Monday, 13 September 2010

From profitability to extortion: IT comparison

In August I wrote the Product to service financial ratio, that dealt with the fact that there is a certain ratio between what you pay for a product, and the service provided on it
A twitter conversation on (vendor) implementation cost to software license cost ratios was the source for that.
Today, I present a different comparison: vendors, consultants and system integrators: those that build, advise on or implement the software

A caveat is in place: the "players" at hand are a diverse mix in themselves: some build, advise on and sell software at the same time - I thought the above picture was pretty appropriately showing such a combination. Yet, those percentages will be given so you can judge for yourself (I always like to have people think for themselves, saves myself a lot of thinking and my brain a whole lot of wear)

The list: Oracle, SAP, IBM, Accenture, Capgemini, Logica, Atos Origin
The rationale: I have worked for Capgemini for 14 years. Atos Origin is not only next-door from our Dutch HQ, they're also a French company, like Capgemini. Accenture is in Americas what Capgemini is in Europe (and vice versa). IBM is combining consulting with software, and SAP and Oracle are pure vendors

Consulting, system integrating, outsourcing: I'm sorry but I'm going to throw them all in one basket for now. There's either software building, or implementing it.
Atos Origin, Capgemini, Logica, Accenture: 100% implementers
SAP, Oracle: 20% implementers, 80% builders (Oracle does slightly less than 20% and SAP slightly more than 25% on implementing, actually)
IBM: 60% implementer, 25% builder, 15% hardware

Anxious to see how I'm going to compare all these apples and oranges? I am!

To complicate matters a bit, I did a bit of calculation on the Fortune 500 as well: to get an idea of the differences between profitability and extortion. The Fortune 500 is built upon plain revenue: the bluntest measure there is, but it's a measure. I prefer the more elegant comparison of profitability: divide the profit by the revenue, and then sort on that...
What comes up? Google at number 10 with only 27.6% operating margin. On top? Liberty Media, a TV company! In the 21st century?Anyway, if you're a customer of them, you must feel ripped-off now: of every dollar you pay them, they pocket over 60 cents as pure profit
Now that's extortion!

After getting over the fact that no. 2, 3 and 4 on the list are pharmaceuticals, making huge profits on diseases, truly redefining the meaning of parasite themselves with operating margins averaging 45%, we can see that roughly the last 100 are actually losing money, showing negative operating margins
Here's the graph showing the average operating margin for the Fortune 500 (with Symantec and Fannie Mae left out, as their huge negative margins of -110% and -250% ruin the graph)

Looking at that graph, I think we can define 10% as profitable-to-be-desired: that's no. 96 holding that exact position, Dr. Pepper. And who doesn't like Dr. Pepper?!

Right, sorry for this long sidetrack but at least we now agree on the definitions and measurements of profitability and extortion (I'm wondering how many there are on the phone now with Liberty Media btw, that is if anyone is able to figure out what those people are dealing in) - back to IT

Here's the full list, in millions of dollar, euros or pounds (doesn't matter as we're just looking at the operating margin %):
Update 24th July 11:55 CET: after last night's post I realised I mixed net and operating income in this post and overlooked subtle attempts to tweak figures - a big mess-up for which I sincerely apologise. I went through all companies and reports again, and took my time, doublechecking and cross-comparing all figures. The outcome now is very different, in both tables below:
RevenueProfitOperating profit %
5,1270,0701,4%Atos Origin

So, SAP and Oracle implementations really ARE expensive, it seems. A 24% operating profit % puts you at position 18 or higher in the Fortune 500, but 36% puts you in 6th place!

Now, towards the most deadly of all comparisons: like I explained in Measuring Individual value contribution to a Group, if you find the lowest denominator between groups you can compare anything. In this case, that's the employee. I really, really regret not having all employees for all Fortune 500 companies, but I do have them for the IT companies. It took some annual and financial report wrestling, so don't try this at home

Here's the profit-per-person table - it contains amounts in euros so all global multinationals could be compared (yes, the dollar is out, in case you hadn't noticed yet):

Profit per employee
1,389Atos Origin

So, Oracle, SAP and IBM lead with -by far- the biggest operating profit, absolutely as well as relative
For argument's sake, here are's figures:

ProfitOperating marginProfit per employee

Update 17th September 20:38 CET: here are the figures in euros for clean comparison with the above. By the way, I used an exchange rate of 1 pound = 1.3 euro, and 1 dollar = 0.8 euro. Crude? Heck yeah

ProfitOperating marginProfit per employee
861698,0%19,200SFDC has the operating profit % of a system integrators, but an operating profit close to IBM's - that will appeal to many, many people...

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