Tuesday, 22 April 2008

Views on Logica’s Business Review

I wasn’t able to get to Andy Green’s presentation of the results of Logica’s Business Review earlier today due to a clash of engagements.

I reported the basic messages in my earlier post (to reread Click here) For those interested in the full Powerpoint you can download it and view the webcast Click here.

The reaction to the review has not been very favourable and Logica shares ended the day down 3% at 111p.

The main criticisms of the review were as follows:

- the review was not radical enough
- the new targets set were ‘undemanding’
- execution risks were high. The ‘challenges’ ahead had been under estimated but the returns over estimated.
- too benign a view was taken of the outlook for IT services in Europe. Ie Logica’s assumed IT services market growth rates are too high given current market unease
- competition, particularly from the offshore players themselves, had been under estimated. Indeed, that Green failed to understand where its competition really came from.
- even more should be done to boost Logica’s offshore capabilities
- Logica’s strengths had been ‘over puffed’
- Logica risked the departure of its best people before the incentive plan could be implemented

Holway’s view?

Anyone viewing the Powerpoint slides of Green’s presentation would be impressed. But as I waded my way though I had a growing feeling of “So what?”. Almost every measure proposed was pretty much what the competition was doing already – indeed had implemented yonks ago.

Logica’s problem is that they are Logica. They are a mid-sized player doing lots of different things in lots of vertical areas in lots of countries in Europe. They are a ‘mid-sized generalist’. For many years they have been a ‘mid-sized generalist’ and if Green’s plan is followed they will continue to be a ‘mid-sized generalist’.

If you have read Holway’s views over the last 20 years you will know that being a ‘mid-sized generalist’ is an increasingly uncomfortable place to be.

There are only two ways out of being a ‘mid-sized generalist’;

1 – You get BIG. Logica has used up all its acquisition cards. It is quite impossible for it to get Big by buying any of the other European ‘mid-sized generalists’. So the only route to get Big is for someone to buy Logica.

As I worked my way through the presentation, there was a slide (14) which showed Logica’s main competitors in each country. In the UK the Top Four were shown as BT, EDS, Capita and IBM. This is quite different from the rankings I have produced over so many years. Using the old established Holway metrics, Ovum puts the UK Top Four as EDS, IBM, Fujitsu and Capgemini – with BT #6. What concerns me is that Green doesn’t seem to have learned how different the BT “IT services” definition is to that applied at, for example, EDS. I would suspect that throughout Europe, Logica’s real competition for global IT services accounts comes from the core global IT services players – IBM, Accenture, EDS and CSC…and possibly Capgemini. I do not believe that Logica can realistically aspire to play in that league.

I believed – indeed said quite publicly – that Green’s sole task in joining Logica was to prepare it for a sale within (say) two years. I would put even greater odds on that now after Green’s review. If Green can get a bid at approaching 200p by end 2010, then I’d say he had met the objective.
The problem is that to get there he has to execute well and the market has to be on his side. The execution risks – ie avoiding a series of profits warnings – is great and I am increasingly of the view that, although 2008 might well be benign for IT services, the real problems will be felt in 2009.

2 – You get NICHE. Green missed that opportunity. See ‘generalist’ comments above. Green could have majored on becoming the market leader in a few key industry sectors. Indeed, he could have used this as a reason to dispose of some of Logica’s assets – raising much needed cash in the process. Green ruled out divestments. Indeed, Green seems to be planning to extend Logica’s ‘generalist’ offerings into such areas as BPO.

I do wish both Logica and Green well but I do have a feeling of “too little too late”. Of continued missed opportunities and the inevitable outcome of Logica ceasing to be sole remaining UK-HQed IT services standard bearer.

1 comment:

john said...

I agree a sell off is the inevitable outcome here.

However, the company is now being run by someone who headed up a large part of the most conservative organisation on the planet. So his approach does not surprise me in the least