Merrill Lynch Event

                 Three Leading Service Firms & Major Market Observations

I attended last week's Merrill Lynch Internet, Software, and Services analyst conference in NYC. It was a frightful travel adventure getting (and returning from) there but quite worth the while. Incidentally, I posted a couple of exclusive write-ups on the show to the Enterprise Irregular's site. Follow this link to read a lengthy post on the big issues/challenges keeping these top executives thinking (http://www.enterpriseirregulars.com/EI/21736).

Three particular highlights were the the individual briefings by Cognizant, IBM Global Services and Accenture. As a cautionary note to readers: all three of these firms are successful service firms and my comments in this post may seem slightly skewed to the positive. That said, let's get into the insights.

Gordon Coburn, CFO, and Francisco D'Souza, CEO of Cognizant offered a number of insights into the services space. This New Jersey firm has been a darling in the services space for several years. If you listen to an earnings call of theirs, be sure to stay on for the Wall Street Q&A. Many of these analysts positively gush when they get to speak to these folks. Cognizant today has revenues of $1.4 billion and will likely grow this to $2billion by end of year. Merrill's got a great report on other financial and operational stats for them, so I won't be redundant with their work.

What's fascinating about them is this:

• all of their revenue originates from only 400 or so clients. That's it.
• they are plowing back a fair bit of their profit margin into developing the future of the business. They're investing in methods, vertical knowledge, people and infrastructure.
• of their 400 clients, 87 are 'strategic' (i.e., they generate $5-40 million/year in fees) and another 5 are deemed to be 'mature'

This firm does almost all of its delivery via India but it uses a lot of Big 4 executives to develop and grow the accounts they establish footholds within.

I've always liked this firm as it seems to be what you'd get if you cross-bred Accenture with a great Indian services company. While their client focus is "a passion for building stronger businesses" may be easy to say but they do seem to have the offshore execution, on-site sales account management and other business processes under control to realize it.

During Q&A, these two executives fielded a number of questions re: attrition in India, growth in markets beyond North America and Britain and growth into China. If you'd like more info, drop me an email or give me a ring.

Accenture's Joellin Comerford discussed:

• the firm's complete closure with any matters related to the NHS outsourcing contract.
• how the mix of outsourcing contracts they're getting now contain a large quantity of smaller and medium sized outsourcing deals. Mega-deals are far less commonplace today but this represents a new level of understanding by clients when it comes to managing risk and other factors. This phenomena is actually good for everyone involved.
• Accenture's investments in SOA. Media sources peg this at $450 million over 3 years.
• How outsourcing advisory services have changed in recent years. A new consciousness has come over these advisors and they now see that squeezing all the margin out of a deal creates bad (not good) long-term deals for clients.
• Accenture's global delivery model, particularly when backed with extensive numbers of vertically relevant local country executives is still hard for others to beat.

Steve Mills of IBM had a number of market observations in line with the other services executives. One of my posts to the Enterprise Irregulars covers his remarks in quite detail.

Now, allow me to comment on the other issues raised by analysts, investors and service executives.

• ERP vendors and service firms are on two different ends of the SOA space. The service executives see a very complicated systems environment in their client base. They don't see these companies getting everything covered with a single, closed/proprietary SOA solution set provided by a major ERP vendor. Because companies acquire software organically and via M&A activities, apps diversity and apps bloat is still a problem out there. My vote: Services firms will do much better with SOA, near-term, than ERP vendors.
• ERP vendors do not need to worry about services firms getting into the application software space. Except for IBM's middleware and traditional systems management/OS products, none of the services executives want to be in that space.
• ERP vendors are definitely not tuned into 'real innovation'. Nope, the consultancies are the clear leaders here as ERP firms see innovation as a platform, not functionality, play. This is an almost criminal abandonment of innovation by ERP players and represents a huge loss to the buyers of applications and, potentially, to US GDP.
• Consulting is making a comeback. Accenture booked a $3 billion quarter recently in good old consulting (not outsourcing). While Accenture considers outsourcing to be counter-cyclical to consulting, when both practices are firing well, that makes firms like their's a double threat.
• Weak service firms were expected to die but somehow have managed to still survive. We should expect some prolonged, lingering deaths of some of these. I doubt acquisitions are possible given the legal woes some firms possess.

Comments

[vinnie mirchandani]

Brian, no question the SAps and Oracles have slipped on innovastion but if you expect it from SIs, you are looking for love in the wrong places ...see

http://dealarchitect.typepad.com/deal_architect/2007/02/of_potatoes_and.html