Wednesday, 27 February 2008

Logica returns

Before I get on to the FY07 results announced today, Id like to welcome the return of Logica – in my view the very BEST name ever given to a company in our sector. From today the CMG suffix is finally dropped.

This was also Andy Green’s first outing to present Logica’s results for 2007. He only joined seven weeks ago so has no responsibility for the poor results which had been widely trailed.

Revenue of £3073m represented a 3% organic growth. The UK performance was, if anything, worse than I expected with a 7.8% decline in revenues to £662.5m and a 61% fall in operating profits (to £30.5m). The only regions to show any operating profit increase at all were the Nordics and Germany (where a profit was made as opposed to a loss in FY06) So overall operating margins slipped from 7.6% to 6.8%. The enormity of this shortfall is apparent when compared to a near 10% group operating margin achieved just a few years ago. It was Martin Read’s 10% margin goal – and his obvious failure to achieve/maintain it – “whot done for him” in the end.

Trying not to dwell just on the bad bits, I’ll point out that Logica’s UK Public Sector (56% of Logica’s UK revenues) showed growth of 14% in H2. But even here, the fact that UK Public sector was over half of UK revenues gives cause for concern. Public Sector is only c30% of the UK IT services market; so Logica is already over exposed to a sector which is itself subject to lower growth rates. Logica’s high growth in that sector just underlines how poorly it has done in the UK Commercial Sector – and that was in 2007 before any effects of the economic downturn were felt. For example, Logica’s UK revenue from Financial Services fell 29%, Telecoms & Media was down 34% and Industry, Distribution & Transport down 35%.


Green says “Our outlook for 2008 is set against an uncertain market environment. Although we have seen a few incidences of slower spending, market activity levels generally appear resilient”.

So what to do?

It would have been totally wrong if Green had announced significant strategic changes so soon. Let’s give the guy the normal 100 Days which just about equates to Green’s commitment to “communicate the outcome of the strategic review by the beginning of May”.

If I was Green, these are the bits I would concentrate on;

- increasing the offshore delivery capability. Logica trails its main competitors in this (see my Indian Headcount post earlier this month) It’s not too late. Continental Europe (unlike US and UK) is still hesitant on the use of such resources. Whether they can build it fast enough organically is another matter. An Indian acquisition would be my preferred route, but would Logica’s beleaguered shareholders stomach that? Indeed, given the aversion of many in Continental Europe to Indian offshoring, maybe there are more acceptable places to achieve the same objectives?

- being a EUROPEAN IT services player. Trying to be ‘global’ is an ambition too far. That means the main emphasis is how they get decent momentum in Germany and even a presence in Italy and other European regions. The US should be seem as a European sales and support centre.

- what they are really good at. Currently Logica has still has too many fingers in too many pies.

- deciding if BPO is part of the Logica offering and, if so, really GO4IT. You can’t do BPO half-heartedly (as they seem to have done with Edinfor in Portugal)

- getting a grip on staff morale. Logica’s staff attrition last year was 16%. They cannot afford to loose too many more of their most experienced managers.

- remembering that he has inherited a fine UK company with a reputation and pedigree that most would die for. Play to those strengths!

As I have said far too many times, being ‘mid-sized’ is getting increasingly uncomfortable. But Logica is too big and too general to be ‘niche’. Ultimately I believe that Logica will be bought. But Green’s job is to restructure the company and boost shareholder value so that he gets hero status when that sale occurs in a few years time.

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