Outsourcing gives services a lift

A public-sector activity, dominated by Americans? David Bowen finds myths exploded in the 'Holway Report'

The outsourcing market is back to the boom levels of the mid-Eighties, according to one of the UK's leading IT observers. Richard Holway has produced the eighth edition of his monumental Holway Report, which analyses the performance of more than 1,250 companies working in the UK software and computing services market.

Mr Holway says that the 14 per cent growth in the whole computer services market in 1994 was in large part due to the switch to outsourcing. He points to the pounds 1bn-plus contract won by EDS, the world leader, to run the Inland Revenue's computer systems, as well as to several other large "facilities management" contracts won by the American giant. "We reckon EDS revenues are running at pounds 500m a year, double the 1993 level," he says.

But the real star, he adds, has been Computer Sciences Corp, EDS's main rival. Its biggest UK deals have been with British Aerospace and Lucas, though it has also won some smaller contracts. CSC's revenues jumped from pounds 40m in the year to March 1994 to pounds 160m in the latest year.

Holway says a number of myths have grown up around outsourcing. It is not true, for example, that outsourcing is predominantly public sector. "Over 80 per cent, both by volume and value, of the 100-plus outsourcing deals worth more than pounds 1m a year awarded in the last two years were from the private sector," he says.

The belief that outsourcing is not profitable is also a myth. "The best performing [computer services] companies in the latest round of results have been those engaged in outsourcing," he says. For example, ICL's CFM subsidiary saw its revenues grow by 28 per cent in 1994, while the specialist Capita increased its outsourcing profits by 87 per cent.

More surprising, Holway says it is not true that UK outsourcing is dominated by the Americans. "It is true that nine of the 10 top facilities management deals ever awarded were to US companies, but 80 per cent of all deals are valued at less than pounds 5m a year. Here non-US companies pick up the majority of the deals, with Sema, Hoskyns, CFM, Capita, FI Group, PCL, Integris (Bull) among the companies picking up a significant number of deals."

The IT staff market, through which many permanent and freelance computer professionals work, also grew at a stonking 21 per cent in 1994, Holway reports. The bulk of the rise was from large companies such as Parity and Computer People, showing that the big players are growing bigger. Parity, which became the biggest IT agency after buying Computer Search and Selection in 1993, claims to have 20,000 self-employed programmers and freelances on its books. Holway expects the contract staff market to keep growing rapidly - at 17 per cent a year between 1995 and 1998.

There has been a string of acquisitions in the IT contracting market, which shows, he says, that it is now maturing. Having taken over the management of Computer People early in 1994, Roger Graham and Tony Reeves have been busy buying other companies, the Span Consultancy and VNG Group. The smaller but also aggressive CRT bought a number of companies, while KPG Support and Inline Computer Servces merged last autumn.

'The Holway Report', pounds 1,600, is available from Richard Holway Ltd, 18 Great Austins, Farnham, Surrey GU9 8JQ.