After one of its most difficult years, the IT services industry is set to return to growth, according to the latest predictions from analyst group Gartner. In 2003, worldwide IT services revenue will reach $591.4 billion, up 6.2% from 2002. The latest round of financial results from some IT services companies supports Gartner’s bullish forecast, albeit with a few notable exceptions.
EDS, the world’s second largest IT services company, has moved quickly to stem any further decline in revenue and profit. In its third financial quarter, the company posted a slight year-on-year decline in revenue of 1%, dragged down by weak demand for high value consultancy services, particularly in Europe. However, drastic cost-cutting measures enabled EDS to record a slim profit of $86 million.
CEO Dick Brown says these restructuring actions will continue well into 2003, when EDS will reduce its workforce by a further 3% to 4%, and reduce other corporate overhead expenses by $75 million. Brown also plans to focus less on the big money, long-term contracts with which EDS has typically been associated in the past, as these often carry large start-up costs but have little immediate impact on revenue.
Perot Systems, meanwhile enjoyed healthy year-on-year revenue growth of 12% in its third quarter. Perot recorded revenue of $342 million, compared with $307 million in the same quarter in 2001. The bulk of Perot’s revenue comes from its IT Solutions business, which focuses on outsourcing, and this division grew 2% during the quarter to $300 million. A more positive influence on the company’s results was its high-level consulting business, where revenue grew 16% year-on-year to $15 million. Perot also now generates a substantial portion (18%) of its revenue from its government services division, which it formed after its acquisition of ADI Technology Corporation in July 2002.
The situation was less rosy at Cap Gemini Ernst &Young (CGEY), the largest European IT services provider. Revenue fell 14% in the company’s third quarter of 2002, compared with the same quarter in 2001. This decline contradicted CGEY’s earlier predictions that it would see a recovery in its revenues in the second half of 2002. A trading update from CGEY in October suggested that this hoped-for recovery would not occur until next year at the earliest. CGEY has been hit harder than many of the IT services companies because it focuses largely on consultancy – an area in which organisations are reluctant to invest in an economic downturn.
Web development companies such as Icon Medialab and Razorfish have also fallen victim to the hiatus in IT spending. Despite exiting a number of non-core markets in the preceding quarters, revenue at Stockholm, Sweden-based Icon Medialab fell 42% during its third quarter compared with the corresponding quarter in 2001. US web consultancy Razorfish, meanwhile, announced within weeks of reporting disastrous third-quarter results – half what they were in the same quarter in 2001 – that it is to be acquired by professional services company SBI.