Last week's profit warning from IT and engineering firm
Siemens signalsunsettled times ahead for IT services firms and
users, according to experts.
Siemens issued its warning after the
Department for Work and Pensions (DWP) cancelled an £65m IT
services contract with the company.
The contract to build a central payment system was signed in
2006, but the project significantly exceeded its budget and its
completion was delayed until December 2010 at the earliest. As a
result of the delays, the government cancelled the contract.
Ovum analysts, Cornelia Wels-Maug and Georgina O'Toole,
commented, "The key issue is that Siemens was hoping to use its
experience at DWP to offer similar systems to client recipients of
DWP such as Jobcentre Plus and other 'funds flow' organisations
such as HMRC and Defra. This cancellation therefore has broader
implications."
Although some analysts said the bad news was "Siemens-specific",
others see broader implications for end users of IT services firms
falling on hard times.
Ian Brown, senior analyst in Ovum's IT Services Practice, said
that the coming months may lead to upheaval for customers of IT
services.
At the end of last year, Ovum predicted an increase in mergers
and acquisition activity among services firms during 2008, and
Brown believes this may happen in the second half of this year.
"We expect some of the IT services players, particularly in
specialist or niche areas, to merge with larger firms, and larger
IT suppliers to be on the lookout for smaller local and niche
players."
However, Brown said, "In a downturn there is greater competition
for IT project deals, which will benefit end-users," he said. Brown
said users may be able to negotiate lower-cost outsourcing and
multi-sourcing contracts, in particular.
Ollie Ross, director of research at The Corporate IT Forum,
said, "Although the current marketplace is volatile, change has
always been a constant in the IT supply sector. Mergers,
acquisitions and consolidations have always occurred and will most
likely increase in frequency as the sector matures."
"Most CIOs will have contingencies within their organisations to
mitigate the impact of dramatic occurrences in the market - and the
majority of large businesses will have a balanced portfolio of IT
suppliers in place to ensure that that they are not over reliant on
any single IT supplier."
Stefan Foster, managing director of corporate membership body
The National Computing Centre
(NCC), said that broadly speaking, IT budgets are not going
down, and are arguably going up, as organisations see IT as
strategic to the businesses, and useful in combating a potential
downturn.
But, Foster said, "With the Siemens' issue, what is coming out
is that there are some things that are clearly wrong and high risk,
but what people are doing from a business point of view is looking
at IT as a business investment rather than just as
expenditure."
He agreed that there was some volatility among technology
service providers, and said, "if you are a large procurer of IT
services, it is in your interest to help your IT services firm to
survive."
"It is incumbent on the supplier as well as the procurer to work
much more closely together, on cost reductions and service levels
for example, because if the suppliers do not survive, it may affect
the front end of your business."
Despite the warnings, one thing that analysts are not predicting
this time around is a tech crash similar to 2001-2002. This is
because there is not the same "IT bubble" overvaluation of tech
stocks and organisations are not overspending on IT.
One positive comment came from search engine giant Google, which
said it was well positioned to weather any economic downturn as its
advertisers were broad based, and that it was not dependent on any
particular market.
On a visit to Sydney, Google chief executive Eric Schmidt told
reporters that falling share values and a shortage of credit in
financial markets was "a very serious issue", but said, "We believe
that if there were [a US recession], we will be well positioned
There tends to be a flight in a global slowdown to higher-quality
advertising and higher-quality advertising is determined by what
sells."