In yet another sign of how tough things are out in the UK SITS market, Logica has renewed an IT outsourcing relationship with UK house builder Taylor Wimpey, for £15.2m over the next five years – a total contract value (TCV) that is 50% lower than its previous £30m five-year deal with TW signed in 2008 (see here). TW has been a Logica customer for nine years and this new deal will see the relationship extend to 2016.
Of course a lot has changed since the original deal was struck. The housing boom has turned to bust, and the construction sector entered a deep decline. TW has itself gone through a severe cost cutting exercise following its 2007 merger between Taylor Woodrow and George Wimpey, and TW IT director Andy Feldon told us that Logica was previously supporting a ‘significantly bigger organisation’. To put in context, TW today employs an average of 3,484 full time staff, down 19% on the 4,300 average in FY10, and 27% off the 4,754 average in FY09. Feldon said that Logica will now be supporting 24 regional offices in the UK, down from 39 previously.
TW’s house building market remains very tough. In H111 (TW’s most recent available numbers), revenue fell 28.2% to £817.2m, although it is clearly keeping a tight control on the costs – pre-tax margins were 3.5% vs. -0.2% in H110. The commercial construction players like Carillion, Interserve, Costain and Balfour Beatty, face similar challenges (see Construction companies – unusual suspects in UK BPS). However these players are now seeking to build or acquire support services and business process services capability to diversify and generate longer-term recurring revenue opportunities.
Logica is clearly now delivering services to a smaller organisation, which goes some way to explain the drop in TCV. However Feldon did also point out that a good benchmarking exercise against four of its peers, and a parallel comparison of costs of insource vs. outsource had helped keep Logica competitive.
We see this contract as an indicator of the wider state of the UK SITS market, and the challenges facing providers at renewal time. With unemployment still on the rise, UK organisations across many sectors like retail, construction, BFSI, travel, and of course public sector, continue to cut costs and reduce their number of employees. This is only likely to continue in 2012. It makes the case for suppliers to charge anywhere near previous prices extremely difficult. Although this example may be at the extreme end of things, it certainly points to the direction of travel we are seeing.