02:07 PM

IBM Offers Hope For Shaky Services Market

But cutthroat price competition and tight spending are likely to slow growth

The first quarter saw business-technology outsourcers ink several billion-dollar-plus services deals and send a smattering of other hopeful financial signals. Still, the overall IT-services market will probably continue to skid along this year as CIOs avoid long-term projects amid economic and geopolitical uncertainty. The good news for buyers is that vendors appear to be aggressively cutting prices to attract new business, a Merrill Lynch analyst says.

IBM, the world's biggest seller of computing equipment and services, can thank a number of recent wide-reaching services deals with large customers--including BellSouth and Canada Life, and a $2 billion contract with Visteon--for boosting its numbers. Last week, the company said its earnings from continuing operations increased 8% year over year in the first quarter ended March 31, to $1.4 billion, on an 11% sales rise to $20.1 billion. IBM's services group increased revenue 24% to $10.2 billion, though its services gross profit margin slipped one percentage point, to 25%. IBM's services group booked $12 billion in contract signings during the period, its second-best performance during a first quarter.

IBM CFO John Joyce says the company's acquisition last year of PricewaterhouseCoopers Consulting is broadening its consulting footprint. Business consulting now represents more than 30% of IBM Global Services revenue. And Joyce says that 110 of the 149 customers that dropped PWC Consulting over concerns about conflicts of interest with its auditing practice have come back.

There are other signs of life in the services market. Hewlett-Packard this month booked its largest-ever services deal, a $3 billion IT outsourcing contract with Procter & Gamble Co. EDS is making a new push in the promising market for business-process outsourcing, creating the EDS Business Process group to sell more complete services, particularly in call centers and financial services, and to develop technologies that help businesses manage outsourcing relationships. EDS last week also revealed business-process outsourcing contracts with American Cellular Wireless, Dow Chemical, and Wanadoo, the Internet division of France Telecom.

Accenture last week said it booked $4.8 billion in new business in its second quarter ended Feb. 28, its second-highest total for a three-month fiscal period. Revenue from outsourcing grew 33% to $828 million, making up 29% of net revenue. But total revenue for the period fell 3% year over year to $2.8 billion, with business consulting sinking 15% to $2 billion. Its quarterly operating income dipped 5% to $367.8 million.

Business-process outsourcing looks like the growth market du jour in the services sector. IDC says today's $177 billion annual market for such services will grow at a compound rate of 9% to 11% through 2005. But Merrill Lynch takes a more cautious short-term view. Based on a survey of CIOs, it predicts spending by businesses on IT outsourcing will grow just 1% in 2003, spending on business-process outsourcing will grow 3%, and spending on business consulting will drop 4.6% because "user demand is deteriorating, price competition is rampant, and offshore competitors are becoming more aggressive," analyst Jennifer Dugan says. Outsourcing prices are down 4% from a year ago, and consulting prices are down 13%, Merrill Lynch says.

However, there's plenty of reason to remain bullish about consulting services, IBM's Joyce says, noting that many large companies are fundamentally restructuring business and IT processes and will need consultants to see them through it. Says Joyce, "This is where we're focusing billions of dollars in research and development and acquisitions."

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