also read these articles

Search Site

Search Directory

  • Search for:


Previous Issues