New ideas with roots in the past

With the benefit of 40 years at the sharp end of IT change, a prominent analyst looks at what has changed in the industry, and asks what the future may hold

With the benefit of 40 years at the sharp end of IT change, a prominent analyst looks at what has changed in the industry, and asks what the future may hold

With the benefit of 40 years at the sharp end of IT change, a prominent analyst looks at what has changed in the industry, and asks what the future may hold

As Computer Weekly celebrates its 40th anniversary, I too celebrate 40 years in the UK IT industry. On 1 January 1966 (there wasn’t a New Year’s Day holiday back then) an 18-year-old Richard Holway arrived in London and started training as a programmer. I could write a whole article about my experiences with 80-column punch cards and assembly-level programming, but that would be incredibly boring.

After nearly 20 years at Hoskyns (now Capgemini) and ending up as the group marketing director, I then spent the next 20 years as a software and IT services analyst building both my own company and now Ovum.

Back in 1966, the software and IT services industry in the UK consisted of processing bureaux such as Baric and Centrefile, and consultancies including Hoskyns, CAP and Systems Designers, which designed and built systems, usually charging by the day. Processing bureaux basically enabled customers to share the cost of using a computer to do things such as payroll processing or invoice production.

In some respects we have gone full circle, with shared services being the current public sector panacea, and business process outsourcing being the fastest growing sector of the market.

The move, first to IT outsourcing in the 1970s and then to business process outsourcing in the 1990s, means that outsourcing now represents more than 50% of the entire revenues of the software and IT services sector. It is unstoppable. By 2025 I believe it will represent more than 60% of the sector.

There are many companies which took advantage of the IT outsourcing trend. I was at Hoskyns when it signed its first outsourcing deal in 1969, although it was called “facilities management” then. Hoskyns went on to become the UK facilities management market leader.

But perhaps the accolade for spotting the business process outsourcing trend and really running with it was Capita – now the out-and-out UK market leader.

From a mere stripling in 1989 when Capita floated, it has grown to become a FTSE100 company with a £3.4bn valuation. Indeed, a £1,000 investment in the IPO would now be worth £165,000 – the best performing FTSE100 company of all time.

Business process management skills are now all important. Indeed, they are often more important than advanced IT skills. In 20 years the largest players in our marketplace will be those that have taken advantage of this trend. The future leaders could well include names more familiar to followers of “support services” than IT.

Changing shape of software
In 1966, the software industry was dominated by operating software, and IBM in particular, as application software was in its infancy. Distributed processing in the 1970s and the PC in the 1980s have meant that software has not only been the fastest growing and most exciting sector, but has produced IT’s biggest names such as Microsoft, Oracle, SAP, and here in the UK, Sage.

Throughout 40 years, software has been sold as a packaged product – often in a shrink-wrapped pack. The most significant missed prediction I made as an analyst was in the mid-1990s, when I forecast that, by 2000, most software revenues would change to what was then called ASP and is now referred to as software as a service.

I may have got the timescales wrong, but the trend is now firmly established, as pioneered in the enterprise space by and now in the “consumer” space by the likes of Google. Even Microsoft is moving that way too, and I am sure it will not be too long before software as a service becomes the accepted norm in both the enterprise and consumer space.

A change of careers
For much of the past 40 years, a career in IT meant a well-paid job with great prospects and, if you kept your skills up-to-date, job security too. In the mid-1990s, the average employee in a UK IT services company earned 60% above the UK national average wage.Those days are over. Average IT pay is now around the national average.

Poor graduate employment prospects are just one reason why the number of students choosing to study computing, or indeed any numerate subject at university, has fallen by 20% since 2000, whereas the number going to university has risen by 11%.

Another reason why a career in IT now looks less appealing is the rapid shift towards what we call global sourcing – the use of IT staff either based in developing countries, India in particular, or IT staff from those countries working in the UK.

Just 10 years ago the phenomenon was unknown. I first became aware of it when Hilary Cropper at FI Group, now Xansa, acquired IIS of India in 1997.

According to a recent Ovum study, in 2005 20% of all the IT staff working on services activities for UK clients were either working in or were from developing countries, with India representing 95% of the total. But even more worrying, when we asked the largest players for their employment sourcing projections, the figure rises to 40% by 2008.

Overall, there is a reduction in the number of UK-sourced IT employees over that period; with non-UK companies such as EDS and CSC leading the trend to reduce UK staff in favour of global sourcing. I confidently predict that by 2025 global sourcing will represent more than half of the employees engaged in IT services in the UK.

The situation is not helped by many UK companies halting or scaling back their UK graduate recruitment programmes. Some now only take on graduates in India.
UK graduates who might have gone into IT in the past will still get good jobs. But they will more likely go into financial services or media.
The UK might, however, take a lead role in teaching the rest of the world how to embrace global sourcing.

Growth, but not as we know it
During the past 40 years, the UK software and IT services market grew by three times the rate of growth in UK gross domestic product. In the 1990s it grew by four times the GDP, with growth of more than 25% recorded in 1998.

Since 2003 the market has returned to growth, but not as we know it. Growth is now roughly one times that of GDP, about 2.5% a year in real terms, or 5% when inflation is included. I can see no prospect of the market returning to double-digit growth.

Global sourcing might actually act to depress the total size of the market, as more resources are provided for less money. We should remember that in recent years rapid price deflation in PC hardware has not been matched by volume increases in the developed world. And this is something that could well happen in IT services too in the years to come.

In 1966 all the companies engaged in IT services in the UK market were UK-owned. I have watched as all the leaders back then have been acquired by foreign companies. SD-Scicon was bought by EDS, CAP by Sema (now Atos Origin), Data Sciences by IBM, Centrefile by Ceridian, ICT/ICL by Fujitsu, Hoskyns by Capgemini. I could go on.

Although we still have some small to mid-sized players, less than a third of the IT services work undertaken for the UK market is carried out by UK companies – lower than any of the main countries in Europe or, of course, the US. Although companies such as Logica CMG are battling against the trend and buying abroad, unfortunately I think it is inevitable that the UK-owned segment of suppliers will dwindle even further.

New competitors for a share of the UK market will come from the Indian players and other developing markets. By 2025 at least two of the top 10 suppliers to the UK market will be Indian.

Many people tell me that ownership does not matter. I think it does. UK-owned companies tend to list on the London Stock Exchange, creating jobs for UK accountants, brokers, financial and legal advisers. They tend to employ UK CEOs, directors and managers and often pay far more UK taxes.

And, if France can have a Capgemini and an Atos Origin, surely the UK can have one global top 10 IT services player?

The future looks exciting
My life, and the last 40 years in IT, have truly been blessed. I could give you a long list of things – from rock music to medical advances and increasing life expectancy to my ever-improving standard of living, that back up my belief that I have lived through a Golden Age.

IT too has had its own Golden Age over that period. There is a tendency to become a grumpy old man and predict that the Golden Age is over, but I do not subscribe to that.

The pace of change and disruption is now faster than ever – and accelerating. I find the technology scene more exciting than ever.

The fact that I can be “connected” anywhere, anytime and from any device has been liberating both in my work and leisure. Google has shown that big players such as Microsoft can, indeed, be challenged by newcomers. Apple has shown how you can reinvent yourself for a new age.

The future will be very different, of course. But dull it never will be.

CV: Richard Holway
Richard Holway has been involved in the UK IT services sector for nearly 40 years and is considered one of the UK's leading analysts in this field. He is a director of analyst group Ovum, having sold his own technology group to Ovum in 2000.

Holway is also a non-executive director of consultancy group Microgen and an adviser to blue-chip companies including BT.

Prior to setting up his research firm in 1986, Holway was group marketing director at Hoskyns (now Capgemini) and managing director of Wootton Jeffreys.

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