With services revenue for the year ending March 1999 coming in at $283m Computer Associates International Inc is some way off its chairman Charles Wang’s assertion last spring that the company would build a $1 billion IT services business in under a year. Following the failed takeover of Computer Sciences Corporation CA was forced to adopt a strategy of building a services division through a sequence of small service business acquisitions. This was capped with the proposed $3.5 billion cash acquisition of Platinum Technologies Inc whose performance is ailing, though the acquisition would actually double the revenue figures for the new CA Global Professional Services division. If the deal gets clearance from the DoJ, it still leaves Wang a cool $460m short of his ambitious goal.
In the longer term, the Platinum acquisition could provide a platform for strong growth in new and emerging IT service sectors. Like CA, Platinum is big on systems management, but has a strong presence in fast moving data warehousing and OLAP analysis sectors, too. In the short term though it has to be asked what exactly CA is buying because all is not well with Platinum’s professional services operation. For the quarter ending March 31, 1999 service revenues were down 5% to $52.692m on figures for the same period 1998.
Additionally, the cost of revenues for the quarter ending March 31 increased by 28% on the previous quarter to $64.576m resulting in a significant deterioration of the division’s margins. The poor performance has been attributed to a decline in demand for the division’s training services, as well as an increase in the number of billable employees. Platinum’s professional services division returned revenue of $253.9m for the year ending December 31, 1998 but with an operating margin of just 7%.
As part of Platinum’s announced restructuring program geared to raising margins to match those of its peers, 1,000 employees are to be let go. This is to include 550 non-billable staff from its service division according to analysts from the ABN Amro investment group. Along with its $1bn revenue target CA also stated that it aimed to have a consultant headcount of 5,000 by the end of fiscal year 1999. Currently this stands at around 3,000.
There is some disquiet amongst analysts regarding CA’s decision to move into the IT services market. Software license margins are very much fatter than those enjoyed in the IT service business. Investment analyst Chris Shilakes at Merill Lynch cautions that the resulting deterioration in margins could weigh on CA.
Further, some question the strategy of building an entire IT services business via acquisition. It is one thing to integrate a raft of multi-million dollar product acquisitions, but skills cannot be bought and fashioned in the same way.
In the past year there have been five main CA acquisitions. The largest came in February 1999 with the $435m purchase of Florida based consulting and implementation business Computer Management Systems. The acquisition provided 800 consultants. All of CA’s acquisitions are paid for in cash so revenue from targeted companies can simply be added on to CA’s. The CMS purchase will boost revenue by around $90.2m for the financial year closing end of March 1999. With gross margins of 39% CMS has one of the most efficient operations in the consulting arena.
December 1998 saw the $15m cash purchase of Aventura. The Oslo, Norway based company specialised in EDI and added 65 to the CA GPS consultant headcount. This buy also brought some web authoring tools and considerable know-how on EDI for AS/400. Aventura had a well-established business to business value added network for outsourced web-based electronic procurement.
Other recent CA GPS buys include Realogic, QXCOM and LDA systems each of which were principally Lotus Notes houses and are designed to help CA win business in areas beyond CA’s core product focus.
Some 600 of CA GPS’s consultants are based in Europe. Assuming the Platinum deal goes ahead CA will have a presence in many of the main European centres including the UK, Scandinavia, France and Germany. An estimated 34% of Platinum’s service revenue for the first quarter 1999 derived from Western European customers, an increase on 26% for the same period in the previous year. Platinum has around 400 consultants in Europe from a global pool of 1,000. A spokesman for GPS reported that they are currently looking to establish bases in the Baltic states, Poland, Hungary, the Czech Republic and Austria.
CA’s services are divided between its Product Services group focusing primarily upon Unicenter services and its Solution Services group that hopes to cover many of the services more usually associated with IT service organizations.
At present the product services division is dominated by services for Unicenter TNG. It should be noted though that in 1998 from $2bn of product sales in Unicenter, CA could supply only a fraction of the $4bn demand for consulting and deployment services that accompany systems management sales.
CA is currently trying to build its OS/390 consulting business and Jasmine services. Its Service Retention Programme (SRP), based upon a fixed fee and an agreed number of engineer man-hours on an annual basis, aims to maximize OS/390 investments. SRP is divided into two service levels Gold and Platinum. These provide maintenance for the CA OS/390 product suite. It includes product area assessment where a GPS consultant will provide initial and annual assessment/audit of deployed applications. The assessment also provides input for recommendations for improvements in process, maintenance, optimisation, training and consolidation strategies.
Its Enterprise Systems Assessment service evaluates the maturity of clients’ enterprise systems management practices and suggests areas for improvement. Believing OS/390 skills to be particularly thin on the ground at present, CA’s SRP offers training at a CA training centre or on-site if required. The SRP gold service also comes with help desk services delivered either over the Web or via teleconferencing.
The Platinum service offers upgrades, implementation and customisation services. These include the use of CA-PROWL tapes to speed delivery and simplify migration to CA’s OS/390 products. Platinum clients also receive onsite system programming support services for CA-PROWL tape in addition to 40 days onsite/remote GPS services to be used as a client resource in dealing with the product area assessment outcomes.
The Solution Services division encompasses workgroup, e-commerce, packaged business, infrastructure implementation and document management services. CA’s e-commerce division offers services in a range of e-commerce areas including business process analysis of value chain and distribution channels and security. Technologies covered include Internet/intranet/extranet, electronic data interchange and virtual private networks. This division boasts 1,000 consultants operating out of eight outsourcing centres to provide bespoke development and deployment. At present though this is largely a US centric operation.
Building upon its recent acquisitions of Lotus Notes houses and Microsoft Exchange experience CA claims it can offer services covering the full workgroup life cycle from strategic planning and transitioning through application consulting and implementation to business application integration
In its packaged business solutions division CA aims to get in on the boom in demand for integrating business applications such as CRM systems with back-end systems. Currently though CA has only around 40 consultants in Europe working in this area.
CA GPS’s Infrastructure implementation service offerings focus upon upgrading complex network infrastructures and the utilization of middleware. Finally its Enterprise Document Management Solutions (EDMS) practice, launched in April 1999, provides end-to-end services from initial business consulting, through architecture design, to post-support of document management environments.
