SAN FRANCISCO (CNN/Money) -
When the going gets tough, the tough store provisions. And for big technology companies in these tough times, it seems there's no provision more sustaining than a long-term, multibillion-dollar services contract.
In its first-quarter earnings announcement last week, IBM (IBM: Research, Estimates) stated that it had a current backlog of services contracts worth $113 billion. This means that, in addition to the $12 billion in contracts the company recorded for the quarter (which covered services such as consulting, installation, repair, and outsourcing), it has customer agreements worth more than $100 billion still in the pipeline.
"Having that backlog helped IBM through the worst part of the recession," says Joseph Beaulieu, an analyst with Morningstar.
Many technology companies, in the face of stagnant or declining revenue from product sales, are ratcheting up their efforts to nail big services contracts.
On April 11, Hewlett-Packard (HPQ: Research, Estimates) announced it had won a 10-year, $3 billion contract -- its biggest services deal yet -- with Procter & Gamble (PG: Research, Estimates). HP also announced similar -- if smaller -- deals with Ericsson (ERICY: Research, Estimates), the Bank of Ireland, and FirstEnergy (FE: Research, Estimates).
It's easy to see why companies are eager to step up their services efforts. Though HP's services division accounted for only 16 percent of total revenues for the first quarter, it contributed 28 percent of total earnings.
| Recently in Tech Investor
|
|
|
|
|
IBM's services division tells a different, but similarly lucrative story. The first-quarter gross profit margin for the division is only 24.9 percent (compared with 84.6 percent for the software unit), but total revenue from IBM's services division for the quarter was $10.17 billion, or just over half the company's total revenue of $20.06 billion.
The HP news is significant for two reasons. First, while competitors IBM and EDS (EDS: Research, Estimates) have been in the services industry for 10 years and 40 years respectively, HP really entered the IT services market only after it acquired Compaq in May of 2002. The company didn't score its first multibillion-dollar services contract until September.
Second, HP made no secret of the fact that, though IBM was in the running for the Procter & Gamble account, Big Blue lost out to HP. "That's a big feather in HP's cap," says Eric Rocco, a vice president at Gartner Research. "Competitors such as IBM, EDS, Computer Sciences (CSC: Research, Estimates), and Affiliated Computer Services all have to look back and realize there's another entrant to the dance of the multibillion-dollar services deals."
"This is a huge win," says Juergen Rottler, a vice president for marketing at HP's services division. "This was the best deal on the market. Everyone wanted it. This establishes us as a tier-one player in this market."
And while most of the IT spending market languishes, services continue to enjoy a steady -- if small -- growth rate. Gartner predicts that the industry will grow at about 6 percent this year and record "decent" growth through 2006, when Gartner's prediction time frame ends. This rate is down from the 18 percent year-over-year growth the sector saw in the 1990s, of course, but with today's diminished expectations, it's a sweet spot for some companies. With HP's recent win, competition in the space just got tighter.
Sign up to receive the Tech Investor column by e-mail.
Plus, see more tech commentary and get the latest tech news.
|
