It appears that in the space of a few weeks, the political parties (in this case the Conservatives) have gone from ‘consultant bashing’ to ‘major IT services company bashing’. In the Tories’ Technology Manifesto published yesterday (see Conservative Technology Manifesto), the benefits of working with the large IT services companies appear to have been completely ignored.

UK Government has been all too willing to pass on significant levels of risk to these players, to use their vast programme management experience, to use their offshore resources (under the covers), to utilise their experience of working in other sectors and in other governments, to ‘hand over’ vast swathes of their people to them in outsourcing contracts.... but now they seem to be treated almost as the ‘enemy’. Bring on the SMEs.... let’s disregard the years of experience on major IT projects that the HP/EDS’s, the IBMs, the Fujtisu’s have gathered.  

Okay, that might be a bit harsh but there really is very little to indicate how they are going to make better use of the bigger players. Let’s take a closer look:

• “Under Labour, just nine IT companies received 60% of public sector IT spending. We can’t go on like this”. Here we are back to the days of UK Government forgetting to take account of pass-through revenues. I well remember the OGC coming up with a truly crazy figure for EDS’ market share a few years back. Yes, nine companies did receive c60% as prime contractors but that totally ignores the revenues that they pass on to SMEs. If the Tories are going to spend the rest of the Manifesto banging on about the need to utilise SMEs more effectively, they should at least have a better understanding of exactly how SMEs currently benefit from public sector spend.
• “By opening up IT procurement to SMEs, we can increase competition for contracts and so drive down costs, and we can help to create new jobs and support high-tech British enterprise”. Do SME’s always want to be priming on contracts? I wouldn’t have thought they’d all want to take on the risk, or indeed have the capability or capacity to take on a £100m contract (of course, that depends how the Tories are defining SMEs). Again, it is assumed that SME’s working via the big IT companies is a bad thing (despite the fact they have the financial backing and the willingness to take on significant levels of risk).
• “We will create a level playing field for open source IT by implementing open standards across government IT systems. Open standards will also enable large contracts to be broken down into smaller modular components, so reducing risk and enabling more small businesses to bid for government IT contracts”. UK Government has (quite sensibly) taken a pragmatic approach to open source adoption, to try to ensure a cost-effective platform that allows usage of the best applications for the job. That said, the world is moving on and open standards - which is NOT the same thing as open source - is a necessary precursor to giving maximum flexibility in terms of service delivery - be that SaaS, or moving to shared services, or process outsourcing. It is however a little worrying that some people in government don't seem to know the difference between open source and open standards.
•  “To ensure that high tech small businesses are not locked out of the IT procurement process, a Conservative government will also introduce a presumption against government IT contracts worth over £100 million. These policies will not only save costs, but will also help to catalyse the growth of the next generation of high tech British IT companies”. I’m not sure where the £100m figure comes from. There have been numerous IT contracts with a value greater than £100m that have worked (even if there’s been a bumpy road along the way).  Just because contracts are broken down into smaller values doesn’t mean the IT programme itself will be any smaller or any less risky. In fact, if contracts are spread across a greater number of players, the programme will be harder to manage and actually become more risky as a result.

I am not disregarding the SMEs. Industry (and Government) needs smaller, more agile, companies to bring new ideas and innovation. The major IT services companies are also aware of the benefits of working with these players. Only this week, for example, I visited Fujitsu’s Future Concept Centre, where the company brings together technologies from numerous smaller technology firms to showcase how they can be work together to deliver an optimal solution. Everybody benefits, including the SMEs.

UK Government needs the leading IT services players so let’s hear more about how it will find improved ways of working with them. The most I read in this Manifesto was “We will transform the way that government procures IT by strengthening the capability and accountability of Whitehall departments for procurement and management”.  Haven’t I heard that somewhere before?

Acquisitive Canadian company, Constellation Software, has increased its stake in public sector document management player IDOX to just over 5%. Is Constellation moving towards a bid? Its track record would suggest so. Constellation took its original stake last November, but at its prelims meeting in January, IDOX Chairman Martin Brooks admitted that the company had had no contact with Constellation.

Constellation’s strategy is to grow by acquiring large numbers of smallish companies – particularly in the public sector. It appears to want to build a bigger position in the UK. Indeed, this is the same Constellation that recently made a fresh bid to buy education & leisure software company Gladstone (see The Gladstone stakes and track back for the complete saga). Constellation acquired 21 companies in FY08 and 34 the prior year bringing the tally to 85 companies altogether. In FY09, Constellation recorded revenues of US$331m – up 36% (but only 5% organic). Of that, 70% was public sector. So, if Active Network pips Constellation to the finishing post for Gladstone ...

We recently met up with Matt Key, Head of UK Public Sector at Siemens IT Solutions & Services (SIS). Key mooted strong growth in 2009 – we estimate revenues were up by over 30% - as the company increased penetration in its key customers (Vehicle Operators Services Agency (VOSA), National Assembly for Wales (NAW) and National Savings & Investments (NS&I)) and got a few new deals under its belt.

Key’s description of the public sector S/ITS market - “buoyant” and “active” - is somewhat at odds with our analysis and indeed with the sentiment of most SITS suppliers in the space. But, it’s all a question of perspective.... TechMarketView Foundation Service clients can read more on UKHotViewsExtra.

Music has defined my generation of ‘baby boomers’ like no other. But my, generally now ‘old’, friends argue that ‘things ain’t whot they used to be” back in the 60s/70s. I really do disagree – there is much really great new music around today. But there is one area where I do think we have taken a step backwards.

Playing an album from start to finish is still one of the joys of life. Even more so when it is a concept album designed to be played as a whole – not separate tracks. Side 2 of Abbey Road (1969) really only works if you play it from start to finish which, indeed, was the only way I could on my old Dansette record player! Then along came Pink Floyd and took the concept album to a new level. From Dark Side of the Moon (1973) to Division Bell (1994) their albums are best consumed complete.

So I rejoice in the Court win for Pink Floyd in EMI case (FT) yesterday. In the new world of digital downloads, EMI can no longer sell Pink Floyd tracks separately – they must  ‘retain the artistic integrity of the albums’. Although this is a yet another setback for the beleaguered EMI, I think it’s a victory for music!

To put the dilemma into context, I read data from the International Federation of the Phonographic Industry (IFPI) showing that digital music sales (mostly single tracks) now account for over 25% of all revenues from digital music. But physical CD sales were down 16%.

Of course, if only they could resolve their differences, the remaining members of the original Pink Floyd could solve all their financial problems by reforming and doing some concerts. I’d be the first in the queue for tickets at almost any price.

The Conservative Party (Francis Maude and Jeremy Hunt) launched their Technology Manifesto today. If you want to download it (or read it in the e-reader format) Click here.

The main proposals have been aired before. But the headline-grabber was the ‘pledge’ to roll out a 100mbps broadband network to ‘most’ of the population by 2017. We’d certainly welcome that down here in Farnham. This will be paid for by competitive pressure in the private sector plus bits of the BBC licence fee.

Other headlines to catch our eye included ‘strengthening the role of the Government CIO’. That’s John Suffolk at the moment. Francis Maude said the present CIO had to persuade departmental IT heads to collaborate. "Winning hearts and minds was all very well, but  the Richard Nixon approach ("When you have them by the balls, their hearts and minds will follow") had merit". (Quote from Computer Weekly)

The establishment of a ‘government skunkworks’ that can develop low cost IT applications inhouse and advise on the procurement of large projects - ie the much heralded Government Apps Store. The ‘presumption against Government IT projects worth over £100m” is obviously aimed at avoiding the problems of projects such as the NHS IT Programme. IT procurement will be ‘opened up for SMEs’. The use of open source will be encouraged.  Private sector non execs with ICT experience will be appointed to departmental boards. (So ex-CEOs of UK SITS companies will have continued job prospects..) They will “reform the design and procurement process for government IT.The design process should first explore simple, low cost solutions and examine existing solutions before contemplating bespoke commissioning.”

The talent supply chain will be boosted by new technical academies where the brightest STEM graduates will be encouraged to teach by paying off student loans and paying competitive salaries.

Much as I want to enthuse over this Manifesto – afterall it’s still odds on that the Conservatives will actually win on 6^th May – I do find it rather light on real substance. The £100m limit sounds attractive but there are so many current systems that we all take for granted that would have failed that test. Sure, the Government’s record on IT project overruns (budget and time) is pretty bad but most of the systems tend to work ‘in the end’. The concept of huge numbers of SMEs undertaking work at a local level, sounds good but it could be a recipe for duplicated work and inefficiency too. Bulk discounts tend to apply to...well, bulk.

When Francis Maude and his team actually take up the responsibility of Government, they might find that it’s all not quite as simple as this Manifesto implies.

Buy-and-build player, Avisen, continues to feed its voracious appetite (see IndustryViews M&A) with an agreed all-share offer for, well, another buy-and-build player, Xploite (see Xploite CEO launches NetServices M&A drive). Avisen is to pay 52.2p a share, a 43% premium to yesterday’s close, valuing Xploite at £11.4m. The only remaining operating business in Xploite is SaaS storage analytics developer, Storage Fusion, which recorded a £400k loss last year (to 31^st Oct. ’09) and for which the sales memorandum reports “sales momentum being slower to develop than originally envisaged”. Hmmm. The market has marked AIM-listed Xploite’s shares up 12% but only to 41p. Avisen, meanwhile, is down 16% to 12.3p. The whole thing looks a bit weird to me but I guess someone out there must think it makes sense.

Well, it looks like we may be on the final lap of the Gladstone Stakes, with Constellation yesterday posting its formal offer document at 33p a share (see Constellation buys and bids again for Gladstone). Gladstone is recommending shareholders sit tight to see if late starter Active Network is going to truly get out of the gate with its 36p mooted offer (see New Gladstone suitor queers Constellation’s pitch). Investors are hedging their bets, with Gladstone’s shares currently at 34p.

Retail and manufacturing software company, Sanderson, reported in a trading update today that it has won more business from new customers in the first five months than in the whole of the previous financial year. Continuing the improvement reported at its prelims (Sanderson shaping up for return to profit) the company says that new products and services are helping to win new business in both manufacturing and retail. Order intake, revenue, profitability and cash generation are all ahead of the previous year. However Chairman Chris Winn notes that there is still an uncertain outlook, and trading conditions remain tough, hence he is “cautious but confident.” Despite the caution in his statement, Sanderson shares have jumped 11% this morning following the announcement.

Although its results were previewed in January (see Computacenter mirrors the market), we never tire of trumpeting the progress Computacenter is making on the services front. At the risk of repetition, the story has been consistent for some time – product revenues down, service revenues (especially ‘contracted’) up. To be more precise, netting out the disposal of its trade distribution business, group revenues fell 5% at constant currency to £2.50b. As reported, product revenues declined 2% to £1.68b, while services revenues grew 8% to £740m.

But as always, you need to look under the covers of the services business to see the real trends. Whereas Professional Services revenues (project-based services) declined, Managed Services revenues grew 12%, bringing the contracted revenue base a tad over £500m, up 9% (ccy). This trend was broadly reflected in all of Computacenter’s core markets. The shift to higher margin services, and other cost-saving measures, also had a positive impact on group margins, with gross margins maintained (and a bit) at 14.0% (FY08: 13.9%) and operating margins up 40bps to 2.1%.

I met up with Computacenter UK MD Simon Walsh last month and also took the chance to bid a fond farewell to Mark Howling, who has moved to pastures new. As CEO of Digica, which Computacenter acquired in Jan. ’07, Howling was instrumental in developing Computacenter’s UK managed services business, and we wish him well in his new venture. Walsh really does understand where Computacenter can (and can’t) play in services, and it is a testament to their pragmatism that has prevented Computacenter drifting off into the void trying to chase services way above its station. Anyway, UK revenues fell 7% to £1.14b, but adjusted operating margins expanded a full point to 3.1%. UK services revenues were up by 2% to £334m, with managed services showing 6% growth but project services a 7% decline.

A couple of other things caught my eye in today's results. First, confirming what CEO Mike Norris told me back in January (see Computacenter mirrors the market – update) it looks like enterprises are finally upgrading their desktop operating systems with the advent of Windows 7. While I don’t think this will be a stampede, it should be some sort of driver for Computacenter’s professional services business (and product sales) over the medium term.

Secondly, there’s Computacenter’s £32m ERP roll-out. I say £32m but I have just noticed that when originally announced (see Computacenter shows faith in ERP), the bill was tagged at £25m. Hey-ho, such is the way of major ERP projects. Well, it’s £22m down with £10m to go, and all seems just about on schedule. There’s no ROI till H2 2011, which shows the great faith management is putting in the system. Brave and courageous.

But when all's said and done, Computacenter is a company that well sticks to its knitting and the results speak for themselves.

Eg solutions, AIM–listed operations management software provider, is to acquire a small Bristol-based outfit called Xtaq. Xtaq – with 8 people and a turnover of £550k – won’t make a big difference to eg in revenue terms (about 10-12%). But its business performance management (BPM)  software, Nuqleus,  is said to be complementary to eg’s own offering. Nuqleus offers real-time data capture and dashboard functionality, features which eg would like to build into its software so this offers a shortcut. Eg also has an eye on cross-sell/upsell into Nuqleus’s customer base, which includes financial blue-chips like Barclaycard, Citibank, GE Capital, and RBS. Xtaq also has some public sector clients; we remarked some while ago that we believed public sector could be a good opportunity for eg (eg solutions wades through the chewing gum). 

We are starting to hear about a lot of interesting little players in the BPM space - both Business Performance Management and Business Process Management (for example, see AOM active in BPO operations) and we expect to see much more M&A activity as the market consolidates. The holy grail for many of them, we would imagine, is to become an 'Aris', the BPM product developed by Germany-based IDS Scheer, and now owned by Software AG (see Software AG extends scale and reach with IDS Scheer). Aris has is the standard business process modelling tool in the SAP environment (and widely used elsewhere). We would imagine the likes of eg and AOM are vying for a similar position with the leading BPO players. But just in the UK there are others -- PNMSoft and Corizon, for instance -- also competing for a share of the pie.

Three cheers for the Ministry of Justice! That’s how various media sources are reporting on a parliamentary answer which shows the department reduced its spend on consultancy services from £20.7m in 2007-08 to £10.5m in 2008-09. Clearly the department has shown great commitment to the UK Government’s target of reducing consultancy spend by 50% over the next three years (see Consultants to UK Government in firing line (again!))....

Or has it? As always, it’s easy to come to any conclusion you want from statistics. It appears to me that this just comes down to timing. The majority of the reduction is a result of the end of the department’s Libra project for which Accenture was developing an electronic case management system. As a result Accenture’s payments from the department reduced from £15.5m to £4.0m.

In addition, I continue to have an issue with the way that UK Government measures “consultancy spend”. Looking at parliamentary questions, the department was asked about spend by specified consultancy firms (PwC, KPMG, BDO Stoy Hayward, Baker Tilly, Smith & Williamson, Tenon Group, PKF, McKinsey and Accenture). The problem here is that Accenture isn’t purely an advisory firm and, as a result, the ‘consultancy spend’ with Accenture was for systems development not for pure consultancy. However, other systems development spend by MoJ suppliers under the more recent ‘DISC’ contract hasn’t been included. It’s a similar story if you look at the consultancy spend calculation by the Department of Health. Again, spend with Accenture by NHS Connecting for Health is included but not spend with the other National Programme for IT(NPfIT) suppliers.

So, until we are comparing like with like, I suggest we all take all such reports with a pinch of salt.

My report Down on Farm on Zynga’s highly successful Farmville ‘social game’ created much feedback. Most of the comments seemed to question why anyone would pay real money for a virtual tractor or chicken to add to the farm. One suggested that it might have the same profit margin as selling Microsoft licences without reimbursing Microsoft (unfortunately not unknown in our sector!)

But selling virtual goods is BIG business. Already worth $5b in AsiaPac, a similar amount is forecast to be spent by US social gamers in 2010. Zynga, Playfish and many others make a considerable part of their revenues in this manner. Of course, because the payments are small – say c$1 – they are ‘easy’. The child who has played for a few hours and needs ‘one more chicken’ might well be persuaded to go to bed after Mum has speeded up the game by buying said chicken for real money.

Anyway, the strangest story I found in my research (ie putting ‘virtual products’ into Google News) was in Forbes – What we buy in Games. This concerned the Ultima Online game where, for some reason, virtual horse dung was in short supply. Players were prepared to pay “hundreds of dollars” to “lay their hands on the stuff”. Fortunately virtually not physically.

I feel I’ve wasted my life as there clearly are easier ways of earning a fortune!

In the latest edition of IndustryViews M&A (IVMA) we review acquisition activity in the UK SITS market for the final quarter of 2009 and across the year. According to data from our good friends at Regent, besides a notable pick up in M&A activity in the UK SITS (software and IT services) sector in Q4, we also saw the return of some larger transactions.

Certainly the downturn didn’t dampen the appetite of some of the industry’s well-known serial acquirers, with Capita buying no fewer than 12 companies last year. Vin Murria was also in fine fettle, with four deals at the increasingly diversified Advanced Computer Software, and three at web hosting player, Innovise.

But we fear the window which appears to be opening again for both M&A and IPOs may shut sooner than you might expect. Indeed, latest data from Regent indicates a dip in M&A activity last month, albeit not unexpected for the time of year. TechMarketView Foundation Service clients can form their own judgments by downloading IVMA today.

At the half-way stage last year, Anite CEO Chris Humphrey advised that Q4 would be more than usually critical to its FY results (see Loss-making Anite nails colours to wireless mast). In today’s Q3+ IMS, he reiterated that statement. With less than two months to go to year-end there seems to be no material change to management’s expectations or indeed to the business signals. Travel revenues were down, Wireless up. Net net, Q3 revenues down yoy, but order books were rising in both divisions.

But as we said last time, it’s all down to Anite’s LTE (4G) proprietary testing products, now that it has severed its relationship with Agilent. Management reports positive customer sentiment and Q3 revenues higher than the whole of first half. But the level of uncertainty repeated in today’s statement is not hugely encouraging.

Workforce optimisation software specialist Allocate Software reports a strong Q3 with a string of contract wins in the UK and internationally.  Its healthcare offerings are still, it seems, proving popular with NHS customers. Contracts secured during the quarter included eight new NHS contracts for its e-rostering application taking its NHS customer base for that product to 105 Trusts. It is also encouraging to see some sales of its new e-Expenses solutions for the NHS, albeit only three.

Perhaps most interesting though are the new international customers – Allocate has signed its first healthcare customers in New Zealand (Capital & Coast District Health Board) and Australia (ACT Health Board). If managed carefully, this international expansion could prove a useful avenue for growth for Allocate, which has ambitious plans to achieve organic revenue growth north of 20% per annum over the next three years (see Allocate Software’s big plans for more on its strategy for growth).

StatPro is building itself a strong and profitable niche serving the global asset management industry. Today’s results for the year to end Dec’ 09 reveal a 13% increase in turnover to £31.5m, adjusted EBITDA of £8.63m (2008: £6.75m) and PBT of £7.4m (a 471% improvement on last year). The trading analytics software company is confident that 2010 will see continued revenue and profit growth thanks to high levels of recurring revenue and new product launches.

Total revenues increased despite a 32% reduction in consulting revenue (to £2.1m) as clients delayed expenditure in response to the global recession. On the flip side, levels of recurring revenue were up by 19% in the year to 93% of total revenue giving StatPro great revenue visibility going forwards.

The 123% increase in free cash flow to £6.3m in 2009 also enabled StatPro to pay down a good proportion of its debt and it ended the year with net debt of £8.9m, compared to £14.6m the year before. The post balance sheet sale of source code to Johannesburg Stock Exchange brought net debt down further to £6.4m.

The company continues to benefit from the move to SaaS (see StatPro anticipates new SaaS revenues and SaaS winning the argument for StatPro). As a proportion of analytics revenue, some 20% of its clients are on its new SaaS platform up from around 10% at the start of 2009. StatPro also boasts a large pipeline of existing clients wanting to make the move to SaaS and expects many more clients to convert this year.

As we’ve said before, the move to selling considerably higher volumes at a considerably lower price point with its new SaaS products implies quite a change to the sales and marketing model. We’re pleased to see StatPro saying today that the focus will now be on organic sales growth with investment in its sales teams and an increase in its marketing profile, particularly on the web.

Although gross margins improved in H2 for Cologne-based and London-listed testing services player, SQS, CEO Rudolf van Megen warned of ‘lower than pre-recession gross margins’ in 2010 due to ‘ongoing economic uncertainties and pricing pressures’.

Otherwise results were pretty much in line with January’s trading update (see SQS back on track), after its profit warning in May (see Testing services slowdown prompts SQS profit warning). Revenues for the year to 31^st Dec. ’09 fell 6% (as reported) to €134m, though FX accounted for about half the decline. Gross margins were clipped by 3 pts to 31.7%, with H2 recovering to 33.9%. EBIT margins almost halved to just 4.4% (FY08: 8.3%). SQS’ UK business (includes Ireland, South Africa and India) was particularly hard hit, with revenues down 18% (constant currency) to €33m. Revenues in home market Germany fell 7% to €64m.

SQS is trying to do all the right things to fight the many battles in the marketplace. It has increased offshore headcount by 20% to 310 while holding total staff numbers flat at 1,168, bringing the offshore FTE ratio up from 22% to 27%. They also have a fledgling managed services (i.e. fixed price contract) business which today is only 3% of revenues but has the ambitious target of generating half of SQS’ revenues ‘over the medium term’.

The big question, in all honesty, is how much faster can they move on both these fronts?

Offshore testing is now the norm in the marketplace. It is dominated by the India-based SIs, led by Wipro, which generated just over $500m from its testing services in 2009. And Indian players can perform as much as 90% of testing activities offshore. They are also masters at fixed price contracts (typically around 40% of their total revenues), which demands a level of finesse in project estimating as well as execution which I would suspect few other players have yet achieved.

SQS also talks of an ever expanding market opportunity for testing services, though I’d like to think that bandying around mega-billion dollar market estimates impresses only the ignorati. We do believe there is a viable and growing market for testing services (and see our SoftwareViews - Software Testing Trends research note), but this will be increasingly dominated by scale players. We’re not just talking about the Indians. Last month Capgemini finally got its testing act together, merging its core testing operations with those of its bodyshop brand, Sogeti, as we had urged them to do last May (see ‘Flat is the new good’ - Capgemini on India). This brings Cap’s combined testing headcount to 6,400, of which a third are based in India.

There will be little wriggle-room for mid-sized generalist testing firms like SQS, the largest among its ‘independent’ peer group. They key as ever in commoditising markets will be either consolidation or intense specialisation. Frankly, there is such a rag-bag of players sitting underneath SQS in the testing marketplace that I’m not sure consolidation makes a whole heap of sense. So my sense is that it will come down to market focus. That, to my mind, is the real challenge for SQS.

We got another prediction right this week. We predicted that all the media would be full of features around 'Ten years since dot.com bubble burst' today/10th Mar as that's the anniversary of NASDAQ hitting its all time high. (Eg see FT article today) However, we did our 10th anniversary review on Saturday - See 10 years ago today - as that was the 10th anniversary of the dot.com bubble bursting in the UK; representing the all-time highs for the UK's Techmark100 and FTSE SCS Index.

Let me restate one important point. Just as the current financial crisis was caused by the greed and stupidity of investors and bankers rather than the 'real' companies that design and build things, so the same applied to the dot.com boom. It was investors - from 'private' day traders to big institutions - that caused valuations to rise to crazy levels. It was investors who ploughed billions into internet start ups with no business models capable of earning revenues let alone profits before the cash ran out. Conversely the forecasts that were made for internet takeup were not only achieved but considerably surpassed. Indeed, those internet companies that had viable business models have produced great returns for their investors over the last ten years - as any Google or Amazon investor will testify.

In 1999, I remember sitting on a kind of Dragon's Den panel chaired by Michael Jackson of Elderstreet. Applicant #1 talked of 'eyeballs' but I asked him where his profits were to come from. Applicant #1 looked puzzled. Surely the profits would come when they sold out at IPO? Applicant #2 arrived with the same 'let's build eyeballs' model, so I changed tack and asked where the revenues were going to come from? I got a similarly puzzled response. When Applicant #3 arrived, Jackson immediately warned "We have a bit of a dinosaur on the panel today who is going to ask you where your revenues are going to come from so you better have an answer!'

Today I'd ask where the positive cash flow was going to come from. In fact, I am more and more convinced that startups having large amounts of investor cash in the bank is a bad thing. Generating cash from your customers at the earliest opportunity is a much better model. I guess that means I'm even more of a dinosaur today.

When AOM founding CEO, Richard Jeffery, asked to brief us on his company, I thought I was going to hear about yet another UK SaaS start-up.

I had completely missed the point.

What I actually heard about was a UK-based operations management consultancy that uses its own IP (delivered as a service) to play at the very heart of back-office BPO.

Active Operations Management International (to give it its full monicker) has a proposition all about giving enterprises better control of (mainly) back-office operations. Based in Reading, AOM runs an associate-leveraged model with subsidiaries in South Africa and in India, and franchises in Australia and in North America. About two-thirds of its £5m revenues derive from its international operations. AOM is profitable (always has been) at some 28% operating margin, with big growth plans.

The client list skews towards major banking groups, but also includes UK BPO player, Xchanging, as well as Capgemini and HP Enterprise Services (i.e. EDS). Indeed, the more I heard about what AOM does, the more I thought that other BPO players ought to be all over this company like a rash.

There’s other interesting aspects about AOM which I won’t go into here, in particular its use of an Indian offshore partner to co-developing its core IP.

You can argue the case whether AOM is really in ‘our space’ but its proximity to back-office BPO and its SaaS IP delivery is good enough for me. One we shall certainly be keeping our eye on.

No, it’s not a bad joke, it’s apparently for real. An article in the FT reported that some £74m of public money invested in Regional Venture Capital Finds (RVCFs) has been written down to just £5m, with many funds showing huge losses and few successful exits.

RVCFs were set up by the Government in each of the UK’s nine regions, with the first launched in 2002. The initiative aimed to raise a total of £250m, mostly from the private sector, with £74m funded by the taxpayer. RVCF’s could invest up to £250k per initial investment in each start-up and up to £600k in total. All nine RVCFs have since closed to new investments, though Early Growth Funds (EGFs), launched at much the same are still operational. EGFs have a £100k investment limit which usually has to be matched by private sector funds.

According to the FT, the Department for Business Innovation & Skills (BIS) had invested £338m in 28 VC funds, including RVCFs. It was especially critical of the claimed £46m spent by RVCFs to fund managers vs the £130m actually invested (where can I apply for that job?).

Yet BIS’ own report on the efficacy of RVCFs and EGHFs published in January gave a generally positive assessment of the funds, though with the caveat that “the full impact of the RVCF and EGF programmes can only be carried out once the investments have been fully realised, perhaps 2012 at the earliest (our italics).” This is despite a record that I reproduce verbatim:

“At the end of December 2008, a total of £226 million had been raised by RVCFs, including a Government commitment of £74 million. In total 356 businesses received investments, of which 91 have been written off and 18 exited. Over £200 million has been invested alongside EGFs, which received a Government commitment of £31.5 million. In total 138 businesses received equity investments from six EGFs, of which 34 have been written off and 1 exited, whilst 85 businesses have received mezzanine finance from a seventh EGF, of which loans to 13 businesses have been written off.”

I have tried to establish the link (if any) between the RVCFs and the network of nine Regional Development Agencies, some of who are very active investors in IT start-ups. However, this is not apparent at first blush from any of the government websites. But I did find a kluge of reports (including the one above) on the BIS website which purport to “contain evidence on the environment for business offered by the UK, in particular whether it enables the start-up of new businesses and growth of existing ones.” I really don’t know how UK start-ups are meant to negotiate the maze of Government-assisted ‘support’ programmes on offer, and I suspect many don’t even try.

The FT article includes a statement from Edward Leigh, chairman of the Commons committee investigating Government investment in VC funds. “Whether the investments represent value for money is entirely unclear”. Really? I think it is very clear indeed.

One of the joys of Facebook is finding out what your ‘business’ friends do in their leisure time. One such, a lady CEO of considerable industry reputation, is a major user of Farmville. However, she swears that she only plays to keep her young nieces and nephews happy and never pays a penny.

Social gaming is a major phenomenon - the market will be worth c$6b in 2010 some suggest (see The Times - Fun and games as web giants play catch up).  60% are female. The ‘average’ Farmville player is 43 and female. 15% of all Facebook users play Farmville which just happens to be the most successful social game all. Farmville has 82m million players – well, that’s probably already out of date as it is growing at 1m a day! Farmville is owned by Zynga which also happens to have other best sellers like CafeWorld and Mafia Wars. Exactly how much revenue they make is difficult to assess - $100m, $150m, $250m (or is that ‘run-rate)? What we do know is that they raised $180m in Dec 09 which put a valuation of $2b on the outfit. An IPO at $3b is now being suggested.

Social gaming is far from the image of the lonely saddo with no friends hunched over his PC. Farmville is much more like the board games of my youth; the playing of which taught me much of my social skills.

But even though my Facebook friend swears never to have bought an extra acre of farmland or a new tractor to make life easier, clearly a lot of other players do. Zynga is finding life good ‘down on the farm’.

The European Information Technology Observatory (EITO) has released its latest market forecasts for the global ICT market (Click here for full Press release) . Personally I thought it was a bit disingenuous to issue them under the headline Global high-tech market is growing again. Sure, EITO estimates the global ICT market will grow by 1.9% to €2.3trillion in 2010 but that’s less than global inflation and much lower than global GDP growth for 2010. Still I suppose it’s better than the 1.6% fall in 2009.

But the growth in the EU is anaemic – to say the least – just 0.1%. Now that is certainly negative in real terms and lower than the albeit equally low forecasts for EU GDP. US is expected to grow at 0.4% but Japan – the third largest global ICT market will decline by 1.3%

It’s the BRICs where all the ICT action is. But, as you can see in the chart, the BRICs still represent a small percentage of the global ICT market. By sector, telecommunications will grow by 2.9% - but ‘diversity of performance’ yet again rules the day with a 4.6% decline in fixed network voice but a 1.4% increase in mobile with mobile data services up 16%. Software and services will grow by 1% - slightly ahead of the market but still negative in real terms.

I’m unsure if the EITO will tell HotViews readers anymore than they will have known already by reading our many forecasts over the years – indeed it’s all pretty much in line with our latest MarketViews 2010 released this morning (see Latest MarketView points to another decade of decline) That comment makes even more sense when I remind you that EITO is produced by our partners PAC. It’s just that you’d never think it reading the EITO “high-tech market is growing again” headline!

At Atlanta’s HIMSS healthcare IT conference last week, Dell extended its partnership with BridgeHead Software, a small UK-based data management and storage virtualisation software company, as part of its attack on the healthcare hardware market.

BridgeHead Software’s focus on healthcare is a fairly recent (and very sensible) move designed to differentiate it from its much larger competitors – the likes of Symantec and Comvault. That is not to say that BridgeHead doesn’t already have an interesting story to tell in healthcare. Back in 2003 it was selected by US hospital information systems (HIS) supplier MEDITECH to provide the software that backs up its systems. That relationship has gone from strength to strength and now more than 70% of BridgeHead’s revenue is directly related to its MEDITECH business and BridgeHead’s software is in over 1,000 hospitals worldwide.

We recently met up with Tony Cotterill, founder and CEO of BridgeHead Software, to learn more about the company and discuss its plans for the future. TechMarketView subscribers can read our views on this interesting ‘little British Battler’ on UKHotViewsExtra.  

Not even a week after picking up its hosting partner, DigiMIS (see K3 reaches for the clouds), supply-chain ERP software player, K3 Business Technology announced that it has acquired the main bits of Netherlands-based ERP solution provider to the fashion industry, Pebblestone. K3 will pay up to €2m for the Microsoft Dynamics focused player, which turned over just under €4m last year with about €0.5m pre-tax profit. That sounds rather reasonable at first blush, especially given that future year tax deductions will bring the net price down to €1.5m.

K3 also announced interim results based on its new June FY (to line up with Microsoft). Revenues for the six months to 31^st Dec. ’09 rose 15% to £23.5m while operating margins trimmed back just 40bps to 18.4%. K3 chairman Tom Milne sees tough market conditions ahead though was optimistic on new business pipelines.

A new suitor for education, health and leisure software player, Gladstone, made itself known just after markets closed last Friday, in the guise of US-based Active Network, a ‘provider of application services technology and marketing solutions for community service and participatory sports organisations’. Active Network has mooted a 36p per share offer, trumping Constellation’s 33p offer last week (see Constellation buys and bids again for Gladstone). Gladstone’s board said they would make the ‘dash for Active Network’s cash’ if no higher bid was forthcoming, however Constellation now holds nearly 44% of Gladstone’s stock and seems desperate to take the company out. Don’t you just love an auction?

NorthgateArinso, one of Northgate Information Solutions’ three divisions, announced plans last week to acquire the HR Management division of US provider Convergys. This looks like a good buy from Northgate that promises to significantly strengthen its HR business and boosts its presence in the US market.

Northgate is paying c$85m in cash on closing and $15m in cash over three years for the assets – including the global HR service delivery network and entire customer portfolio – of Convergys’ HR Management (HRM) division. Prior to the sale, Convergys had expected the division to turn over around $250m this year with an EBITDA of $20m. The valuation of 5x EBITDA is roughly in line with where Convergys’ shares were trading before the deal was announced.

The acquisition, which is expected to close in Q2, could be ‘transformational’ for NorthgateArinso. Most significantly, Convergys HRM will provide NorthgateArinso with considerably stronger presence in the important US market, which accounts for over a third of the global HR services market. As Chris Stone, CEO of Northgate Information Solutions said: “As it is home to many multinational businesses, it is a critical marketplace for us as a specialist and we expect to strongly develop our position in the US over the coming years.”

The purchase will also add scale for NorthgateArinso, which already claims to be one of the top five global HR services companies, and help to boost its global credentials. Convergys HRM will bring around 2,300 employees to NorthgateArinso, taking the HR business to around 8,000 employees, a third of which will be based in the US. Combining Northgate’s HR software and services expertise with Convergys’ HR outsourcing know-how could also create opportunities to develop the business.

As for Convergys, it will now focus on its Customer Management and Information Management businesses but this may not be the last sale we see. The company has promised to “take opportunities to further streamline the business as they are identified”. 

... with the caveat that “trading conditions still have some way to go before they can be regarded as normal”. That’s the picture for ‘ITSA-Plus’ (IT staff agency) recruitment firm, SThree for its first quarter (to 28 Feb. ’10) and is pretty much in line with commentary at its prelims last month (see SThree “pragmatic but positive” – Update). Like most companies across the IT sector that we speak too, CEO Russell Clements talks of an ‘encouraging’ pipeline, but we do urge you to consider this in the context of our comments in our just-released MarketViews SITS Forecasts report.  

For the record, SThree is becoming even more international, with 60% of gross profit deriving outside of the UK (FY09: 55%), though this has more to do with the horrible conditions in the UK market (GP down 36%) compared to outside (GP down 19%). But as I have said before, SThree is a class act in the ITSA world and has traditionally withstood downturns better than most recruitment firms with its multi-brand focus on the mid-market. Long may it be thus.

TechMarketViews publishes latest MarketViews UK SITS Market Size and Forecast

Last Decade...Next Decade?
The last decade had hardly got under way when Richard Holway rather stunned the industry with his prediction that the UK IT market would likely end the first decade of the 21st century as a lower proportion of UK GDP than when it started. This was in November 2002 and we were at the tail end of the dotcom downturn with little sign of recovery. Holway’s pronouncement did not fit well with the industry’s hopes and expectations, despite the fact that the UK software and IT services (SITS) market—generally the fastest growing IT segment—was only jogging along at around GDP growth rates, compared to the spectacular 20%+ growth seen in the run-up to Y2K.

Well, Holway was right!

And here we are, just at the beginning of the second decade, and we fear that it will be no different. As best as we can call it, we think the UK IT market will probably grow slower than GDP over this decade too.

2011 ‘double-dip’?
We are especially nervous about the prospects for market growth in 2011. Of late, we have been asking the ‘captains of industry’ how business is going this year. Most talk of healthier pipelines and ‘more conversations’ with clients, which they reasonably take as signs of demand returning. None, by the way, are calling it anything like ‘business as usual’ and most are still cautious on their outlook.

But when we ask them whether customer decision-making is getting any faster or easier, the general answer still seems to be no. In other words, the pipeline may well be getting fatter, but there’s still a thin nozzle at the end.

And when we then ask them what’s in the pipeline, it’s very largely projects that had previously been delayed, cancelled or curtailed. In other words, very little genuinely new demand.

Our worry is this. Although the IT ‘tap’ is now being turned back on again, it’s more a dribble than a deluge. Any demand recovery in the second half of this year may be very muted indeed, leading to another year of market decline. Indeed we expect the UK SITS market will contract by nearly 2% this year in real terms, about half the decline in 2009.

Now ask yourselves this. What will happen once the delayed/cancelled/curtailed projects have finally flushed through the pipeline? What’s following on behind them? As yet, not very much. In other words, at current course and speed, there is a real risk we could well be in for a ‘double dip’ in the UK SITS market in 2011.

Read more in our latest MarketViews report
TechMarketView Foundation Service clients can see our full market forecasts, compiled in cooperation with our research partners, PAC, in our MarketViews UK SITS Market Size and Forecast report, available for download now on our website.

I’ve never been one to let a significant anniversary pass. So let me remind you of 6^th March 2000. That was the day that both the TechMark 100 (5743) and the UK FTSE Software & IT Services Index (5542) hit their all time highs. You might get others writing similar articles on 10^th March as that was when NASDAQ hit its high (5048). At least, in this, the UK was ahead of the US!

The extent of the fall has been amazing. The FTSE SCS Index crashed to an all-time low of 269 on 23^rd Sept 2002 – some two and half years since its high. As you can see from the chart, it then doubled by early 2004 before a long decline to another low of 320 in Nov 08. Since then it has doubled again to today’s 637.

As with all things ‘stock market’, it’s all in the timing. UK Software and IT Services  investors have done very well in the last 18 months. But those that might have thought investing ‘for the long term’ was the right approach would be nursing a near 90% loss over the last 10 years.

In comparison NASDAQ has fared much better. NASDAQ is ‘only’ down 55% (at 2292) from its peak. The TechMark 100 (1836), however, is down 70%. These indices included a much wider spectrum of tech stocks – from hardware to telecomms to biotech. Clearly, Software and & IT Services has been hit the hardest of all.

I’ve said many times that I don’t give share tips but I would guess I was on pretty solid ground to repeat my prediction that the UK Software & IT Services Index  will never see the heady heights of March 6^th 2000 again – well in my lifetime anyway. But I’m pretty sure there will be other bubbles in other regions (many suggest China is a current ‘bubble’ candidate) and other areas of ‘tech’.