Location: http://news.zdnet.co.uk/story/0,,t269-s2097359,00.html
Tech services feeling economy's wrath

Reuters

One of the technology industry's last defences against a weak economy --
its steady stream of services business -- may have started to fall,
kicking out one of the last supports after hardware and software sales
have faltered.

Titans such as IBM have parlayed their expertise into long-term
consulting contracts with corporations to keep computer systems humming
and integrate complicated technology.

The subscription contracts, which often run for years, have been a
welcome, steadying influence on results for companies such as IBM.

Hewlett-Packard says it plans to buy Compaq Computer largely to beef up
its own capability in the area, but analysts warn that the slowdown in
corporate spending could finally be making its way to the services
industry.

"Everybody likes to view these as annuities businesses, and they are
really not," said Merrill Lynch analyst Tom Kraemer, noting that
consulting services in particular were at risk. "They are just more
insulated. But they are not immune.

"This will be the third quarter the economy has been weak. And it is
getting worse, not better," he said.

Technology services brought in an estimated $666bn last year, an enormous
number that includes maintenance, consulting and running corporate
systems, called outsourcing, research company Gartner said.

All three areas have been sold as cost-saving opportunities for companies
under pressure, making the sector appear more resistant to the economic
slowdown than sales of hardware and software, which have slumped since
late last year.

But the same kind of counter-cyclical confidence also once surrounded the
prospects for computer servers and storage, two industries that fell like
dominoes as the economic downturn accelerated this year.

Concern centres on consulting. "It looked like it was slowing down, then
it slowed down a little more, then it slowed down a little more," said
IDC analyst Rebecca Segal, whose research group has been cutting
estimates.

IDC still sees IT services up 8 percent in the United States this year,
with similar growth next year, but cautions that there is less demand for
consulting when companies do not plan to buy equipment.

Economic uncertainty was exacerbated by the 11 September attacks, she
said, and some analysts see outsourcing deals getting smaller and
shorter.

"Sometimes it is an emotional response on the part of customers. They may
not want to commit to as long an outsourcing deal as they had in the
past," she said. "You do see a fair number of outsourcing deals having to
be renegotiated.

"There is some debate within our group," she added. "Some folks are
seeing smaller contracts...so we think that companies are saying, do we
have to do [outsource] everything, or can we do just certain pieces and
keep certain pieces in house?"

Competitor Gartner is not very optimistic. "We still see marginal
growth," services analyst Eric Rocco said.

Electronic Data Systems, the No. 2 technology services company behind
IBM, this week reconfirmed its outlook for the just-ended quarter and the
longer term. EDS also said that its disaster recovery business was
booming after the 11 September attacks scared companies into action.

"It's an easier sell when times are tough. We're not immune to economic
cycles but we are well insulated and have been historically," chief
executive Dick Brown said after a speech last week.

HP, which stands to become the third-largest services company if its
proposed merger with Compaq goes through, says the effect is mixed.

"The economy is actually having a positive impact on the outsourcing
business," services chief Ann Livermore said recently. "That is not true
for consulting."

But HP's largest chunk of the services business is from maintenance,
which Rocco said is the highest margin, despite the lack of glamour.

"HP and Compaq -- much of their strength is around support," Rocco said.
IBM, on the other hand, has 40 percent of its services in outsourcing and
30 percent in consulting. Maintenance is part of the remaining $10bn of
business.

"I think it is going to hit IBM the hardest," Rocco said.

IBM's services chief, Doug Elix, said in a recent interview that cost
savings would spur outsourcing in a down economy. Corporations still
needed help, he added. "Despite the economy, there is still a skill
shortage."

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