UpperEdge is calling it. Time of death for the information technology buyer’s market: March 25th, 2011.
When it comes to the acquisition of technology and services, there have been reams of data over the last 12 months to support the pendulum of leverage shifting from the buyers to the sellers.
Corporate earnings, earnings call transcripts, and the emboldened approach observed from sellers of technology in our own sourcing engagements has reinforced that the shift was occurring.
On March 24th, Oracle and Accenture released their respective quarterly earnings. A few highlights are provided below.
- New bookings of $7 billion (highest in 10 quarters) -> consulting accounts for $3.8 billion and outsourcing accounts for $3.18 billion (second-highest Consulting bookings ever)
- Revenues of $6 billion (above guided range of $5.6 to $5.8 billion)
- Net income of $556 million (last year same quarter was $462 million) with increase of 22%
- Gross margin went down from 32.7% to 31.7% (contract profitability was lower)
- Headcount is 215,000 employees ( 122,000 in global delivery)
- Q2 utilization was 86%; attrition rate went from 15% to 14%
- Eight deals over $100 million in Q2
- New bookings for 2011 fiscal year should be between $25 billion and $28 billion – above outlook
- New Software License Sales were up 29%, to $2.2 billion
- License updates and product support sales grew 13%, to $3.7 billion
- Income (overall) rose 78% to $2.12 billion, 41 cents a share – previous year was $1.19 billion or 23 cents a share
- Revenue rose 37% to $8.76 billion from $6.4 billion
- Revenue in the fourth quarter is expected to rise 9% to 13%
Overall, the results are impressive, even when you peel back the numbers and dig deeper. The impressive results makes sense when you think about how many companies have been getting their houses in order and sitting on the sidelines for the last 18 months or so. There has been a lot of pent up demand in the market which is getting released. This was further validated by the 30 large transactions UpperEdge advised on last year – most of these transformative in nature. As additional major technology companies like SAP, IBM, MSFT, and HP release their forthcoming earnings, expect further validation that it’s now officially a sellers’ market.
So, what does this mean for buyers’ of technology and services? Expect the following:
- Discipline and focus from providers – deal constructs that allow the providers to maximize revenue and margins will be the sole approach
- Technology and service providers being more opportunistic during sales cycles and negotiations
- Resource rate and support fee increases in contracts that do not lock or limit such increases
- Higher percentage of work being accomplished from global delivery locations
- Challenges in obtaining high quality resources
- Polarization – big vendors keep getting bigger via tuck in and strategic acquisitions
Buyers of technology and services who do not have a consistent approach for mitigating the risks associated with a seller’s market will be adding bloat to their IT operating budgets.