Europe's IT Services Market Splits Leaders From Followers
19 May 2003
Claudio Da Rold, Nicole France, Ian Marriott, Gianluca Tramacere, Alan Mac Neela, Roger Arthur Cox, Dean Blackmore, Cathy Tornbohm, Khalda Parveen, Peter Redshaw, Robert De Souza, Peter Dueck
Document Type: Research Note
Note Number: M-19-2590
In a turbulent European IT services market, some aggressive providers are doing well and setting the pace for expansion. Others must react promptly and change strategy to fit the conditions, or face decline.
What You Need to Know
A market that grew at a "double-digit rate" for many years has masked many errors and a lack of strategy. It is now becoming more crowded and flat and only a few providers will set the market. Aggressive providers must concentrate on execution, while followers must review their strategy to compete in a turbulent and maturing market. We expect increased consolidation and specialization in the future. Clients must enhance their sourcing strategies and management capabilities, apply risk management practices and keep contracts short and flexible, as required by their business strategies and dictated by the turbulent European services market.
"Buying and selling services has never been so complex, particularly in Europe. This decade will see major changes in how IT services and IT-intensive services are engineered, sold and delivered into a changing European marketplace. Matching client sourcing strategies with provider selling strategies will differentiate winners from losers" ("Buying and Selling in the European Services Marketplace").
That was in early 2002. One year on, the effect has become apparent and Gartner has conducted a status review on two key questions:
1) Which providers do we see as aggressively setting their strategies, have performed reasonably well (given the tough market conditions) or are outperforming the market average while planning for further expansion?
2) Which providers do we see as lacking or being late on strategy or execution, underperforming (according to their potential, or compared with the first category of players or the market average) and therefore could find themselves in a declining role in the industry without prompt action?
The results are reported here (see also Notes 1 and 2).
This note provides a snapshot of major international and European service providers based on their strategy and how they performed during 2002 in an increasingly difficult European marketplace. It cannot be intended in any way as an evaluation of a specific market or region nor a direct comparison between the named players (they represent different kind of providers, such as infrastructure providers, full service providers, offshore providers and niche players in some cases operating in different geographies). The Gartner tool to compare and position providers on a single, selected services area and region is the Magic Quadrant and this note is not an MQ.
The second list is in alphabetic order only.
Providers not included in this Research
In Europe there are a lot of players it is a crowded and complex market and each country-specific market has its unique issues. The omission of certain providers in this market snapshot does not imply that they are not valid options for consideration. Simply they were not included in this study, as they did not materially stand out for the two key questions already stated.
Gartner's European services and sourcing analysts expect providers to be working on new strategies. In so dynamic a marketplace, these actions may modify players' positioning even in the short term. In such a climate, it is extremely important to continuously and clearly articulate to the marketplace (clients and influencers) the strategies and their execution stages.
Aggressive or Outperforming Service Providers
In 2002, IBM the European leader in professional services (PS) and outsourcing made two very aggressive and strategic moves that fit the Gartner vision of the changing marketplace (see "The 2001-2010 Reshaping of the IT Service Market"). The first was IT utility/on demand, which started with a marketing campaign and investments in research and delivery. The second was the acquisition of PwC Consulting. This strengthened IBM's position for consulting and system integration (CSI) activities and its understanding of business processes and verticals.
On demand was initially a technical approach, but it is now the overarching IBM business approach. During 2H02, IBM converted these directions into real business through a mix of outsourcing, project work and on-demand elements, which are gaining traction in the marketplace. FY02 services revenue increased by 4.0 percent at $36.4 million, with gross margins up by 4.4 percent (these numbers do not include PwC Consulting revenue).
IBM is setting the pace for an evolving European services marketplace. It faces significant challenges posed by the new approach, the integration process, an increasingly complex business structure and the huge number of consultants to be billed in a shrinking CSI market.
Accenture is the fourth-largest IT services company in Europe (see Gartner Dataquest MarketView "IT Services Europe Final Market Share Database") and, arguably, the thought leader in the European IT services industry. It continues to experiment with new business and engagement models with various subsidiaries and client joint ventures and to develop business process outsourcing and business transformation services. The next 12 months will demonstrate if those innovative approaches pay dividends to all parties. It has done well in important, but notoriously difficult, country markets such as Germany. Given its focus on project services, it has weathered the downturn well. Although revenue in 1Q03 was down from 1Q02 (6 percent in euros, flat in dollars) this was in line with expectations. Challenges will be to continue building innovative client relationships, overcome an aggressive reputation, and respond to IBM's new capabilities and approach.
Hewlett-Packard's (HP's) integration with Compaq Computer went reasonably well. In infrastructure services, its size, geographical coverage and scope has helped position it as a comparable adversary to large providers like IBM and Electronic Data Systems (EDS). Its 4Q02 results showed a revenue increase of 9 percent to $18 billion, with services recording a 4 percent sequential increase. HP has performed aggressively in services, winning a number of large-scale deals.
Further aggressive growth is anticipated in its European services business as HP seeks to leverage its increased size and scale. But HP's focus on the merger has reduced its focus on marketing innovative offerings (it pioneered the on-demand and utility data center concept), so its response to IBM is not entirely clear. The standardization and "commoditization" trend cannot be ignored it requires a careful strategy from every infrastructure provider.
HP's challenges lie in maintaining a portfolio of profitable deals, consistently delivering across Europe and climbing the value chain. Its aggressive approach on large-scale deals has resulted in outsourcing contracts with Procter & Gamble and Ericsson.
Wipro, a major Indian service provider, has made significant steps to broaden its range of services in Europe. Its YE02 revenue increased by 27 percent to $690 million. It is forging a strong market position, particularly in the United Kingdom.
The European IT services market is fiercely competitive and Wipro is expected to come under pressure from other offshore providers seeking to increase market share in Europe. Also, local and multinational service providers are increasingly emphasizing their own offshore capabilities. It is crucial that Wipro establishes its infrastructure management and business process outsourcing capabilities in 2003. It will also need to consolidate further its penetration into other mature European markets, such as Germany, the Nordics and Benelux.
Healthy Local Niche Players
Even in a tough CSI market, some highly focused, local systems integrators have been performing well. These midtier players have had a satisfactory year because of a vertical and regional focus, a willingness to understand clients' business needs, innovative offerings, client relationship models and attentive financial management. Three examples are:
This large, native player in the Nordic services market has had some success through a very focused industry-driven strategy with a 12 percent growth in 2002 (total revenue of 1.3 billion euros). It leverages local, leading businesses to develop vertical offerings and capabilities in forestry, oil and gas, telecom and media, financial services, and healthcare. Industry focus has also driven its international mergers and acquisitions strategy and it experienced both absolute and organic growth in 2002. Challenges will be the extent to which its sector expertise can be expanded abroad and which new offerings develop to meet specific industry needs.
In the 1990s, this was an application development and SI player in a crowded pack of two-tier providers in Italy. After becoming a public company in 2000, it focused on few verticals (finance and government) and avoided unknown verticals or expansion outside Italy. It increased its outsourcing services (such as application and end-to-end services), vertical business expertise and its focus on local government, healthcare and utilities. With careful management of client relationship and deal partnerships, it reported steady growth in FY02 with an increase in revenue of 17.6 percent to 254 million euros. Earnings before taxes (EBT) increased by 48.4 percent.
This is a small, privately owned U.K. company founded in 1995 with no debt or external shareholders. It experienced a yearly growth of 60 percent by providing project and consulting services, from applications to IT infrastructure. FY01 revenue was 15 million euros with just 150 staff. Its strengths are technical capability, teamwork, adaptability, simple contracts and pricing, and a good relationship with major IT vendors. Growth has been driven by reputation. Challenges will be to maintain low overheads and retain a focused business model while expanding and meeting larger competition.
Followers or Underperforming Service Providers
Cap Gemini Ernst & Young
Its CSI capabilities and vertically focused solutions are still strong and it has effective geographical coverage of the European and U.S. markets. However, following the merger of Cap Gemini with Ernst & Young, the challenges of fully integrating its CSI capabilities has caused it to lose focus on outsourcing, hindering its ability to grow market shares. CGE&Y has shed more than 10,000 people since the merger. Its still broad skills portfolio will help it to rebound, but unless it improves its outsourcing focus, this may not be until economic recovery allows clients to invest in business transformation projects.
Electronic Data Systems
Capabilities in vertical processes and technologies, and a comprehensive geographic presence make EDS a viable provider of large-scale outsourcing solutions. But EDS's brand has been weakened by a series of profit warnings, difficulties with high-profile bids and contracts, and the perception that it would not have sufficient cash reserves to fund large-scale deals.
These challenges have impaired its ability to react to IBMs growing dominance in the services market. To re-establish its brand, EDS must win and execute deals against the likes of Computer Sciences Corporation and IBM, and the emerging HP. Also, it must establish a clear and credible strategy for meeting the competitive pressures of indigenous European providers in local deals. The departure of its CEO, expectations for a new business strategy and rumors about talks with other large players mean that its problems won't be resolved quickly.
Finsiel maintained its leadership in the Italian market for decades through the once-captive government market and, later, by outsourcing work from the owner, Telecom Italia (TI). But, since the 1990s, Finsiel has been struggling. Lack of an open market strategy, as well as a management style that was formed in a captive environment are the main reasons for its current position.
After the 2001 Pirelli takeover of TI, a new management has defined a new strategy and is restructuring this business. TI services has been insourced back, the larger client contract Sogei has been released back to the Ministry of the Economy, the consulting branch and minority participants have been sold, the workforce has been reduced and a new line management put in place.
Although Finsiel lost its position as market leader in 2002, its long-awaited business restructuring is finally taking place and the outcome is a reduced, more focused and potentially healthier Italian player (see "Finsiel Shapes Up for a Healthier Future"). Challenges are to update a brand still too often associated with the past, to increase credibility in other verticals outside government and leverage business partnerships.
After integrating three services entities, Fujitsu Services evaluated, aligned and rationalized its offerings and worked to capitalize on its capabilities throughout 2002. It has chosen areas to specialize in, such as multivendor infrastructure management and wireless services. However, it has not built the geographic coverage necessary to be a strong European player and it recently sold seven Eastern European subsidiaries. It still lacks partnerships with other IT services players that could help it grow in Europe. Concentrating on the United Kingdom has been successful and it recently won a $1.5 billion project from the U.K. Post Office.
To be successful as a European player in addressing large deals for multinational corporations, it needs to expand its coverage dramatically. It is a global company without true global coverage and a full service provider with significant gaps in its services portfolio. A strong focus on selecting the right offerings is required for Fujitsu Services to achieve better results.
Getronics is a global provider of vendor-independent IT solutions and services. The head office is in Amsterdam, Netherlands, with regional head offices in the United States (Boston and Washington D.C.) and Singapore. Over the past two years, Getronics has experienced poor performance and uncertainty. Earnings before interest, taxes, depreciation and amortization (EBITDA) have steadily decreased, from 259 million euros in 1999 to 106 million euros in 2002. FY02 revenue decreased by 13.4 percent to 3,595 million euros.
In January 2003, Getronics announced an invitation to tender to reduce its gross debt burden and provide itself with a long-term financing solution. The initial invitation to tender was unsuccessful. This had an unfavorable impact on its reputation in the financial markets by creating customer concern and causing some suppliers to require early payment. In February 2002, the board stepped down following differences in opinion on how to manage the company. It remains uncertain whether Getronics will recover quickly from this period of financial and organizational distress and regain a strategic foothold with customers.
Bull and Arthur Andersen should be given a special mention here. Most of Bull's business has been acquired by Steria and it has ceased as a service provider, except in France and Italy. Arthur Andersen has also ceased as a consultancy firm, but it has partially merged with DeLoitte & Touche and KPMG throughout Europe.
What are the trends and directions in sourcing?