European IT services companies enjoyed record growth of about 20% in 1998, according to Paris-based Pierre Audoin Conseil, a small IT services analyst group. In its sixth annual roundup of the European services market, Christophe Chalons of PAC comments that, along with increasing revenue, there has been an accompanying general improvement in profitability.
These exceptional levels of growth were fueled by favorable GDP (gross domestic product) growth rates of around 3% in many of the suppliers’ national markets. PAC notes also that, as many large corporations took the opportunity to upgrade hardware and networking platforms as part of their Y2K and Euro preparations, there were business opportunities in the sector for suppliers of every size. However, with GDP rates falling across Europe and the Y2K services sector reaching the end of its life span, PAC warns that the market will slowdown in the near term to around 12%.
Chalons stresses that Europe should not be seen as a homogenous market. Countries with centralized economies like France or the UK tend to generate better opportunities for project services, while countries with a decentralized federal structure and high numbers of small and mid-sized businesses such as Germany are more attracted by ‘solutions.’ Here product sales are tied to services. Germany also has a large manufacturing sector which is influenced differently by economic forces than other countries, such as the UK with its large financial services industry or Italy with its high level of government ownership.
PAC points to desktop and ERP outsourcing as being particularly strong in Germany right now. The arrival of these new ‘selective outsourcing’ sectors has allowed access to new entrants and boosted revenue for established leaders like EDS, debis Systemhaus, IBM, CSC, Sema Group and SBS. New players are being drawn from the hardware manufacturer and PC reseller side of the industry. Hardware suppliers have come in on the back of maintenance and product support divisions while PC resellers have become targets for acquisitions by companies such as Debis and W M-Data. Independently, resellers like Computacenter and the leasing company of GE Capital have also managed to build strong businesses in this area.
PAC’s Jean-Francois Perret reports that the number of IT services start-up companies doubled in the two years between 1996 and 1998 compared to the previous two years. Perret puts this down to the emergence of internet technologies in Europe as being the main engine behind this population explosion but cautions that mortality rates are likely to be high. He also notes the increasing penetration of US services companies in continental Europe. Internet leaders such as AOL-Netscape are poised to make the European top 20 services companies as early as 2000, while others will make significant inroads with the provision of online subscription-based services.
Europe is also seeing an increased level of acquisition activity from US IT services companies with the likes of Keane, Renaissance WorldWide and Metamor WorldWide all active in the market. More generally, Perret expects the market will experience a degree of consolidation that will see a few leading providers capture around 5% to 10% of the European IT services market.
