2006 in Information Technology

Events

Anniversaries

3rd quarter 2006 summary

The same long-term factors influenced 3Q06 as other recent quarters. But their effect is perhaps a little clearer:

#The dramatic build-out of fibre-optic cables in the 1990s enabled an extraordinary increase in the data capacity and call volumes possible on the world’s telecommunications networks. Without the cheap calls this enabled, we would have little or no Internet.
#After decades of talking about it, the convergence of IT and telecommunications has become a reality, based on IP. Firms such as BT Global Services have reinvented themselves as providers [http://www.btplc.com/news/articles/showarticle.cfm?articleid=04573f62-b32d-498b-9abf-5dd78ed9fbd0] of ‘networked IT services’.
#When combined with the invention of the PC, the Internet has greatly lowered the entry barriers for content creation to the extent that a teenager can make a hit record and the video and release it on YouTube from her bedroom with less than £500 of hardware. And because of the enormous catalogues that e-commerce sites like Amazon offer, markets are fragmenting into thousands of niches, because buyers no longer have to purchase items from the Top 30.
#The combination of the Internet and software is spawning a second generation of application service providers – now called Software-as-a-Service -- with the most successful (Salesforce.com and Google) using software that is specially written for the purpose.
#The unending market aggression of Microsoft has spawned both the rise of open source software and continuing antitrust court battles.
#The Internet, cheap calls, relatively low pay, and a large well-educated English-speaking workforce, were all necessary to the seemingly unstoppable rise of Indian offshoring.
#And similarly, the combination of relatively low pay, quality manufacturing, and a standard hardware platform (namely the PC) has enabled China to dominate computer production.
#Rising energy prices are changing not just the way vendors design computers (for lower electricity consumption) but also the method of transport vendors use to get their products to Europe.
#Post-dotcom caution still leads many business people to believe that IT is not a vital aspect of competitive differentiation. It can be safely outsourced and/or simplified.
#In recent years, the UK government has demonstrated great confidence in the ability of IT to achieve efficiency targets and improve the lives of UK citizens. It has also consistently demonstrated the belief that large IT projects are better outsourced to the private sector.

We have seen all ten of these forces bringing pressure to bear on 3Q06.

Public sector

The UK government’s belief in the value of IT has taken a jolt this quarter with troubling news on the NHS mega-deals known as "Connecting for Health". The ISV iSoft has been at the heart of much of the fiasco [http://business.timesonline.co.uk/article/0,,9075-2328828.html] , allegedly delaying the roll-outs of both Accenture and CSC by two years. While it is best-in-class in the rest of the world for organic growth and profitability, Accenture has been having a ghastly time in the UK, suffering three quarters in a row of revenue decline, largely because of its NHS commitments. Accenture is said to be in talks to enable it to walk away from these contracts, in which case it faces a possible £1bn fine, and CSC is said to be waiting in the wings to take over. Not that CSC has an outstanding record: a hardware failure in its storage area network severely disrupted the services it provides to 80 NHS trusts this quarter. CSC, by the way, has declared that it is no longer up for sale.

BT reported a 9% increased in networked IT services, but analysts suspect that its operating margins are less than 3%. It was revealed this quarter that despite investing at least £200m in tooling up for its NHS contracts, BT [http://business.guardian.co.uk/story/0,,1859650,00.html] has been paid less than £2m for its work so far. (Compare that with the £110m that Accenture has already been paid.) But unlike Accenture, BT refuses to write off any anticipated losses on these mega-deals. BT Global Services has vowed to double its revenues in the USA and Far East by 2009.

Perhaps in part because of these problems, the UK public sector has become a tough market, reported [Atos Origin] and LogicaCMG, with particular apprehension about discretionary SI projects and central government. Atos Origin, which is over-dependent on public sector work, reported an 8% fall in UK revenues. Rumours persist that it may acquire Siemens Business Services, in which case it will move up from being Europe’s fourth-largest native services provider to second place. LogicaCMG’s UK revenues fell by 3%, but its bigger problem is the widespread market skepticism that greeted its $1.7bn bid for WM-data, the Nordic services provider.

In the UK local government sector, things have been going well for two of the leading players: Serco declared a 15% increase in revenues and Capita a 17% increase in organic growth. Last year, Fujitsu Services reported a 10% organic growth in revenues, of which 70% is generated in the UK. Local government seems to have a pronounced preference for native British firms, such as Capita, Serco, BT and even Fujitsu Services, over US firms such as IBM, Accenture and EDS. Parts of the sector are also keen on local job creation, so there is less of a tendency to send work offshore.

Offshore and Far-East production

Capgemini and Axon are both enjoying a current revival in the SAP services market. The UK consulting market appears to be undergoing a minor boom, but long-term, the prices that European services vendors can bid are clearly being affected by undercutting offshore providers. For example, some customers are trying to negotiate lower support charges for software, although only a small percentage will actually opt for third-party maintainer, because they need the new releases that only the ISV can provide. The price pressure exerted by offshore firms means that, on a worldwide basis, much of the revenue growth reported by services vendors has come from acquisitions.

For reasons of cost, UK businesses continue to move IT jobs offshore to lower-wage economies. The IT jobs market in the UK is also affected by a decline in the number of IT graduates entering the market. In the past five years, there has been a 50% decline in applications for computer-related degrees.

And relatively high European wages are putting Dell’s configure-to-order model at risk, when assessed against vendors who build everything in the Far East. The Dell train clearly came off the rails this quarter, with poor customer satisfaction, declining profits, an SEC investigation into its financial accounts, and the largest battery recall in history. In a survey of US enterprise customers, Dell was the lowest-regarded and IBM the most highly regarded of the big four server vendors.

It is worth remembering that competing with the Dell business model was the pretext for the 2001 announcement of plans for the merger of HP and Compaq. This led to disquiet in the HP boardroom, particularly from Walter Hewlett, who believed the merger was less about business logic and much more about Carly Fiorina’s desperation to make a strategic decision and to give her some breathing space from Wall Street. This unease, in what one observer has called “the most dysfunctional boardroom in the IT industry”, has led, through an unfortunate sequence of events, to the current pre-texting scandal which has taken the scalp of HP’s chairman and may yet be the undoing of HP’s "wunderkind" CEO, Mark Hurd.

A price war between chip-makers AMD and Intel contributed to the low growth on the EMEA PC market. Intel announced over 10,000 job losses. The declining price of hardware was largely responsible for the 8% fall in Computacenter’s revenues and the 4% in Morse’s. Ovum applauded the shift of both resellers towards services.

Rising fuel costs

The high oil price has led some vendors to ship rather than air-freight goods from China. The increased time that shipping takes, together with the higher volume of goods in transit at any time, means that vendors are more vulnerable to sudden, unexpected changes in demand.

But Acer’s recent success in the laptop market is in part due to channel-stuffing, wrote Canalys. Acer pumps large volumes of stock into the indirect channel to enable dealers to offer next-day delivery. This trick also discourages dealers from stocking other vendors’ products, because dealers tend to focus on selling existing stock before ordering more products.

A Merrill Lynch survey of CIOs revealed that, although power consumption is an important issue, it is not a sufficient reason on its own for switching server vendors.

UK consumers and SMEs

The United Kingdom has just overtaken Germany as Europe’s biggest online spender, driven by the penetration of broadband. The fastest-growing Websites are those that rely on user-created content, such as MySpace and Wikipedia. Both BT Group and Dixons announced they would be setting up support services targeting the SME and/or consumer market. It was announced that Microsoft is the UK’s favourite consumer brand; IBM came 71st, a few places behind Kleenex. And Ernst & Young calculated that carousel fraud (to do with the non-payment of VAT on mobile phones and IT hardware when imported from EU member states) is now so extensive in the UK that the country’s export figures could be distorted by 6% this year.

Microsoft and open source

The European Commission imposed a €280m fine on Microsoft for non-compliance with its 2004 anti-trust ruling. Microsoft now claims that its next release of Windows, called Vista, could be delayed due to this legal tussle, and has cited research (which it commissioned) saying that European jobs would be at risk due to the Vista delay. Microsoft announced a 16% increase in revenues and promised strong double-digit growth next year.

A recent survey showed that although most UK colleges and universities consider acquiring open source software, it’s only official policy to do so for 25% of them. Sixth-form colleges are more likely to buy [http://www.centurycomputing.co.uk/Services/IT_Support_Services/default.aspx?id=73 IT support] than universities.

Buying behaviour

Companies are not increasing their IT spending at the same rate that their business is growing, said Gartner. Even in companies with sales growth of more than 10%, IT budget increases remain at 5% or less.

And focus group research revealed that CIOs often choose big-name IT vendors to minimize risk, but they also believe that smaller vendors can be more responsive, more attentive, and better at delivering on time and within budget.