Competing on Strengths

Competing on Strengths

This study aims to identify the major opportunities and challenges facing Europe’s information technology firms, and[…]

Client: KPMG/Economist Intelligence Unit
Assignment: Annual review of Europe’s tecnology sector

(Read the original here.)

After a 2004-2005 recovery in spending, the growth of Western Europe’s market for computer hardware, software and services is moderating. Spending is likely to expand 4.1 percent in 2006 – slightly down from the previous year – to reach €280 billion, according to technology research firm IDC.

Europe’s IT industry can take some comfort from knowing that IT spending is running ahead of the region’s GDP growth, which the Economist Intelligence Unit expects will come in at 2.8 percent for 2006. In 2007, moreover, IDC predicts IT demand growth to accelerate to 5.3 percent, creating greater opportunities for suppliers, particularly of services and software.

The European IT managers in our survey broadly agree with this outlook. While 17 percent say they plan to keep to their current spending level over the next two years, 53 percent plan to boost their expenditure.

Europe’s IT market is not homogeneous, and as the European Union (EU) enlarges so too does the divergence between IT spending among its member states. Germany, France and Italy are mature IT markets with below-average growth. Spain and Benelux are the most buoyant markets of the traditional EU-15 members, with growth rates of over 5 percent. The UK falls between the two growth extremes.

The emerging economies of central and eastern Europe (CEE) offer the continent’s best growth prospects. IDC predicts that IT spending in CEE will reach $54bn in 2009, more than double the figure for 2004. The combination of public sector reforms, increased foreign direct investment and major efforts to meet international standards has spurred businesses to pump money into IT in the region’s new EU member states including Bulgaria and Romania, the latest entrants.

In western Europe, too, public sector reform is also driving IT spending, with trends such as decentralisation, shared services and e-government providing strong business for vendors. “Public sector IT is a good business to be in, particularly the local government and healthcare sectors,” says Massimiliano Claps, a senior research analyst at IDC.

In the UK, for example, shared services have become a focal point for boosting government efficiency. “Among governments of the major EU nations, the UK’s is the most advanced at leveraging technology,” says Pierre-Yves Cros, director of global strategy for IT services firm Capgemini.

Pockets of growth

Against a background of modest European increases in IT spending, pockets of faster growth exist where its suppliers are strong; namely in IT services, mobile devices and applications, and enterprise software.

Over 50 percent of our 2006 survey respondents predict an increase in their spending with European IT services firms over the next two years. In our 2005 survey, by contrast, only 35 percent of respondents said they planned to spend more with European IT services firms in the subsequent two years.

Notwithstanding this, the pressure on service providers to reduce their cost base through greater use of offshore outsourcing will continue. It also means that consolidation is likely. “Europe’s IT services market is still very fragmented despite the attempts made to consolidate,” says Soumitra Dutta, Professor of business and technology at Insead, a European business school.

Two other promising growth areas for Europe’s IT industry, according to the survey, lie in mobile devices and enterprise software. European vendors established an early lead in mobile devices in the 1990s and, in an industry now characterised by intense price competition and relentless innovation, Europe’s mobile market continues to offer opportunities both for giants like Nokia and the smaller more specialist vendors.

“Mobile technology is an area where Europe is still ahead of the US,” says Jon von Tetzchner, Chief Executive of Opera Software, a Norwegian firm that produces browsers for mobile devices. Opera is supplying its browser to, among others, T-Mobile for the latter’s new mass-market mobile web service.

Among IT managers in our survey, 44 percent say they plan to boost spending with European suppliers of mobile devices, including PDAs and smartphones. (IDC predicts growth of European spending on smartphones of nearly 40 percent per annum over the next two years.) And 39 percent say they will spend more on mobile applications.

Enterprise software is another relatively buoyant IT market and one where European suppliers continue to count, although recent years have seen several of Europe’s smaller vendors acquired by North American rivals. While 44 percent of IT managers expect to maintain the same level of spending on European enterprise software, the same number say they plan to increase it.

Germany’s SAP continues to dominate the enterprise software market in Europe, and its huge presence sustains an extensive “ecosystem” of systems integrators and smaller software firms who benefit from partnering with the German giant. One such firm is Autonomy, the UK search engine specialist. The association with SAP works well, according to Mike Lynch, the firm’s Chief Executive, as Autonomy customers often buy both vendors’ products together.

The more numerous and successful the giants, the more successful the ecosystem. However, Europe’s technology sector has few such giants, and European IT firms appear to find it more difficult to scale up than their US counterparts.

(Read the full report here.)

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