Firms Jockey for Space in Tech Services

The Wall Street Journal

Big Competitors Join Increasingly Crowded Market as New-Deal Spending Slows

 Michael Dell, left, and Ross Perot Sr. Dell bought Perot Systems in 2009.

 

 

Hewlett-Packard Co., Dell Inc. and Xerox Corp. are seeking new profits in the technology-services industry. But those companies face a major challenge: While competition is intensifying, their corporate clients are spending less on new deals.

Over the past two years, H-P, Dell and Xerox have spent billions to muscle their way into better positions in tech services. The market, traditionally led by International Business Machines Co., is regarded as attractive because it provides steady revenue from customers who pay recurring amounts to outsource their tech systems like email or payroll.

But even as the total number of new services contracts awarded each year more than doubled globally between 2000 and 2009, the amount spent on those new contracts fell to $74.5 billion from $90 billion in the same period, according to tech-consulting firm TPI. The market is expected to remain tight even amid a recovering economy.

Behind the slowing growth are companies like Dow Chemical Co. that are signing smaller, shorter-term tech-services contracts. In 2000, Dow Chemical signed a seven-year deal to outsource parts of its information-technology systems to IBM. Last year, it signed a new services deal with IBM for just five years. IBM and Dow Chemical declined to disclose the dollar values of the deals.

"From a buyer point of view, you always want smaller contracts," says Dave Kepler, Dow Chemical's head of IT. Dave Liederbach, general manager of IBM's strategic outsourcing division, acknowledges that "the deal size, on average, is going down."

Industrywide, "we're increasing the number of deals, but revenue isn't increasing at the same rate," says Tom Blodgett, head of corporate tech services for Xerox, which last year acquired services provider Affiliated Computer Services Inc. for $6.4 billion.

The declining growth started last decade, says Don Mann, who heads Dell's services unit for large businesses. "The deals kept getting smaller and smaller and smaller," he says. In the past, it was common for large companies to sign 10-year outsourcing agreements with tech-services providers like IBM.

But a growing number of players in the services market, including low-cost Indian competitors like Infosys Technologies Ltd., have made the market more competitive and given customers more leverage, says TPI vice president Mike Slavin. That's allowed customers to grab smaller, cheaper deals that can be frequently renegotiated.

Such dynamics haven't dissuaded tech giants from investing in tech services. Dell last year bought Perot Systems Corp., which specializes in public-sector tech services, for $3.9 billion—a 68% premium over Perot's share price at the time the deal was reached. H-P spent more than $13 billion to purchase Electronic Data Systems. The wave of acquisitions came as profits fell in areas like computer hardware and printers.

Since the services industry has no one dominant player—IBM had less than 8% of the total market by revenue in 2008, the last year for which data are available, according to market-research firm Gartner—the big tech companies saw an opportunity to grow, says TPI's Mr. Slavin. They also saw services as a way of developing new customers who would buy computers, he adds.

In response to the slowing growth, H-P, IBM, Dell and others are also trying to cut costs by creating new software, developing niche specialties in areas like health care, and shifting to employees in lower-cost countries like India. IBM, Mr. Liederbach says, has been sending research scientists to develop new software with companies like Dow and now bids for smaller, short-term contracts with customers in the hopes of securing larger ones in coming years.

Dell's Mr. Mann says his company has created new offerings for health-care customers, which stand to receive more than $19 billion in federal funding to computerize patients' records, enhancing health care seo. Xerox's Mr. Blodgett says his company is focusing on outsourcing specific functions, like employee benefits, which ACS started managing for Ford Motor Company last year.

Still, customers such as General Motors Co. appear to have the upper hand. GM, which at one point owned EDS, played a big role in the move toward smaller contracts when it changed its outsourcing strategy in 2006. Until that year, GM outsourced almost all its technology to EDS, but in 2006 sought bids from other providers to get away from giant, single-vendor contracts. GM awarded a $700 million contract to H-P (which had not yet purchased EDS) for certain systems and also outsourced pieces of its IT to IBM and Wipro Technologies Ltd.

EDS said in 2006 that it still expected to get about $1.2 billion a year from GM, though it only had 70% of the outsourcing work, rather than close to 100% as it had in years past. A GM spokesman declined to comment. An H-P spokeswoman said the company still does work for GM.

The Pogie Awards 2009

David Pogue Lauds the best Tech Ideas of the Year

NY Times

Wow, what an opportunity! Imagine having a newspaper column published precisely on the last day of the year. What a chance to step back, look ahead, sum it all up.

Or else I could just trot out my usual end-of-year silliness, better known as the Pogie Awards.

These honors, now in their fifth consecutive year, aren’t meant to identify the best products of the year; that’s way too obvious. Instead, the Pogies celebrate the best ideas of the year — great, clever features that somehow made it past the obstacles of cost, engineering and lawyers.

Kindly turn off your cellphones and refrain from flash photography. All right, then, let’s begin.

DROID DOCKS The Motorola Droid, of course, is an app phone (that is, an iPhone wannabe with a black rectangular touch screen, etc.). It’s generally a very good one, with slide-out keyboard, excellent speed and the Verizon network.

The winner here isn’t the phone, though — it’s the docks. One $30 plastic dock suctions to your windshield. When you slip the phone into it, hidden magnetic sensors automatically fill the Droid’s screen with Google’s new GPS navigation software, complete with turn-by-turn driving directions, spoken street names, color coding to indicate traffic, map icons (for parking and so on), satellite view and more.

Or buy the $30 home dock. When you insert the Droid, the screen becomes a handsome, horizontal-layout alarm-clock/weather display, complete with buttons that let you access your music or even dim the screen for sleepy time. You have to charge your phone overnight anyway, so why shouldn’t it be doing something useful in the meantime?

ITYPE2GO In 2009, the risks of text messaging went mainstream. Statistics made it clear that texting while driving was shockingly common — and incredibly dangerous.

But what about texting while walking? You’re looking down as you flail away on your keyboard; next thing you know, you’ve crashed right into a person, a tree or a fence. Trust me: It’s hard to look cool when you’ve just face-planted on a No Parking sign.

Fortunately, iType2Go (a $1 iPhone app) is a funny idea that really works. It superimposes what you’re typing over a live camera view, so you can see where you’re going even while you’re focused on the screen.

With the touch of a button, you can also direct your typing output to an e-mail message, Facebook page or Twitter update. And you can rotate the phone to get the widescreen keyboard, if you prefer. (Similar for Android phones: Droid Text’n’Walk, $4.)

MIFI. It’s not often a company invents an entire new category with one fell press release, but that’s what Novatel did. The MiFi ($100 from Verizon or Sprint; monthly fee required) is a tiny, credit card-size, personal, portable, powerful, password-protected wireless hot spot. That’s right: you now have a Wi-Fi hot spot in your pocket, purse or laptop bag.

In many ways, it’s better than those U.S.B. cellular modems that jack into your laptop. On the MiFi, five people can connect at once. There’s nothing to connect or disconnect and store. And the MiFi can handle more things than laptops; Wi-Fi netbooks, cameras, game gadgets, iPhones and iPod Touches can get online, too.

SAMSUNG DUAL-SCREEN CAMERA The front of Samsung’s DualView TL220/TL225 ($300/$350) looks completely shiny and black. But when you tap the empty spot next to the lens, a small screen lights up there on the front of the camera.

Having a front screen is great for framing self-portraits, for letting your subjects see what they are going to look like, for displaying a self-timer countdown, or for displaying a happy face as a “Smile!” cue when you’re taking a group photo. The screen can also display a choice of cartoon animations that keep younger subjects riveted, smiling and facing the camera.

The camera itself isn’t so great, photographically speaking. But what a great idea.

NIKON PROJECTOR CAM You can’t mention great camera feature ideas of 2009 without bringing up Nikon’s Coolpix S1000pj ($430). It’s another so-so pocket camera with a killer hidden feature: a built-in projector.

When you want to show your pictures or videos to friends, no longer must you crowd them around the camera’s little built-in screen. Now, with a single button press on the top of these cameras, you can turn on the projector. The image is beamed straight from the front of the camera onto a wall, a ceiling or a friend’s T-shirt. Nobody’s going to confuse the image (40 inches, max) with an Imax movie. But especially when the lights are low and the wall is nearby, the projected image is perfectly adequate and really something to see.

BING POP-UP PREVIEWS The actual search results from Microsoft’s new Bing.com service may not be as good as Google’s. But Bing has a few incredibly juicy features, like the one that lets you point to any search result in the list without clicking. A popup balloon shows you the first few paragraphs of text on it. Without leaving the results list, you know if it’s going to be helpful. You really miss this trick when you return to Google, where you have to click a link to see what’s behind it.

PALM PRE DATA CONSOLIDATION Palm’s latest app phones, the Palm Pre and Palm Pixi, offer a software trick that’s satisfying both in concept and execution: it consolidates the different sources of your life’s information.

For example, you get to see the appointments from your online Google or Yahoo Calendar, your Outlook work calendar and your Facebook events, all on a single color-coded calendar. Ditto with your various online address books, your various e-mail accounts and your various chat program buddy lists. Simple is a good thing; we like simple.

FIND MY PHONE. Your cellphone, obviously, knows where it is, especially if it’s a model that has built-in GPS functions. So why do we wind up losing our cellphones so often?

That’s the question that Apple answered with its Find My iPhone feature, an incredibly useful aspect of its $100-a-year MobileMe service. On the me.com Web site, with one click, you can see where your iPhone is on a zoomable map.

If it’s just lying in your house somewhere, the Web site lets you make it beep loudly for two minutes, so you can hunt it down among the couch cushions. If the phone is in the hands of some stranger, you can make the phone display a message (say, “Return my phone! It’s covered with deadly germs!”) or even erase the thing completely by remote control, so at least your personal life is protected.

The only thing that could be better than Find My iPhone would be a free version. That’s what you get with certain Motorola phones, like the Droid and Cliq. May this one catch on with every phone company.

READABILITY The single best tech idea of 2009, though, the real life-changer, has got to be Readability. It’s a free button for your Web browser’s toolbar (get it at lab.arc90.com/experiments/readability). When you click it, Readability eliminates everything from the Web page you’re reading except the text and photos. No ads, blinking, links, banners, promos or anything else. Times Square just goes away.

You wind up with a simple, magazine-like layout, presented in a beautiful font and size (your choice) against a white or off-white background with none of this red-text-against-black business.

You occasionally run into a Web page that Readability doesn’t handle right — no big deal, just refresh the page to see the original. But most of the time, Readability makes the world online a calmer, cleaner, more beautiful place.

Go forth and install it.

Oh, yeah — and happy high-tech new year.

M & A Returning To Tech Industries

Story from Time

While economists and investors fret over rising unemployment and fears of a double-dip recession, investment bankers and corporate lawyers are practically giddy over a recent surge in mergers and acquisitions activity in the tech sector, replete with limos, late dinners and potentially fat fees.

A recent wave of deals, such as Cisco's decision to buy Tandberg, Xerox's plan to acquire Affiliated Computer Services, Dell's pending purchase of Perot Systems and Adobe Systems Inc.'s acquisition of Omniture have given analysts and investment bankers optimism that a nearly two-year drought in M&A activity is finally over, with tech leading the way out.

Small investors, pension funds and investment bankers are now scouring the sector, wondering which name might be taken out next. Even venture-capital and private-equity players are making their way to the edge of the M&A diving board, ready to spring back into the deal waters.

"We've certainly seen a noticeable uptick in M&A activity in the last six months and that's accelerated in the last few weeks," says Thomas Ivey, a partner at Skadden, Arps, Slate, Meagher & Flom LLP.

IPO activity is also on the upswing. "Since July 4, we have been mandated on five technology IPOs and are competing for two more," says John Moriarty, a managing director and head of technology investment banking at Robert W. Baird & Co. "A year ago, there were none."

Industry analysts say decisions by several big-name tech companies to plunk down billions of dollars on deals in recent weeks is a sign that senior executives believe the economy has bottomed and that buying now is better than buying later. "It's clearly a sign of renewed optimism" in the market and sector, says Peter Bell, general partner at Highland Capital Partners, a venture-capital firm in Boston.

Moriarty expects the deal spigot to accelerate in the next year. "Companies are focused on growing in 2010 and 2011," he says. "Many are afraid that if they don't buy now it will get more expensive [later]."

Make no mistake, this is not a replay of the late 1990s, when frenzied private-equity players and venture capitalists tripped over each other in a mad dash to snap up the next best tech company — and paid outrageous prices for starry-eyed growth forecasts. Today's deals involve strategic buyers, who are seeking out companies with solid track records and real customers. "People are focused on buying proven businesses and technologies as opposed to ideas and dreams," says Moriarty.

The bar is also higher for new IPOs. "Back in the '90s, people were able to go out with just a business plan, raise money in an IPO and then spin the company off to somebody without ever even renting office space," says Marc Pado, U.S. market strategist at Cantor Fitzgerald. Those quick-buck days are long gone as venture capitalists and others are now prepared to hang on to an investment for up to eight years.

What inspires current deals is an almost desperate need for growth. Many computer giants are struggling with declining sales and profit margins as consumers and businesses hang on to their PC systems and laptops longer, and view software upgrades as a luxury. Also, companies are being forced to slash prices on computers and related equipment to compete with cheaper products being produced in low-cost economies like China.

As a result, tech companies are eager to expand into new product lines and markets to generate growth. One such area is information-technology services. Basically, IT-services companies offer everything from integrating computer systems to IT consulting to overseeing back-office processes that handle accounting and health-care plans.

By bringing an IT-services firm in-house a tech company also answers customer demand for one-stop shopping — tech companies that will not only sell products but can also streamline the customers' business processes and manage their tech systems. "A lot of organizations want to go to one vendor to get everything, so if something breaks there's one [firm to call]," says Troy Jensen, a managing director at Piper Jaffray.

Hewlett-Packard kicked off the IT-services trend with last year's $13.9 billion acquisition of Electronic Data Systems Corp. But the trend heated up last month when Dell unveiled a $3.9 billion plan to buy Perot Systems and Xerox made a $6.4 billion bid for Affiliated Computer Services.

Other names being mentioned as possible takeover candidates in the tech services sector include Computer Sciences Corp., Informatica Corp., Cognizant Technology Solutions Corp., Concur Technologies Inc., Teradata Corp., CGI Group Inc. in Montreal, Unisys Corp. and a few firms in Mumbai such as WNS Holdings Ltd. and Patni Computer Systems Ltd. Many of the firms have seen their stocks hit 52-week highs in the past month on takeover speculation.

Some technology companies are also doing deals to diversify into adjacent businesses to gain market share. Adobe's acquisition of Omniture will expand Adobe into Web analytics, where demand has been growing for programs that monitor website traffic and improve online advertising. Oracle's $7.4 billion purchase of Sun Microsystems expands the software company into the computer hardware market and Cisco's recent $3 billion bid for Tandberg will boost the company's presence in the growing videoconferencing market.

Jensen predicts data-management firms, such as CommVault Systems Inc., 3PAR Inc. and Compellent Technologies Inc., could also be attractive takeover candidates.

Today's deals don't come cheap. Xerox's bid for Affiliated Computer Services, for example, represented a 33% premium on ACS's closing price on the previous trading day while Adobe's $1.8 billion acquisition of Omniture represented a 45% premium on Omniture's average closing price in the month leading up to the offer.

Moving into new businesses is no slam dunk. "There is always a risk when a company acquires a business that's outside their core competency," says Ivey. For example, when eBay gobbled up Skype, its plan to tap into Skype's massive customer base failed, and it's now selling Skype.

"If you're going after new markets, new products, new technologies, there's clearly a risk," concurs Bell. "But without risk, there's very little reward."