Saturday, 20 September 2008

A Message from Anthony Miller

I can’t tell you how good it is to be back where I belong after four years ‘on the dark side’ as an equity analyst. Given the current market conditions, some might say, “perfect timing!”

I certainly learned a lot about the way institutional investors and hedge funds view software and IT services companies; indeed this is why I moved into equity research in the first place. I hope you’ll see some of this new-found knowledge reflected in my commentary – though without the stock recommendations of course! Perhaps the most important lesson I had to learn very early on in the piece may seem to you to be a statement of the ‘bleeding obvious’. But I can assure you that what I am about to share with you is rarely appreciated by the traditional industry analyst community when trying to make sense of company share price movements. It is simply this. To an investor, a company is not a company – it is a stock. In other words, an investment proposition. I told you it was obvious. But it goes a long way to explaining why even ‘quality’ software and IT services (S/ITS) companies are suffering in the current financial market turmoil. It doesn’t matter if you have contracts going so far out you need a telescope (e.g. Capita), or cast-iron recurring revenues (e.g. Sage), or margins to die for (e.g. Infosys), it all comes down to how investors see their best chance of making money from the stock – which, as I’m sure you know, can come from a downward bet as well as upwards. As TechMarketView is neither authorised nor regulated by the FSA, we have to be very careful not to cross the line where we might be seen to be giving investment advice. However, I will try to give you some insight into investor thinking where I can.

But my prime focus is exactly what it says on our website – the things that really matter in the UK IT sector, and in particular, the S/ITS scene. Richard has already talked about some of the ‘big issues’ we think are shaping the UK S/ITS market. I want to draw your attention to two that interest me in particular: “offshoring” and “software as a service (SaaS)”. Let me make it clear; this isn’t ‘one for IT services players and one for software players’. Both these themes play to each segment. Sure, having low-cost delivery is frankly a matter of survival now for IT services companies, and I will hammer on about this endlessly. But, with perhaps 20% or more of software products firms’ revenues invested in research and development, moving some of this offshore can make a huge difference to margins. And as for SaaS, well, you’ll have to forgive me for not banging this drum quite as loudly, perhaps, as Richard. Of course, I can see many places where SaaS is a great proposition but, frankly, I am yet to be convinced that it will turn out to be the future of large-scale enterprise application delivery. I also wonder how you make real money from SaaS? As you will see, Richard and I will be not always be in perfect harmony!

There are many other themes I will pick up too, such as Service Industrialisation. You thought the Indian proposition was all about labour arbitrage? Think again. Some of you have heard me say this before but let me say it again … and again. The really clever thing about the Indian SIs is that they have refined a way of disaggregating IT service lines into ‘elemental’ activities which can be industrialised, deskilled and, in many cases, moved offshore. Then they knit them back together again into a near-seamless service which is now low-cost, repeatable, scalable, and needs fewer ‘rocket scientists’ to deliver. Neat, eh? Nothing, I repeat, nothing, is impossible to industrialise in this way, including consulting! By the way, there’s no reason why UK players can’t do this too – and they certainly should.

I’ll also be talking about poorly understood – and highly underrated – services, such as Testing/Quality Assurance. Testing is one of the fastest growing IT service segments, and as much as 90% of the work can be done offshore. I rather see Testing as a ‘hidden jewel in the IT services crown’. Far from being a ‘discretionary’ activity, testing is even more critical in the current ‘make do and mend’ climate. And Testing Services are a great way to open new ’logos’ – as the Indians are proving, by the way.

There’s so much more to talk about which is really important, and you can be sure Richard and I will be trying to guide you through it. Please give us your feedback too (positive or negative) – but we know you’re not shy in doing that!

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