UK Continues to drive growth

Logica and Capgemini reported interim 1Q09 results with UK revenue growth of 7% and 4% respectively. Atos Origin's 1Q09 results (announced on 16 April) showed the UK growing at 8%. For all three companies the UK is now the strongest-performing region worldwide. This is strong evidence that the UK is proving more resilient to the downturn than other markets. Picking the sweet spots and avoiding costly dead ends is going to be crucial for IT services providers in 2009. In the more mature UK market, this equates to a relentless focus on outsourcing to help customers reduce costs, as well as a clear emphasis on the public sector, which continues to spend for now. Standalone consulting has all but dried up, but consulting as a complimentary component to an outsourcing sell is paying dividends.

Telecoms and Software News

UK's potential for further growth

Logica's UK orders shot up 24% in 1Q09, largely thanks to its £76-million seven-year win with the National Police Improvement Agency (NPIA) to develop the Police National Database. This is going to be a phased contract and has the potential to grow following the early development work. We suspect Capgemini's UK orders aren't as impressive, but revenue growth nonetheless was healthy (7%) due to its ability to leverage its public sector assets such as with HM Revenue and Customs (HMRC) where it is a key partner in consulting, advisory and outsourcing. Group strategy director Martin Cook says that Capgemini is still benefiting from lots of smaller project deals for early design-phase work - a strength that Capgemini can leverage on some of these embedded customer relationships.

IT outsourcing remains the primary driver

IT outsourcing (ITO) is driving opportunities in the UK. Group-wide, Logica's outsourcing revenues were up 9% in the quarter, and orders are steaming ahead, up 44% thanks to significant wins such as the NPIA and the UK's Law Society (£12 million), as well as with TeliaSonera in Sweden. Logica expects to see outsourcing revenues growing throughout 2009, so the signs are certainly good - not least in the UK, where outsourcing makes up the highest percentage (45%) of Logica's revenue mix.Capgemini too is seeing a surge in outsourcing bookings - up nearly 40% group-wide in 1Q09. Its notable UK ITO deal is a £14-million five-year contract with Atkins to provide IT infrastructure and applications services. Cook stressed that a large number of first-generation ITO are deals coming through, and it should benefit from these over the coming quarters both in the UK and in other territories.

UK public sector keeps on spending

Despite longer-term concerns, the UK public sector is currently acting as a safe haven. Logica saw UK public sector revenues grow 10% in 1Q09, thanks largely to the NPIA deal. Looking ahead, Logica's pipeline is mostly weighted to public sector and telecoms. Capgemini is seeing significant growth too. Group-wide, public sector now accounts for 28% of revenues, up from 24% in 1Q08. Despite a fall last year, Capgemini benefitted from increased project spending at HMRC on business intelligence and information management systems to improve revenue accrual. We expect Capgemini to benefit further as new opportunities emerge to assist HMRC in reducing tax avoidance. The UK government is currently responding to its financial challenges through a proactive investment in systems and technology to plug revenue leakage. Capgemini and other suppliers would do well to seek out related government 'revenue-leakage' opportunities.

Environment Agency big ticket

Both Capgemini and Atos Origin are bidding on the potential £700-million first-generation IT outsourcing contract at the Environment Agency. This contract is one of the UK's largest in 2009, and is attracting a lot of interest. We would expect IBM to be there too since it provides consultancy to the Environment Agency, and is the lead ITO provider to its department DEFRA.The Environment Agency deal has the potential to deliver a £100 million per annum boost for the winner, and all suppliers are competing on an ambitious sustainability-led procurement. Capgemini has a strong message around the desktop (thanks to its experience at HMRC) and is deploying its consultants to test sustainable ideas, while Atos Origin is exploring green data centres and reducing energy consumption. The eventual winner will need to prove its vision for sustainability through a strong track record elsewhere in government and a willingness to be flexible on terms, pricing and delivery.

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