As a whole, the software companies have the most enviable financial performance, at least for the moment. They have seen overall three-year revenue growth of more than 10 percent, and their margins have long been higher than 30 percent — higher than those of any other group. But they may soon face global rivals among the offshore service providers, who have by far the fastest growth rate and impressive EBIT (earnings before interest and taxes) margins of more than 20 percent, on average.
Global service providers are also doing well; they maintain margins around 15 percent, and IBM generates more than US$15 billion in free cash flow each year. Regional service providers are in a more daunting position: With only mild revenue growth in the last two years, and margins in the 5 to 8 percent range, they may soon find themselves with little room to maneuver. Telecom companies are also stressed financially, but for a different reason: Comparatively stable and with relatively high earnings, they find that their growth has leveled off since the financial crisis of 2008 and shows no sign of renewed liftoff. (See Exhibit 4.)
In the past, each group of ICT suppliers stayed well within their closely guarded sector boundaries. Software companies sold software, and telecom operators built communications networks and sold phone services. The four groups are still distinct, but not necessarily for long. Both traditional and nontraditional ICT companies are consolidating, seeking to build integrated ecosystems that cut across established business models and help them manage convergence.
The pattern of mergers and acquisitions provides a tangible clue to the direction in which companies are moving. In 2009, hardware company Xerox acquired Affiliated Computer Services, a business process outsourcing firm, thereby accelerating Xerox’s shift to IT services. Dell bought IT services provider Perot Systems the same year, with similar intent. Other acquisitions, like Oracle’s 2010 purchase of Sun Microsystems, represent moves toward more complete software integration (adding a little hardware to the mix as well). These types of consolidations allow software companies, which were formerly concentrated on specific applications, to internalize larger parts of systems integrators’ traditional home turf and hold the line against IT service providers.
Launches of new products and services also frequently represent moves across sector boundaries. (See Exhibit 5.) Some telecom operators seek a foothold in cloud computing and IT services; Verizon’s cloud-based infrastructure-as-a-service offering is one example, as is KPN, which provides application management services to its customers. Software and Internet companies are also innovating across boundaries, albeit more selectively. Yahoo, for example, offers comprehensive Web hosting but has stayed out of data center services and desktop operations.
The companies most likely to cross boundaries are the IT service providers. IBM, for example, offers its Sametime Unified Telephony service, which includes telephony features for individual users and multi-PBX telephony integration for telephony managers, and CSC offers Unified Communications as a Service as well as My Conference Space, an integrated audio and Web conferencing solution.
Besides this ability to manage convergence, the score reflects the ability to provide next-generation products and services. Many companies are blending traditional offerings with new, highly advanced technological services, including radio frequency identification solutions for retail, near-field communications solutions, cloud computing, and mobile payment platform support. Unfortunately, the profits and growth expected from next-generation offerings have not yet materialized. Most companies still earn more from classic ICT products and services; the next few years will tell how rapidly their customers will shift to next-generation technologies.
Two other capabilities figure in the score for portfolio strength. First is the development of horizontal digital offerings for particular functions. Companies in the ICT 50 offer such specialized services as customer analytics, digital marketing, campaign management, billing services, sales-force automation, social network integration, supply chain logistics, and e-procurement to company after company. Second is the provision of vertical offerings: tailored, industry-specific technological solutions that work across functions. Current examples include outsourced network management for telecom; clinical information systems, digital health monitoring, and home-care products for healthcare companies; and smart metering systems for utilities. In both the horizontal and vertical cases, the key value proposition appears to be integration; large companies are looking for ICT providers that can weave many diverse services around a coherent, focused, interoperable core.