Outsourcing Keeps IT Services Companies Afloat

Apr 28, 2002 (08:04 PM EDT)

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Outsourcing continues to prop up IT services companies such as EDS, Keane, and IBM amid a dearth of traditional consulting work.

The 7% sales growth EDS (EDS-NYSE) reported last week was primarily because of a 14% increase in its outsourcing business, which makes up three-fourths of its $5.34 billion in revenue for its first quarter ended March 31. In contrast, EDS's product life-cycle-management software group dropped 11% in sales, and revenue from A.T. Kearney consulting fell 15%. EDS's net income fell 21% because of several ac-counting changes, but it increased operating income 36%.

Keane Inc. (KEA-AMEX) is a smaller competitor that's following the same trend as EDS, reporting a healthy increase in outsourcing revenue despite lower net income. First-quarter outsourcing revenue grew 27% from a year ago to $146.9 million, making up two-thirds of total revenue, the consulting firm said last week. Keane's consulting and application development revenue fell 30% to $74.4 million for the quarter, while total revenue rose 6% to $221.3 million. Net income fell by 35% to $5.5 million.

IBM (IBM-NYSE) reported two weeks ago that its services unit's revenue slipped 3% from last year to $8.2 billion, though its outsourcing revenue ticked up 6% to $3.28 billion. Unisys Corp. (UIS-NYSE) similarly reported earlier this month that its outsourcing revenue grew, while overall services revenue fell for the first quarter.

IT outsourcing is appealing because it helps companies cut costs as their budgets tightens, says John Halvey, a lawyer specializing in outsourcing contracts for New York law firm Milbank, Tweed, Hadley & McCloy LLP. Says Halvey, "There's only going to be more outsourcing, not less."