Thursday, 26 June 2008

It was twenty years ago today...

Always a sucker for anniversaries, 20 years ago this month the very first Holway Report hit the streets. I’d been awarded a contract by IBM to study their mid-range agents (S/36, S/36, AS400 etc) IBM was worried (as well they should have been!) about the financial security of these agents and I was asked to devise a set of ‘Performance Indicators’. I ‘invented’ some 20+ different ways of ranking performance (easy ones like revenue, profit, cash and more difficult ones like debtor and creditor days, revenue/profit per employee, ROC, profit/revenue per £ of staff cost etc.)

Having produced the report for IBM, I was having a beer with Geoff Unwin (my old ‘mucker’ from Hoskyns – later to become Capgemini) . He asked for a copy which I naturally couldn’t give him. So he suggested I add all the members of the CSA (now Intellect) and publish it as the Holway Report. He even took a business card from his wallet and wrote “One order for Holway Report” and signed it.

The rest, as they say, is history. The Holway Report begat Systemhouse which begat Hotnews. By 2000 it was a £1.4m revenue business worth £5.8m when acquired by Ovum in Nov 2000.

To this day, people still seem to have a ‘soft spot’ for the Holway Report – or the “Bible” as it was often called. Amazingly, earlier today I had a call from a reader investigating spin-offs from UK banks (wonder why?) and asking for details of NatWest’s sale of Centrefile to Ceridian in 1995. (I was able to supply it…)

1988 and all that

So what was I reporting on in that first Holway Report in 1988?

The first page was full of hope for the UK software and computing services (SCS) sector “with Systems Designers acquiring SCICON and Cap merging with Sema Metra resulting in the UK having two major international computing services companies”. Back then IBM was the only ‘foreign-owned’ Top Ten supplier to the UK market. But it was a highly fragmented market. I estimated that the Top Ten suppliers had 24% of the market (the same figure today is around 50%)

Back in that first Holway Report, I estimated the total SCS sector as being worth £2.5b. It now totals £31.4 billion. That’s a CAGR of 14% pa. Contrast the ‘record’ 25% growth in 1997/98 to growth in the current decade which has been low single digit (or negative).

In 1988 I broke the SCS market down as follows:

- 43% Packaged software
- 27% Custom software and Consultancy
- 6% Training and Support
- 24% Bureau processing

It is worth remembering that only 20 years ago the big names in the sector were the bureaux – like Centrefile and Istel.

I estimated that the UK SCS market had grown 20% between 1986 and 1987. Separately, I reported that Line charges “as more and more systems are linked together” grew by 29% to £340m – still less than the £544m that DP Departments spent on paper supplies.

The Trends section of the 1988 Holway Report was all about rampant acquisition fever. I wrote that my old friends at Regent (where I am now an NED) had reported a 68% surge in UK software and computing services acquisitions to 119. Figures for 2007 are three times higher than that. Indeed my first ever theme was ‘Acquisition Indigestion’ – a theme I still use 20 years on! I was worried that the imminent European Community would mean that “good UK computing services will be acquired by leading European companies”. Although that turned out to be correct, why did I not mention the threat from the US players?

I gave grave warnings of relying on hardware margin without ‘added value’. Still depressingly true today as Computacenter continues to discover.

I forecast that ‘systems integration’ would be the hottest area “as the days of the single manufacturer installation will disappear”. It probably seems strange to today’s readers that such a state of affairs ever existed but my first 20 years were spent dealing with clients who were wedded to “IBM”, “ICT” or whatever.

Back in 1988 the average P/E was 16.8 – amazingly similar to today! But of course, we reached 100+ P/Es during the bubble. Of the 50 quoted SCS companies in 1988 most have disappeared. Logica is the only ‘biggie’ remaining. Others still there include EDP, Kewill, Macro 4, MicroFocus, Microgen and…Total. Why, oh why Total was ever/still is a public company I will never know. They had a market value of £8.5m in 1988. Total is ‘worth’ just £3.2m today.

My final piece of Holway advice was “Companies that 'stick to the knitting' will buck market trends. All the evidence shows that companies in the computing services sector that diversify into radical new areas in which they have had little previous experience often fail”. So gratingly, annoyingly obvious…except that so many companies did- and are still doing – just that! And they are still failing as a result.

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