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Only a few quarters ago, US and European IT services companies would count themselves lucky if they could muster any kind of revenue growth at all. Now, those that have restructured and redrafted their business models for global delivery are looking much healthier.

EDS is a stunning case in point. A little over a year ago, the Texan company was shrinking by between 1% and 5% a quarter. Its closing three months of 2006 present a very different picture. Having spun out its ill-conceived acquisition of management consultancy AT Kearney and put several disastrous contract engagements behind it, the company reported an 11% increase in fourth quarter revenues to $5.7 billion, and net income that almost doubled to $217 million.

As CEO Michael Jordan acknowledges, it has been a four year battle for the company to establish a foundation for profitability – predicated on the creation of a global delivery capability.

Customers clearly like the sound of that. During the quarter, the company signed $7.3 billion worth of contracts, up from $5.3 billion in the year-earlier period, with Vodafone and the Ministry of Defence topping the list for EDS UK. Organic growth in Europe was up 10%, but the real uplift in revenue came in Asia-Pacific with the injection of revenues from MphasiS, the Bangalore-based IT services company in which EDS acquired a controlling interest in June 2006.

Asia-Pacific revenues rose 19% to $410 million. MphasiS will continue to enhance EDS’s profitability by giving the company access to around 20,000 relatively low-cost staff in India (it has an estimated 117,000 people worldwide).

Despite that, EDS does not expect to sustain in coming months the 11% growth rate it experienced in the fourth quarter. It is predicting that revenues for 2007 will rise between 3% and 6% from the $21.3 billion banked in 2006.

Embarking on what he calls ‘Recovery, Act II’, septuagenarian Jordan now says he would consider making further acquisitions with a price tag in excess of $1 billion.

Perot Systems, the offshoot formed in 1988 by EDS founder and one-time presidential hopeful Ross Perot, has been through a similar (if less dramatic) metamorphosis. The company, which derives almost half its revenues from the healthcare sector, has built its delivery capability in India to 7,800 (over a third of its workforce) from an acquisitions beachhead formed through the 2003 buy-out of Vision Healthsource, a medical billing and claims processing specialist, and HPS, originally an applications development services joint venture with Indian company HCL Technologies. Those early investments – and subsequent organic growth – are bearing fruit: the company raised its net income from $26.6 million to $31.4 million in the fourth quarter of 2006, on revenues up an impressive 14% to $601.0 million.

Outsourcing winners and losers

The story is very different at rival IT services company Computer Sciences Corp. Over a third of its revenues are drawn from US federal government contracts (with over 60% of these military-related), and although that base rose by about 6% in the company’s third quarter ending 31 December, commercial business continues to fall “substantially” – especially in the US. The company says commercial revenues were impacted by lower levels of outsourcing activity with fewer companies re-signing deals and others terminating and reducing the scope of existing contracts.

During the quarter, revenue from European commercial contracts outstripped those in the US, but that was helped by a weak dollar. European commercial revenues were up slightly at $1.03 billion (down 7% in constant currency), while those in the US dropped 5.5% to $943.8 million.

The upshot is that revenues overall rose just 2% to $3.64 billion for the quarter and were down 1% when measured at constant currency levels. That static picture, plus the company’s restructuring expenses that have totalled around $300 million since a cost-cutting programme was launched April 2006, meant that net income for the quarter was sliced almost in half to $114.3 million. The restructuring programme involves reducing the workforce, primarily in Europe, and ramping up lower-cost, offshore resources.

Much of the positive news, however, came from Europe – and the UK, in particular. In early January, CSC signed the final agreements to transfer the UK National Health Service Connecting for Health programme work in the North East and East of England to a CSC-led alliance. And CSC has recently announced a £140 million, five-year deal to provide business process outsourcing for UKvisas, the joint Home Office and Foreign and Commonwealth Office directorate responsible for the processing of visa applications overseas.

CSC’s performance in recent quarters means it now trails Hewlett-Packard’s service division. In HP’s most recent quarter (ending 31 January), its services unit (HPS) reported a 5% increase in revenues to $3.9 billion and an operating profit of $414 million, up from $293 million a year ago.

That revenue is still dominated by low-end services such as systems installation and maintenance, but higher margin services are growing fast. While its Technology Services group, which accounts for 54% of the services revenue pie, grew by just 1% over the prior year period, Outsourcing Services (which has a 28% share of HPS) reported revenue up 11% and Consulting and Integration Services (with 18% of HPS) grew by 10%. That performance meant that HPS accounted for 16% of the company’s total revenues for the quarter of $25.08 billion.