Taking Stock: Downturn Hits IT Services Hard - InformationWeek
IoT
IoT
News
Commentary
3/28/2003
10:36 AM
Commentary
Commentary
Commentary
50%
50%
RELATED EVENTS
Moving UEBA Beyond the Ground Floor
Sep 20, 2017
This webinar will provide the details you need about UEBA so you can make the decisions on how bes ...Read More>>

Taking Stock: Downturn Hits IT Services Hard

The pain of downsizing is likely to continue as sales remain weak

Even after March 24's market tumble, when investors became aware that war rarely goes as predicted, the Goldman Sachs technology index was still up 3.2% so far this year. The best-performing segment was Internet-related companies, up 16.9% year to date; the laggard was services, down 9.8% for the same period.

People still trade at eBay and buy at Amazon.com, even in anxious times like these. But Goldman Sachs' networking, semiconductor, and hardware segments were no slouches either, up 9.7%, 8.2%, and 7.0%, respectively. Software was flat for the year. This month has brought news from Oracle of a difficult earnings outlook and warnings of weak results ahead from some other software companies, so that should come as no surprise.

The difficult question is why the IT-services segment, usually stable, is doing so badly. We could point to EDS, with its multitude of maladies, but that would be too easy. Aside from infrastructure outsourcing, which favors large companies such as Accenture and IBM, the outlook for IT-services spending is pretty bleak. In this environment, cheaper offshore consulting services are gaining ground and making pricing difficult for domestic IT-services vendors. Even though government IT spending, especially federal spending, should hold up in the near term, not much else will. This will benefit companies such as Computer Sciences Corp., which earns more than 40% of its revenue from federal IT spending but not many others. Second-tier players such as Perot Systems and BearingPoint come to mind. They're not bad companies, but as IT spending shrinks, they may lose more than their fair share.

Some of these companies don't help themselves in a tough spending environment. Investors hate uncertainty, and uncertainty increases with changes in senior management. Nevertheless, sometimes it makes sense for a company to bite the bullet and replace senior management. The most recent notable hit was at EDS as Michael Jordan, formerly of CBS, took over as CEO for Richard Brown. Investors liked that move, as the stock price rose on a big down day in the market. But EDS shareholders can't have been happy that the company had to pay $37 million to the exiting CEO to clean up this mess. It's a shame that for two year's worth of work, Brown will get almost $19.6 million in pension benefits alone. I bet there are a lot of laid-off workers who would like any kind of pension benefit after such a short time. Is it any wonder that EDS hangs under a cloud these days?

Another big change was the new CFO at BearingPoint (formerly KPMG Consulting), Robert Falcone, a former CFO at Nike. Only time will tell whether these changes will be beneficial to the companies and shareholders.

The U.S. technology sector lost about 560,000 jobs during 2001 and 2002, according to the American Electronics Association. That's about a 10% reduction in head count to about 5.15 million technology jobs over the last two years. Most of this was in manufacturing and communications, but it crossed all sectors. The pain of downsizing is likely to continue, as sales remain weak. I just wish a few of the mainstream IT folks could get some of EDS's Brown's generous retirement package. But I won't hold my breath.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com.

Comment  | 
Print  | 
More Insights
Comments
Oldest First  |  Newest First  |  Threaded View
How Enterprises Are Attacking the IT Security Enterprise
How Enterprises Are Attacking the IT Security Enterprise
To learn more about what organizations are doing to tackle attacks and threats we surveyed a group of 300 IT and infosec professionals to find out what their biggest IT security challenges are and what they're doing to defend against today's threats. Download the report to see what they're saying.
Register for InformationWeek Newsletters
White Papers
Current Issue
IT Strategies to Conquer the Cloud
Chances are your organization is adopting cloud computing in one way or another -- or in multiple ways. Understanding the skills you need and how cloud affects IT operations and networking will help you adapt.
Video
Slideshows
Twitter Feed
Sponsored Live Streaming Video
Everything You've Been Told About Mobility Is Wrong
Attend this video symposium with Sean Wisdom, Global Director of Mobility Solutions, and learn about how you can harness powerful new products to mobilize your business potential.
Flash Poll