In IT services, how small is too small? LogicaCMG, the giant of the UK sector, is from intense competition from such as Tata Consulting, Wipro and Infosys. At the opposite end of the scale, Maxima that it was forced out of some contracts with its largest customer by a global IT services giant.
As companies look to cut costs, IT services providers are feeling the squeeze. Investors are in turn pressurising share prices, with Logica, Morse and Axon all falling 9 per cent last week.
George O'Connor of Panmure Gordon downgraded Morse, which generates half its revenues from financial services, to a sell on . "The concern is that the financial services industry has soaked up lots of the industry IT consulting capacity," he says, "and with a pending gloomy scenario of less utilisation, day-rate consultancies in this field have the ability to present investors with worse operating news."
It's unclear just how differentiated Morse's services are, aside from a more collaborative approach, than the super-sized systems integrators, who can compete harder on price. Horizon Technology's demonstrates the risks in transforming from hardware reseller to consultancy, an approach also taken by Computerland UK and .
While are one focus of investors' concern, the public sector is another area of vulnerability. The culprit for Maxima's warning is thought to be Network Rail, while NHS and local-government-focused tiddler @UK recently warned of "very slow" deal-making. IBS Opensystems also warned in January that it expects tightness in local government IT spending to continue throughout 2008. That could mean more bad news to come from 's local-government division, while - in spite of its recent success with the Home Office - is vulnerable to Ministry of Defence cutbacks.
But size need not be a disadvantage. "Mid-market IT services companies really tend to be relationships businesses," says Evolution analyst Roger Phillips. "They've often had a couple of absolutely key customers for years and years, which makes those accounts defensive and hard to dislodge." Morse's long-term relationship with Royal Bank of Scotland and Axon's with BP are prime examples.
But clinging on to key accounts can be expensive. Phoenix IT only retained the Department for Work and Pensions as a customer after taking a heavy hit to margins, while Computacenter's BT deal was won in the face of price pressure from larger rivals. Phoenix's incoming chief executive, Jeremy Stafford, says no customer is now worth more than 4 per cent of turnover. He says Phoenix stands to profit from mid-market customers looking to consolidate to a single supplier - a trend that's a "deep-seated change rather than something triggered by shifts in the global economy".
