Logic needed for Logica

With IT outsourcing, it's all about cost savings. So, for example, offering generic - and cheaper - services from a workforce largely based in cheap, offshore locations sounds sensible. Then there is the way Logica does it: having a large proportion of staff onshore, with most of these being highly skilled and therefore expensive to employ. Logica has being trying to change this mix, raising the low-cost headcount so it now represents 17 per cent of its workforce, up from 13 per cent in 2009. But this is still below the industry average; for example, low-cost employees account for 37 per cent of the headcount at rival outsourcing business Capgemini. So Logica remains at a competitive disadvantage.

Keen pricing is a particular issue for Logica because 94 per cent of its revenues come from Europe, where customers' purse strings are tight. Logica's dependence on Europe prompted it to issue its most recent warning on sales. In December, its bosses cautioned that full-year revenue growth for 2011 was expected to be just 3 per cent; previously they had suggested that revenue would grow by at least 5 per cent.

Admittedly, Logica has been seeking to gain exposure to emerging markets, having acquired a Spanish consulting business, Grupo Gesfor, last May. The purchase brings a much-needed presence in fast-growing Latin America. However, with just 6 per cent of sales generated outside of Europe (most coming from Australia), Logica's emerging-market presence is still notably below that of rivals. Capgemini derives almost a third of its sales from emerging markets and is offsetting the slowdown in its mature markets.

That said, Logica has accelerated re-structuring efforts to offset Europe's slowdown and will spend the early part of 2012 axing 3 per cent of its workforce, or 1,300 jobs . This will mean one-off costs, including £80m associated with redundancies and £39m relating to contracts. In addition, Logica took a £20m hit in the first half of 2011 (mainly in the UK) for an initial restructuring effort. Streamlining is expected to save £50m to £60m a year from 2013, with up to £35m in savings expected to materialise in the second half of 2012.

However, while cost savings are welcome, City analysts worry that Logica still hasn't got it right. They argue that the solution to its woes needs more drastic measures - a merger or a big acquisition to gain significant exposure to emerging markets, or even more aggressive job cutting in the troubled regions such as Sweden and the Benelux countries, where almost a quarter of Logica's staff are based. George O'Connor, an analyst at broker Panmure Gordon says that about 5,600 staff, or 14 per cent of its workforce, leave Logica each year anyway. So all that happens when management announces a plan to axe 1,300, he says, is that natural leavers are persuaded to hang around and wait for their redundancy payout.