Tech services deals count on more with less

September 28, 2009

Xerox button

The U.S. computer services industry is back in favor, after a decade of struggling to cut costs and compete with offshore firms from India and elsewhere. At least that would be the obvious conclusion to draw from a recent string of multibillion-dollar deals.

Xerox has agreed to buy Affiliated Computer Services for $6.4 billion while Dell is paying $3.9 billion for Perot Systems. They are picking up where Hewlett-Packard left off when it paid $13.9 billion to buy Electronic Data Systems in 2008.

But what’s driving these deals is not a bet on the improving growth prospects of the services industry. Instead, the buyers value computer services companies more as sales pipelines for their own products.

Take Xerox, which has struggled for years to move beyond copiers. The idea now is to manage information in both printed and paperless form. ACS is a leader in processing health claims and student loan payments for governments. It helps commercial clients cut the costs of payroll or human resources processing.

So don’t think of this deal in terms of the traditional revenue synergies used to justify technology mergers. It’s about helping commercial and government clients cut costs, a tight margin business in the best of times.

For while demand for services has stabilized as the economy recovers, there’s little sign of any broad-based growth surge returning. There’s no end to the need for services firms to continue to restructure, replacing labor in high-cost markets with technically savvy workers in lower-cost ones.

The computer services market is defined by its two poles: At the top, IBM is the model of the globally integrated services firm that can supply hardware, software and low-cost labor as needed. Rising up are such aggressive Indian software services firms as Infosys, Tata, and Wipro and smaller players in other low-cost nations, including China and Eastern Europe.

Yet times are tough, even for the upstarts. Indian services firms that enjoyed revenue growth north of 30, 40 or 50 percent earlier this decade now face growth of 5 to 10 percent. IT budgets have dwindled and cost control is the order of the day.

Caught in the middle are the services firms that have failed to adopt new labor-saving technology and offshore service delivery. ACS, Perot and to a lesser extent EDS were all slow to embrace the offshore trend. While each has belatedly moved to expand overseas in recent years, this is not their strong suit. Instead, all three have increased their share of the market for politically sensitive federal, state and local government contracts.

Even after the recent mergers, deal-making in the sector is far from over. Big names like Accenture, Computer Sciences Corp and Cap Gemini remain in play, as do dozens of niche players in services like payroll, data center automation and healthcare information.

Who might be on the prowl? Dell, for one, has said Perot is only a start, and it will still be sitting on a cash horde of $9 billion. Xerox, on the other hand, says ACS will be its one big deal. IBM, as the market leader, can afford to be opportunistic here, but could be barred for antitrust reasons from mega-deals in the sector.

Look for other buyers to emerge from hardware and software vendors like Oracle or even deal-shy SAP.

It’s hard to see intra-industry consolidation, say a merger between Accenture and CapGemini. And Indian services companies have shown themselves reluctant to overpay for services consultants they will likely replace with their own lower-cost workers.

But never underestimate the capacity of desperate companies to do desperate things.

You can find some Eric’s previous columns here.


(Photo credit: Reuters/Catherine Benson)

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

[…] Reuters Columns » Blog Archive » Tech services deals count on more … […]

Posted by Student Discounts on Windows 7 Upgrade ($30) § Code Retard | Report as abusive