Searching For Signs Of An Upswing

So it came as little surprise when stock issues for so many of the industry's largest IT solution providers were up in afternoon trading Thursday, a direct result of Greenspan's remarks to Congress that he sees "encouraging signs" that the recession's end is indeed near.

In his address Thursday morning, Greenspan told Congress he's seen signs that "some of the forces that have been restraining the economy over the past year are starting to diminish and that activity is beginning to firm."

His optimism, whether deserved or not, had a direct impact on Wall Street, particularly on some of the industry's largest publicly held solution providers. According to an informal index of publicly traded VARBusiness 500 companies that I regularly monitor, more than 100 companies were trading up for the day, outnumbering those in the red by more than 2 to 1. (Some of the biggest VARBusiness 500 gains were seen by Accenture, up almost 5 percent, to $25.72 a share; Burntsand, up more than 11 percent, to $2.85; Comshare, up more than 7 percent, to $2.60; I2 Technologies, up more than 13 percent, to $8.20; and Manhattan Associates, up close to 9 percent, at $28.94.)

But beyond numbers, Greenspan's comments about recognizing the signs of an upswing got me thinking about the IT services industry as a whole. So I searched near and far for a few of my own.

Still skeptical about a recovery in 2002? You've got the right to be. But in case it helps, here are just a few of the things I've noticed lately that might be signs of better things to come:

Gorillas Lead The Way

If you got the chance to listen in on Accenture's recent analyst call on fourth-quarter 2001 earnings, you might have heard something that sounded just a bit unfamiliar in the way CEO Joe Forehand and CFO Harry You were speaking. Something in their voices that might have made you step back and take notice.

In case you haven't quite figured it out, it's called optimism. And it comes from having confidence in your company's future.

While so many services firms are still struggling to break out of the economic doldrums that plagued 2001, and others are folding up completely, Accenture is still managing to grow its business--significantly. On the heels of generating a record $2.78 billion in earnings on $11.4 billion in revenue for 2001, the world's third-largest provider of IT-related business services beat analysts' expectations for its first quarter of 2002, with revenue closing in on $3 billion and operating income of more than $400 million. That's the highest single quarter ever generated by the company.

Now I know what you're thinking: Accenture is a multibillion-dollar company with offices in every corner of the globe. What the heck does its performance have to do with my smaller, regional solution provider business?

My answer is simple: Everything.

Too often in the IT services sector, small and midsize players dismiss the performance of industry giants like IBM Global Services and Accenture, assuming their sheer size, geographic reach and depth of services puts them in a completely different category and makes any sort of comparison a waste of time. But the reality is that in virtually any industry in the midst of a sea change, the performance of the largest players ultimately sets the tone for everyone else. So if a spending upswing is indeed in the cards, we'll be seeing the Accentures of the world reaping the earliest benefits.

Don't agree with me? That's okay. Listen to someone else. In a recent edition of its bi-weekly report on IT services firms, Baird Technology Services said the consulting and system integration market hit bottom in the fourth quarter of 2001 and will significantly improve through 2002. And it cited Accenture as one of the companies that will lead the way. The report notes that Accenture's utilization rates improved dramatically in the last six months of 2001, a ray of light in an industry where utilization rates haven't been anywhere close to the highs achieved in late 1999 and early 2000.

"In order for the rest of the industry to get healthy, the industry gorilla has to adequately feed first," reads the Baird report.

Well since Sept. 1, Accenture has booked more than $5.6 billion in new sales for 2002 and has a load of new work in the pipeline.

Then there's IBM. A number of pundits were quick to press the panic button last week after finding out that the $9 billion in revenue reported by IBM Global Services for its most recent quarter was down 1 percent sequentially, primarily the result of business that didn't close in time. But the real indicator, if you ask me, is that it already has about $15 billion in new contracts lined up this quarter, raising its backlog of new business to the neighborhood of $102 billion.

Looks to me like the gorillas aren't going to bed on empty stomachs any time soon.

End-User Optimism

According to a more recent Baird report, released just this week, there's also renewed optimism--though cautious it may be--on the part of end-users as well.

The company, which polled 40 end-user CIOs and CFOs in the last few weeks, found more than 80 percent of the respondents expect budgets to be flat or up this year. The interpretation is that they'll remain flat for the first half of the year as companies look for confirmation that the economy is indeed improving before they loosen the purse strings to release funds for new and delayed IT projects.

Not surprisingly, Baird predicts that the focus on improving ROI will continue to be the most powerful driver for IT initiatives and services in 2002, with security solutions ranking as the number one initiative. Following security were custom application development and maintenance, ERP, CRM, supply chain and finally O/S Windows 2000/XP solutions. On the other end of the spectrum, desktop applications ranked as the area with the least emphasis expected in 2002.

And let's not overlook outsourcing, the area that is quickly becoming the bread and butter for so many solution providers. Unlike the boom of the late 1990s, which was driven by so many new technology initiatives, this time around companies will look to invest in solutions that can make their existing technology work better. That's good news for all outsourced solution providers, whether they're serving Fortune 500 clients, midsize firms or small local businesses.

Vertical Victories

As is often the case during large-scale shifts in spending, solution providers that cater to specific industry verticals will find themselves in the best position for early growth; that is, as long as they have their skills invested in the right verticals.

I believe we're already starting to see some of that growth. While analysts point to health care and education as potentially strong areas for IT spending in 2002, it looks to me like the early lead is clearly in the government sector. Already, some huge deals have gone down in early 2002 involving a number of federal and state agencies and solution providers, including EDS, IBM Global Services and CSC.

And riding on a wave of increased federal government contracts, particularly around the Department of Defense and its war on terrorism, solution provider CACI International just announced record earnings for its second quarter. On revenue of $162.3 million, the company managed earnings of $7.3 million, up 57 percent from last year.

CACI says the strong results are a direct result of managed network and engineering services being sold to the Department of Defense and other federal government agencies. Revenue from those customers grew 34 percent over the same period last year and represented 91 percent of the total revenue for the quarter. The government business was so strong that it "more than offset" continuing softness in CACI's commercial and state and local markets, says president and CEO Dr. J.P. London.

Similarly, companies like Anteon and Integrated Defense Technologies are reaping the rewards of military spending and are now eyeing the public markets for IPOs later this year.

Yes, you read it right: IPOs. The thought kinda makes you teary-eyed with recollection doesn't it?