IT braces for the crunch

The SmartCompany Dun & Bradstreet Industry Growth List for the information technology sector reveals a sector that is growing strongly through specialisation and international expansion. But there are tough times ahead. By JAMES THOMSON and PATRICK STAFFO

By James Thomson and Patrick Stafford

The SmartCompany Dun & Bradstreet Industry Growth List for the information technology sector reveals a set of results that are unfortunately not indicative of the year ahead.

These are nervous times in the information technology sector. While many of the companies on the SmartCompany Dun & Bradstreet Industry Growth List have enjoyed strong growth over the past 12 months and are confident of further growth, IT spending is slowing and a wave of consolidation is set to begin.

The 50 companies on the SmartCompany Dun & Bradstreet Industry Growth List (see end of this feature) range in size and specialty from IT services giant IBM (revenue: $3.9 billion) through to Objective Corporation (revenue: $27.6 million), which specialises in content management systems for government bodies and corporations.

The total revenue of the companies on the list rose 21.8% to $33.3 billion, compared with $27.3 billion in the previous corresponding period. The list is dominated by mid-to-large-sized firms, with the average revenue of the companies on the list being $665 million.
(See the top 10 at right.)

On top is IBA Health, which specialises in software for the healthcare sector. The company’s suite of products includes software for patient record keeping, facilities management, electronic claims management and professional accreditation.

The company’s revenue soared from $59.2 million to $358 million in 2007-08, thanks mainly to the company’s acquisition of British software company iSoft in October 2007 for $408 million.

The company’s executive chairman Gary Cohen says the deal has helped IBA become a global company.

“Twelve months ago we were an IT company focused on the delivery of healthcare solutions, primarily in the Asia-Pacific region,” Cohen said in October after the release of the company’s 2007-08 earnings.

“Fast-forward to the present and we are one of the largest providers of healthcare solutions worldwide, with more than 13,000 customers in 35 countries and nearly 3800 employees. Our business now generates more than 85% of its revenue from outside our traditional territories in Australia and south east Asia.”

IBA has forecast revenue will grow to $540 million to $560 million in 2008-09 as the company’s offshore push continues. “We have opportunities in new markets, such as southern Europe, Russia, the Middle East, China and Latin America as well as in the UK around London and the south clusters,” Cohen said in recent briefing.

As so much of the company’s earnings come from overseas, the company should also benefit from the recent depreciation of the Australian dollar, which will result in a big boost to reported revenue and profit next year.

Cohen is confident the company can ride out the current financial crisis, given its geographical diversity and the fact that most of its revenue is tied to long-term public health spending, which tends to be relatively stable.

But he does acknowledge there are some clouds on the horizon. “Inflation pressures exist in any services business, and we’re not immune, but we hold a tight rein on expenses and are focused on extracting efficiencies in our business.”

Sector under pressure

Inflationary pressures might be the least of IT companies’ problems over the coming year.

A recent survey from credit reporting agency Veda Advantage revealed 44% of companies have delayed IT investments, while Federal Finance Minister Lindsay Tanner recently announced the Federal Government will slash around $400 million in recurrent IT spending and sack 1500 computer contractors in a bid to reduce public service costs. Industry research firm Gartner has also cut its forecast for the sector’s growth in 2009 from 5.8% to just 2.3%.

Andrew Field, chief operating officer of domain name and IT services company Melbourne IT, says the reports of cuts to government and corporate IT spending is worrying.

“From what we understand, corporates are determined to slow down and rethink these things, as we will do for our suppliers. Generally from an IT point of view, that’ll be a big challenge,” Field says.

“Anyone who ignores what’s going on the world economy is going to get what they deserve. You have to question things, and double check them.”

Melbourne IT is ranked sixth on the SmartCompany Dun & Bradstreet IT industry growth list, with revenue increasing 48% during calendar 2007 (the latest full-year figures) to $153.55 million. The company has just released its results for the six months to 30 June, with revenue increasing 12% to $86.7 million and profit up 20% to $7.8 million. Field says the company continues to track well despite the worsening economic conditions.

“In fact, we continue to make a statement saying we’re outperforming the last half, and so far we’ve managed to keep doing that. We work hard in good times and tough times to make sure we’ve got the right size business, the right cost base. We make sure we don’t waste any of our shareholders’ money at any time.”

Still chasing growth

But Field is quick to emphasise the fact that Melbourne IT will not be totally abandoning its growth and investment plans during the downturn and he is particularly keen to look at opportunities to pick up good staff if and when they become available.

“There are more good quality people on the market than there was not too long ago,” he says.

“We’ll never waste money, but we’ll always spend money that’s valuable. If you’d do it in good times, why not in bad times? We are constantly looking for ways to improve our processes.”

The key for Melbourne IT will be convincing customers – and particularly the huge number of small businesses the company deals with – that they must keep spending. While that shouldn’t be too hard in the case of domain name sales, convincing SMEs to keep spending on areas such as online business management systems will be more difficult.

“In times like this, when an SME may be doing it hard and the works starting to dry up, the first thing they’re going to cut is their discretionary costs. We’d like to think we’re positioning ourselves as an investment spend, not a discretionary cost.”

Convincing customers of the need to keep investing is also high on the agenda of John Grant, managing director of IT and communication services group Data#3.

“All of us have to be sensitive in the economic world, but I think it’s about getting through the negative sentiment and convincing customers about the opportunity to realise benefits quickly,” Grant says.

Data#3, ranked 17th on the growth list, is coming off a big year when revenue jumped 28% to $363.7 million and profit increased 26% to $9.1 million. It was also a big year from an operational perspective; the company hired 100 new people, opened three new offices, changed locations at four other offices and started the process of introducing new management software to run the business. “It’s been a big internal challenge,” Grant says.

He admits the outlook for IT spending is less than rosy, and says Data#3 has already seen restraint in spending from the corporate and government sector. While the company is already tightening its belt by examining its cost base and cashflow, Grant is confident the company can ride out any slowdown.

“Data#3 will potentially be affected, but are well positioned and solid. Whatever comes to bear, we’ll also handle. We’ll move very quickly to where the opportunities are.”

Picking winners

That’s also the attitude being taken by Tom Stianos, chief executive of SMS Consulting Group, which ranked 11th on the list with growth of 35%. Revenue was $237.76 million in 2007-08, while profit jumped 42% to $25.5 million.

But Stianos says the company is looking to position itself carefully in the coming months to ensure it concentrates on sectors where demand is strongest.

“We’ve said we expect we will grow, but we will not grow as explosively as in the last four years. We just announced at our AGM that in the first quarter of this year we grew earnings by 19% and revenue by 13%. So we are still growing, but it probably won’t be the 40% or 50% that we have seen,” he says.

Stianos says the government sector – which represents just 5% of the company’s total revenue base – has been particularly flat for more than six months, although project-specific spending by state governments appears to be holding up at present.

“In those terms, we don’t feel particularly concerned. We’re alert, but not alarmed. We’re seeking to position ourselves where we expect there will be ongoing demand.”

Stianos says the main area the company will watch closely is hiring. “A year ago we would go as fast as we could; now we are watching the project schedules and the demand and trying to match the recruitment effort with that.”

But SMS Consulting will be careful about cutting back too hard, mindful that sectors will bounce back as the economy turns.

“We’re not reducing our staff numbers in places like Canberra, which has been most affected by the government cutbacks, because we think that’s going to be a growth area in 2009.”

If there’s one bright spot in all this gloom for IT sector executives, it is that most of them have seen tough times before during the dot-com crash of 2000-02. The companies that survived that black period know how to adjust their business plans when customers start reducing IT spending and should be able to weather the downturn.

“We’ve seen these times before, we’re not going to let them bog us down,” Data#3’s John Grant says. “I think that’s the sort of attitude that needs to be taken.”

SmartCompany Dun & Bradstreet
Top 50 information technology companies 2008

Compiled by Dun & Bradstreet using information from its commercial database of more than 2.7 million companies.