Siemens profits warning marks unsettled period for IT services

Last week's profit warning from IT and engineering firm Siemens signals unsettled times ahead for IT services firms and users, according to experts.

Last week's profit warning from IT and engineering firm Siemens signals unsettled 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."

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