CRS222_Financial_Analysis_Of_Systems_Integrators_Aug89 CRS222 Financial Analysis Of Systems Integrators Aug89

CRS222_Financial_Analysis_Of_Systems_Integrators_Aug89 CRS222_Financial_Analysis_Of_Systems_Integrators_Aug89

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FINANCIAL ANALYSIS OF
SYSTEMS INTEGRATORS

CRS 0222

-For Internal Use Only-

By Richard D. Buchanan
DTN 264-3663

Prepared for Chris Sullilvan
CSS
August 1989

CONSULTING and RESEARCH SERVICE

Andrea Schulman, ManagerlEditor
MK01·11K11 DTN 264-6911
Martha Brunelle, Production Editor

mamDama
Copyright 1989 by Digital Equipment Corporation
All rights reserved

FINANCIAL ANALYSIS OF SYSTEMS INTEGRATORS

TABLE OF CONTENTS

PURPOSE AND METHODOLOGY

.2

EXECUTIVE SUMMARY . . . . . .

.3

SYSTEMS INTEGRATION: AN OVERVIEW.
. .4
Federal and Commercial Sectors Contrasted .
. 6
Commercial Sector Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
FINANCIAL ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Size of the U.S. Systems Integration Market: Input's Estimates
. 9
Estimates of U.S. Systems Integration Market Growth . . . .
. .10
Input's Market Share Estimates for The U.S. SI Market . . .
.13
The Size of the U.S. Systems Integration Market: Computer
Systems News' Estimates
. . . . .
. 17
Top 50 Systems Integrators
. 19
Hardware Vendors .. .
. 20
Systems Integrators . . . . .
. 21
Integration Facilitators . . .
. 22
VENDOR PROFILES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
IBM Corp.. . . . . . . . . . . . .
.23
Electronic Data Systems, Corp.
.24
Anderson Consulting . . . .
. . . . .
. 25
AT&T. . . . . . . . . . . . . .
.26
Bolt Beranek and Newman .
. .27
Computer Task Group, Inc. .
. 28
Litton Industrial Automation Group
. 29
SHL System House. Inc. . . . . .
.30
Unysis Corp. .. . . . . . . . . .
. 31
Digital Equipment Corporation .
.32

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FINANCIAL ANALYSIS OF SYSTEMS INTEGRATORS

PURPOSE AND METHODOLOGY

Managers of CSS contracted with Consulting and Research Service for research into the
cost of sales for systems in~ators. The researcher was asked to examine the pubHcly
available financial records of systems integrators as well as secondary sources available
from third-party market research firms. In addition to reporting the results of these
financial analyses, it was hoped that such comparisons might reveal patterns indicative of
the structure of this emerging industry, allowing Digital managers to more effectively plan
their competitive strategy.
Information was derived from three sources: publicly available financial reports such as
Annual reports and 10Ks; Third party market research reports such as Input's report on
Systems Integration and trade press sources, most notably Computer Systems News'
Systems Integration whitepaper.
Brief familiarity with the systems integration literature reveals a bewildering variety of
estimates as to the size and growth rate of the overall systems integration market. Many
of these estimates differ by a factor of two or three. This is true not only of the industry
revenues and profits but of the number of competitors and the size of the workforce they
employ.
.
The primary reason for these diverse estimates is that the term systems integration
means dramatically different things to different analysts. Some analysts distinguish between systems services and programming and strictly hardware integration. Information
systems design and auditing as practiced by the Big Eight accounting firms is yet a third
definition of systems integration. Depending upon where the line is drawn, estimates of
the size of the systems integration market can vary dramatically. Compounding the problem is the paucity of information available from third-party market research firms on how
their estimates have been reached. Unlike some other areas of computer market research,
systems integration data gathering has not been tested over time. This lack of testing can
lead to douhle-counting or undercounting of revenues and headcounts.
Another important factor which explains the diverse market size estimates is the unavailability of disaggregated financial reports. Because the systems integration function is only
now beginning to be recognized as a distinct business, many of the primary competitors
have never divisionalized these groups. The integration function may be the result of a
collaboration between diverse groups within a corporation, and revenues are not recognized as "systems integration" revenues as such. It is definitely the case that many firms
have no real idea of what revenues they receive from systems integration" services, or
how many of their personnel are involved.
N

Despite these facts, data gathered by industry experts using consistent methodologies is
roughly comparable. The primary sources of information for this report rely heavily on
Input Corporation's Systems Integration Service, and on the special report on Systems
Integration prepared by Computer Industry News. While their overall estimates of the size
of the market differ, comparisons between competitors can be made within each group's
data.

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2

FINANCIAL ANALYSIS OF SYSTEMS INTEGRATORS

EXECUTIVE SUMMARY

Systems Integration is only recently being recognized as a distinct business comprised of
a variety of services, skills and technologies which have traditionally been spread throughout most business organizations. The forces which are driving the growth of systems
integration are fundamental, worldwide economic changes coincident with the emergence
of new, cost effective computing and communication technologies.
The relative youth of the systems integration function makes measurement of revenues
and costs difficult since many firms do not disaggregate their financial statements to
reflect the work done by systems integrators. This difficulty is compounded by the fact
that definitions of systems integration vary widely.
The size of the systems integration market in the United States is variously estimated to
be between $4.8 and $6 billion. Growth rates overall are expected to be in the range of
25% between 1988 and 1993, but rates of growth are different in the two primary sectors;
government spending growth is likely to average 19%, while commercial spending growth
is likely to average 300/0. Overall spending on systems integration in the U.S. is expected
to reach $14.7 billion by 1993.
Profiles of major systems integrators and analysis of their financial statements suggests
that systems integration is a capital intensive business dominated by large firms that are
able to afford the significant investments in software development and contract management that the business demands. Buying behavior of customers, especially their aversion
to risk when faced with a major investment of strategic importance, also contributes to the
advantage that well established, financially strong, reputable firms have when bidding
against smaller competitors. The business entails significant barriers to the entry of competitors, which are likely to remain for the foreseeable future.

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FINANCIAL ANALYSIS OF SYSTEMS INTEGRATORS

OVERVIEW OF THE SYSTEMS INTEGRATION FUNCTION

Systems Integration is only recently beginning to be recognized as a distinct business.
From a marketing perspective, the systems integration function is developing its own
identity, which can be defined in terms of the marketing mix. Definable Products are
being recognized by potential customers who choose them based upon Price, Distribution
and Prom,otional attributes.
This was not always the case. Formerly, customers depended upon hardware vendors,
internal MIS managers or perhaps their accountants to recommend and possibly implement information systems.
The complexity of the task led initially to a centralized MIS approach. This solution
proved to be inappropriate for many decentralized organizations and for those businesses
whose operations required geographic and information system autonomy.
The availability of cost effective alternatives to the centralized mainframe encouraged the
proliferation of diverse and, at times, internally inconsistent information systems. Support
for these multiple systems came from professional service firms that were hired to provide
programming and system design services at the time of initial startup or conversion. This
relieved central MIS of the need to employ large staffs to support the irregular work-flow,
but left the door open for the acquisition of disparate computer systems and software
packages.
Systems integration as a distinct function handled by third-party contractors is- emerging
to solve this constellation of technological and organizational problems.
The growing importance of systems integration, especially in the commercial sector, reflects fundamental changes in the economic and organizational climate for large scale
computing.
Integration of the world economy has forced businesses to link operations and information
systems for coordination of operations and financial strategies and to achieve the economies of scale demanded by...
Increased international competition. The diffusion of economic power that has accompanied large scale economic development in the third world and especially in Asia. has been
encouraged by a fundamental shift in the importance of the traditional Factors of
Production.
The relative importance of Physical Resources, Manpower, Capital, and Managerial Talent
has changed such that Capital and Managerial Talent (especially the talented exploitation
of information), can overcome the limitations imposed by Physical Resources and raw
Manpower. Businesses as well as governments are recognizing that the strategic use of
information is a critical success factor for the achievement of their goals. Investments in
computing resources are driven by attempts to marshal the critical mass of information
required for strategic decision making.

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FINANCIAL ANALYSIS OF SYSTEMS INTEGRATORS

Ironically, the rapid development of computing technologies has often served to undercut
the success of any particular organization's computing strategy. Shortened Computer
Product Life Cycles have left many computer customers with unintegrated computing
systems and with organizational problems that distract from the organization's fundamental mission. Computers are expected by customers to be a means to an end, not an end in
themselves. Increasingly, corporations are turning to third parties to manage their internal computing resources, allowing managers to address themselves to fundamental business problems.
Kodak Company, recently hired Businessland, Inc. to manage Kodak's personal computer
operations, and Kodak managers are seeking third-party integrators to manage DP and
telecommunications functions as well. This is coincident with Kodak's desire, like that of
many modern corporations, to concentrate their resources and managerial talent on their
core business, photography.
"Such thinking puts Kodak in the vanguard of a movement reshaping the computer
industry. Hardware and software companies that have simply pushed the technology as
hard and as fast as they could are finding that it is not enough... " 1 " Companies are
getting increasingly bogged down running their own systems, and they are increasingly
willing to pay the price to be relieved of these headaches, which show no sign of diminishing." 2
The Federal Government was the first major organization to embrace systems integration
as a solution to these problems. This market was the largest source of systems integration
revenues in 1988 but a drastic decrease in government spending will allow commercial
systems integration revenues to surpass government market revenues during 1989. 3
The differences between the Federal government market and the commercial market are
significant in terms of the buying behavior of the customers~ the expertise of the vendors.
the methods of doing business and the prospects for market growth. Because of these
differences, analysis of relative competitive strength of systems integration vendors must
consider the proportion of their revenues derived from each sector. While the
technological/systems design task may be similar, the marketing task is quite different.
1 "Computer Firms Find That Service is What Sells, Not Fancier Hardware"; Wall
Street Journal; August 15, 1989; pp. 1; col. 6.
2 Naomi Karton, Computer Consultant; Quoted in "Computer Firms Find Service.. ",
ibid.
3 "Systems Integration- A Competitive Analysis"; Input, December 1988.

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FINANCIAL ANALYSIS OF SYSTEMS INTEGRATORS

The following represents some of the contrasts between each of these market sectors: 4

Characteristic

Commercial

Federal

Low
Variable
Multiple

High
High
Single

Preferred
Leveragable
Required
Media-Based

Mandatory
Reference
Optional
Historic

Field Sales
Optional
Deferrable
High
Fixed Price
Competitive
Unlikely
Unlikely
High

CBDlbudgets
Required
II Guaranteed"
Contained
Combination
Ceilings
Awards/Incentives
Exception
Limited

Customers
REQUIREMENTS
TECHNICAL KNOWLEDGE
INTERFACE
Vendors
VERTICAL MKT EXPERTISE
CUSTOMER BASE
BUSINESS KNOWLEDGE
REPUTATION

Business Conditions
LEAD GENERATION
COMPETITIVE BIDS
EXPENDITURE COMMITMENT
RISK EXPOSURE
CONTRACT TYPE
PRICE RESTRICTIONS
BONUSES
PENALTIES
PROFIT POTENTIAL

4 "Systems Integration Forecast and Trends"; Input; December, 1988.

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6

FINANCIAL ANALYSIS OF SYSTEMS INTEGRATORS

The Commercial Sector
The commercial market for systems integration is divided, by Input, into thirteen industry
sectors:

The Four Largest Segments
•
•
•
•

State and Local Government
Discrete Manufacturing
Banking and Finance
Retail Distribution

A:dditional Segments

•

Process Manufacturing

•
•
•
•
•
•
•
•

Insurance
Wholesale Distribution
Utilities
Telecommunications
Medical
Services
Transportation
Other

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FINANCIAL ANALYSIS OF SYSTEMS INTEGRATORS

FINANCIAL ANALYSIS

The Size of the U.S. Systems Integration Market;
Exhibit II details Input's estimates of the total size of the U.S. Systems Integration
Market. Exhibits 12, 13 and 14 portray these same data graphically.
Input estimates the entire U.S. expenditure on systems integration to have been $4.8
billion in 1988, approximately evenly divided between Commercial and Federal
Government sectors. Growth rates for the two sectors differ significantly. Input estimates
that the commercial segment will grow at a cumulative annual growth rate (CAGR) of 30%
between 1988 and 1993, while the government sector will average 190/0 over the same
period. For the U.S. systems integration market as a whole, Input forecasts a 25% CAGR.

1r

1r

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FINANCIAL ANALYSIS OF SYSTEMS INTEGRATORS

Exhibit #1
INPUT ESTIMATE OF SYSTEMS INTEGRATION MARKET GROWTH

---------------------------------------------------u.S. EXPENDITURES ($8)
1988

1989

1990

1991

1992

CAGR
1993 88-93

FEDERAL
$2.4
COMMERCIAL $2.4

$2.9
$3.1

$3.4
$4.1

$4.1
$5.3

$4.9
$6.8

$5.8
$8.9

19%
30%

TOTAL

$6.0

$7.5

$9.4 $11.8 $14.7

25%

----

----

----

-----

$4.8

--- -

-- --

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FINANCIAL ANALYSIS OF SYSTEMS INTEGRATORS

!NPUT ESTIMATE OF SYS INT MRKT GROWTH
CAGRS- !='iLl=1;". COMM=JOX.

15 -I
1~

1~

TOTAL=25~

I

i
J

t/

12
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