Eat or be eaten. That's the new mantra for Europe's info-tech services companies. The Continent is home to thousands of such businesses, ranging from mom-and-pop outfits that look after PCs and networks for local real estate agents or dental offices, up to globe-straddling giants like Paris-based Capgemini that score multibillion-dollar outsourcing contracts to run systems for corporations and government agencies. All told, these IT services players are vying for an enormous market, pegged by researcher Gartner Inc. (IT) at $212 billion this year in Europe alone and more than $636 billion worldwide.
Sounds juicy, but Europe's IT services companies are feeling a brutal squeeze. Tough competition is pulling down prices and thinning margins: Gartner figures European industry revenues will grow by just 3.5% this year. At the same time, clients are becoming more global, which requires their IT service providers to move beyond familiar national markets and add operations around the world. The twin pressures are prompting a wave of consolidation. "Given the limited upside in growth, we think there are all the ingredients for merger and acquisition activity to kick off in 2005," says Merrill Lynch & Co. (MER) in an Apr. 13 report.
Some of that activity began last year. Paris-based Atos Origin bought SchlumbergerSema (SLB) for $1.48 billion to beef up its presence in Britain and the Netherlands. Amsterdam-based Getronics snapped up rival Dutch firm PinkRoccade for $434 million. Many companies have struck deals to acquire the IT departments of corporate clients as part of long-term outsourcing contracts. IBM (IBM) bought the IT group of Danish shipping and logistics giant Maersk, as well as a smaller Danish firm, for $575 million, while Siemens Business Services gobbled up BBC Technology Ltd., the broadcaster's IT group, as part of a 10-year, $3.7 billion deal.
Behind the urge to merge are two trends reshaping IT services. First, computer systems are becoming cheaper and more cookie-cutter, so the work of setting up and maintaining PCs, networks, and packaged software is becoming simpler and less lucrative. Coupled with the rise of the Internet, that's driving routine care to remote centers in inexpensive locales such as India and Eastern Europe. At the same time, IT services are becoming more "industrialized." Where once software applications were custom-developed for each client, now fast-rising Indian companies such as Wipro (WIT), Infosys Technologies (INFY), and Tata Consultancy Services can churn out software that may be 90% standard and only 10% customized -- all for a fraction of the cost of bespoke programs.
With their Old Guard businesses under such attack, European IT services providers are looking for new models. They're putting more emphasis on business-process outsourcing, the fastest-growing part of the market, where companies spin off functions such as customer service or even accounting to outsiders. Some, like Finland's TietoEnator, are focusing on certain vertical markets while gingerly expanding their global presence. TietoEnator specializes in telecom, banking, paper, and health care, and though it has staff in 25 countries, it's strongest in the Nordic region. "The competitive edge we have over Indians is that we're local," says Chief Operating Officer Pentti Heikkinen. "Would a Scandinavian bank send its 24/7 IT to India? No."
Other businesses are pursuing geographical strategies. Spain's Indra Sistemas is using its linguistic and cultural ties to win clients in Latin America. And some are specializing. Getronics, the largest European provider of PC desktop management, has a presence in 30 countries. CEO Klaas Wagenaar argues that his reach and focus give him an advantage over Indian companies. "Their labor force is in India, so they can't scale it to serve global customers like Shell," he says.
Still, such strategies may not be enough. "Being in a niche will only get you so far," says Bill Scheer, editor of the Global IT Services Report in Peterborough, N.H. Clients want one-stop shopping, he says, so smaller players will have to form alliances or merge. Market researcher IDC predicts the four midsize Nordic IT services companies, including TietoEnator and Sweden's Wm-Data, may combine into two. Atos Origin, Capgemini, or others could devour smaller British outfits Xansa PLC and Capita Group PLC. The biggest potential deal of all: Troubled U.S. giant Electronic Data Systems Corp. (EDS) may be bought by a European or Indian business. "We will probably end up with a lot fewer European-owned IT services companies," says IDC analyst Marianne Kolding.
In the end, IT providers all over the world will increasingly grow to resemble each other. Western outfits like IBM, Capgemini, and Hewlett-Packard (HPQ) are building up operations in India -- and increasingly, in China -- to match the prices of rivals based there. Indian companies are beefing up their sales and support teams throughout Europe to provide on-site hand-holding in the local tongue. If midsize European players want to stay in the game they're going to have to get bigger -- and be every bit as global.
By Andy Reinhardt in Paris