Europe-based IT service providers surprisingly ahead of the game
For European providers (...) long-term customer relations and continuity are paramount.
The big European IT providers have been achieving excellent growth in sales and EBITDA over the last ten years, often outperforming their competitors of non-European origin. This finding comes as a surprise for many industry insiders, report Carsten Rossbach and Markus Puttlitz.
In a recent study, our InfoCom Competence Center came to precisely this conclusion. It has taken many industry experts by surprise and triggered a lively discussion. The dominant view was that the front-runners in IT strategy and technological innovation were primarily non-European firms. But the notion that European providers are always trying to catch up with and emulate the (mainly American) market leaders is wide of the mark.
Reactions in the IT press
As one industry insider comments, "In the light of these findings, we have to wonder whether the recent trend toward internationalizing by bringing US managers into the highest tiers of European IT management is actually the right way forward." Other pundits point out that top players have been growing more and more international anyway ("How European is a company like SAP today …?"). They also note the importance of having a more balanced worldwide revenue distribution – thought to be relatively good among European providers.
Example: Siemens SIS and Atos Origin
Since the study came out, the recent announcement of Atos Origin's plans to take over Siemens SIS by is seen another step taken by the market in this context. CEO Thierry Bréton has set the goal of "creating the most attractive IT European champion". The two companies will face – no doubt major – challenges when integrating their operations after the antitrust authorities and employee representatives have given the go-ahead. Nevertheless, this move is laying the foundations for a provider with strong "European DNA" that will make a big impact on the global stage.
In this takeover scenario, mastering the complexities of integration is "only" a necessary, but not sufficient, condition for success. The transaction will prove a real success if the parties manage to play to their strengths in customer sectors such as energy, health or manufacturing, i.e. fields that represent the strengths of the continental European economies. The capital markets have been applauding the move, with Atos share prices surging by more than 10% after the announcement.
In a recent study, our InfoCom Competence Center came to precisely this conclusion. It has taken many industry experts by surprise and triggered a lively discussion. The dominant view was that the front-runners in IT strategy and technological innovation were primarily non-European firms. But the notion that European providers are always trying to catch up with and emulate the (mainly American) market leaders is wide of the mark.
Reactions in the IT press
As one industry insider comments, "In the light of these findings, we have to wonder whether the recent trend toward internationalizing by bringing US managers into the highest tiers of European IT management is actually the right way forward." Other pundits point out that top players have been growing more and more international anyway ("How European is a company like SAP today …?"). They also note the importance of having a more balanced worldwide revenue distribution – thought to be relatively good among European providers.
Example: Siemens SIS and Atos Origin
Since the study came out, the recent announcement of Atos Origin's plans to take over Siemens SIS by is seen another step taken by the market in this context. CEO Thierry Bréton has set the goal of "creating the most attractive IT European champion". The two companies will face – no doubt major – challenges when integrating their operations after the antitrust authorities and employee representatives have given the go-ahead. Nevertheless, this move is laying the foundations for a provider with strong "European DNA" that will make a big impact on the global stage.
In this takeover scenario, mastering the complexities of integration is "only" a necessary, but not sufficient, condition for success. The transaction will prove a real success if the parties manage to play to their strengths in customer sectors such as energy, health or manufacturing, i.e. fields that represent the strengths of the continental European economies. The capital markets have been applauding the move, with Atos share prices surging by more than 10% after the announcement.
European providers employ other levers to increase their cost advantages, e.g. through standardization processes.
Success factors behind European IT service providers
Our study underlines that European providers have special strengths in certain market environments. To make better sense of the empirical results, the consultants held a series of interviews with IT decision-makers on the customer side and with senior IT management on the supplier side. They show which factors are crucial for a successful IT business in the European market:
Long-term strategy
Many user companies have noticed that non-European IT providers tend to follow a strategy geared to short-term objectives, sometimes just focusing on quarterly results. The CEOs of such companies often see their role as "first making the sale". They often operate tactically rather than strategically and opt for highly flexible structures that can react quickly to market trends.
For European providers, by contrast, long-term customer relations and continuity are paramount. Building up a core workforce over many years is also seen very much as a strength by both providers and customers in Europe, while non-European companies may perceive long-term employee commitments as an obstacle to investment and a threat to flexibility.
CIO first point of contact for sales
European providers also take a long-term approach to sales and see a customer's CIO as the first point of contact. In their purchasing behavior, European CIOs are often risk-averse. They like their providers to have an excellent reputation and value long-term partnerships.
To meet these expectations, European providers tend to avoid making exaggerated promises. Rather, they concentrate not just on delivering on their promises but exceeding them where possible. The non-European competitors are generally more willing to take risks when selling innovative solutions.
The European sales approach does have some downsides, however. For instance, European sales cycles, with their typically strong technical focus, are often much lengthier than those of non-European players. Non-European IT providers tend to be more aggressive and show great flexibility, even in pricing, in order to make a quick sale.
European approach to boosting efficiency
Both European as well as non-European IT providers need to achieve continuous improvements in cost efficiency. But they do this in very different ways:
Conclusion
The study was certainly not intended to talk up a particular region or disparage other regions. Rather, starting from the surprisingly good performance by European providers, its goal was to tease out the culturally determined differences and debunk the prejudices about supposedly lethargic and anti-innovative Europeans. The strong and varied response to our study has shown that it was a good idea to initiate this discussion.
Our study underlines that European providers have special strengths in certain market environments. To make better sense of the empirical results, the consultants held a series of interviews with IT decision-makers on the customer side and with senior IT management on the supplier side. They show which factors are crucial for a successful IT business in the European market:
- Roots in the strong industrial base of continental Europe
- Clear positioning in the core business
- A high degree of stability and continuity (also in staffing) for customers
- A credible and persuasive CIO with technical expertise
- Professional customer relations at CEO/CFO level based on value arguments
- Competitive cost structures
- Staff approval with employee representatives on board
Long-term strategy
Many user companies have noticed that non-European IT providers tend to follow a strategy geared to short-term objectives, sometimes just focusing on quarterly results. The CEOs of such companies often see their role as "first making the sale". They often operate tactically rather than strategically and opt for highly flexible structures that can react quickly to market trends.
For European providers, by contrast, long-term customer relations and continuity are paramount. Building up a core workforce over many years is also seen very much as a strength by both providers and customers in Europe, while non-European companies may perceive long-term employee commitments as an obstacle to investment and a threat to flexibility.
CIO first point of contact for sales
European providers also take a long-term approach to sales and see a customer's CIO as the first point of contact. In their purchasing behavior, European CIOs are often risk-averse. They like their providers to have an excellent reputation and value long-term partnerships.
To meet these expectations, European providers tend to avoid making exaggerated promises. Rather, they concentrate not just on delivering on their promises but exceeding them where possible. The non-European competitors are generally more willing to take risks when selling innovative solutions.
The European sales approach does have some downsides, however. For instance, European sales cycles, with their typically strong technical focus, are often much lengthier than those of non-European players. Non-European IT providers tend to be more aggressive and show great flexibility, even in pricing, in order to make a quick sale.
European approach to boosting efficiency
Both European as well as non-European IT providers need to achieve continuous improvements in cost efficiency. But they do this in very different ways:
- Non-European providers are more open to new technologies and offshoring ideas and focus primarily on costs in developing their solutions.
- In Europe, cost is not the only criterion for outsourcing. Rather, cultural affinity also plays an important role, with companies often preferring a nearshoring option (for instance to Eastern Europe) to offshoring to India or China.
- European providers also employ other levers to increase their cost advantages. They often play a leading role in standardization processes (e.g. ITIL or CMMI).
Conclusion
The study was certainly not intended to talk up a particular region or disparage other regions. Rather, starting from the surprisingly good performance by European providers, its goal was to tease out the culturally determined differences and debunk the prejudices about supposedly lethargic and anti-innovative Europeans. The strong and varied response to our study has shown that it was a good idea to initiate this discussion.
CIO expert column
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Related study (in German)
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