We’ve got too much on the go in the UK to look abroad, says chairman of UK SAP specialist services company Diagonal Plc, Mark Samuels, basking in the afterglow of a third successive award for SAP partner excellence.
The UK has been a happy hunting ground for the Farnham, UK-based firm; revenues for the year ending November 31 1998 grew by 56%, expanding from 44.8m pounds to 70.2m ($72.2m to $113.1m). Pre-tax profits advanced from 3.7m pounds to 7.4m ($5.9m to $11.9m), making margins 10.5%.
The company opened an office in Leeds earlier this year, to add critical mass in the north of England, where key customers like supermarket chain Asda have headquarters. Diagonal’s acquisition of Conos Resource Ltd in 1997 for just 2.1m ($3.3m) seems a snip considering the firm had sales of 3.2m ($5.1m) in 1998. The opening of the Leeds office is the fourth step in a gradual progression which has consisted largely of adding bolt-on recruitment agencies to give value and stability to the consultancy.
Firms were poaching staff, says Samuels, so Diagonal established its own recruitment elements to control personnel freefall. The purchasing of Mapp Ltd (1988), Marshall-Wilkins Ltd (1989) and Strand Computer Systems Ltd (1995) are representative of this pattern.
Instinctively, we’re from a consultancy background, says Samuels. He set up the company in 1988 with three other directors, all migrating from management and computing consultancy PE International Plc. As the group managing director of PE, Samuels created a computer services arm in 1972 and he took the firm to the stock market in 1986. He now owns 4.2% of Diagonal’s shares, with 16% owned by four executive directors, 15% by staff, 13% by venture capitalist 3i, and the majority by institutional investors, including Henderson Investors and Clerical Medical.
Consultancy seems to be where the action is, growing by 72% last year. Just under half of all revenues are derived from SAP business, but Samuels is keen to build on Diagonal’s success with the giant German ERP provider. SAP may represent only 44% of sales but Samuels discloses that in terms of profit, it is rather more than that.
SAP revenues, broken down between the implementation division and the support side, reveal a ratio of 2:1 ( $27.0m:$11.7m). The average cost of a good-sized Diagonal contract yields $3.2m in software licenses and $8m in consulting. Diagonal is spread in its vertical markets, represented in pharmaceuticals (15%), manufacturing (13%), energy (8%) and electronics (9%) among others.
SAP represents one element in Diagonal’s strategy. The other is playing the UK card. We’ve got more than enough on our plate to stay in the UK, says Samuels. He is looking to the support side to grow very strongly this year. Diagonal’s 220 staff will become 270, but there is no blue-print to move into Europe. A small proportion of the firm’s revenues derive from continental Europe, but aside from the pharmaceuticals behemoth Hoffman-Laroche in Switzerland, Diagonal’s most lucrative contract, all the European money is funneled through Britain. Royal Dutch Shell is one example of a multinational who pays through the UK.
Samuels shuns continental Europe because of its crazy legislation; employment regulations which reduce employer flexibility and heap fixed costs on the business, both anathemas to Samuels, whose business plans for the last ten years have been predicated on the employment versatility that agencies provide.
Legislation is proving a growing source of contracts for the company however. The increasing demands on employers to keep detailed and long-lasting records of employees means business for IT consultants. There is scope here for growth in the market as well as acquisitions. Samuels is unwilling to give too much away, but he does say I’m looking at a particular company, to do with legislation, and to do with consulting.
