Why IT solutions providers lack appeal despite good prospects

  • Business
  • Saturday, 28 Nov 2009

EVER wonder why some companies with seemingly good prospects do not attract as much investor interest as others? That’s the case for most information technology (IT) solutions providers.

There has been much emphasis on information and communications technology (ICT) as a key enabler for industries to move up the value chain and for the economy to enhance growth and competitiveness. But the irony is, in Malaysia, IT solutions providers do not always seem to find favour with as many investors as would justify their potential.

Even among the research houses in the country, none really covers the sector. So, what gives?

Maybank Investment Bank Bhd head of research Andrew Lee gives his reasoning as such: “Investors like plays that offer secular or long-term growth, but IT solutions providers are mainly contract-driven, and they generally have smallish market capitalisation that do not provide as much excitement to investors.”

In general, business opportunities for IT solutions providers are aplenty and these are likely to grow further, as increasingly more corporations in both the private and public sectors begin to focus on their core competencies and resort to outsourcing their supporting functions such as IT.

As Delesh Kumar, director of international consulting company Frost & Sullivan Malaysia Sdn Bhd, puts it: “Outsourcing is the way to go. This is driven less by cost factors, but more by the need to keep up with technology and the fast-changing working environment.”

He explains that with technology moving forward at breakneck speed, very few companies would be able to manage these changes internally unless they outsource their IT requirements to specialised companies.

Based on this argument, it is easy to conclude that the prospects for the IT solutions industry, which comprises players like Mesiniaga Bhd, Heitech Padu Bhd, Dataprep Holdings Bhd, Formis Resources Bhd and Lityan Holdings Bhd, are bright indeed. These players generally depend on the constant flow of contracts from either the private or public sector to sustain their bottom lines.

But the stiff competition in the industry puts pressure to their profit margins.

“There are many players in the industry that are alike one another in the local market, and at the same time, growth prospects overseas are limited because local players there can basically do the same thing,” Kenanga Investment Bank Bhd head of research Yeonzon Yeow explains.

Delesh concurs, as he sees IT companies from emerging economies like India and Russia are adding pressure to the competition among local players.

“Most local IT service providers are generally system integrators that are reselling services of global companies; thus when competition comes in, their margins start to be affected significantly,” Delesh explains.

“Although many local players have been trying to develop their own niche solutions, their primary revenue source still comes from the traditional system integration services,” he adds.

Needless to say, the recent economic slowdown did cause some hiccups to the flow of contracts to these industry players, as organisations tightened their belts and slashed IT spending. Fewer contracts were offered and some were postponed, particularly during the height of the global economic at the end of last year and early this year.

IT investments have direct correlation with the growth of the economy. Based on historical trends, International Data Corp (IDC) finds that IT investments tend to pick up faster than the economic growth, and conversely, drop more significantly than the contraction of an economy.

But in anticipation of suspended budgets on IT projects being revived as the economy recovery, IT solutions providers are positioned to do well, argues IDC associate analyst Hailey Chan.

She points out that there have already been several major IT projects, especially by the public sector, being awarded to IT services providers over the past few months. One such example is the RM70mil integrated e-courts system deal that was won by Formis in August.

IDC is currently in the process of revising upwards its forecast for IT spending trends in Malaysia. It is understood that the numbers, which would be released by the end of the year, are likely going to be substantially more upbeat compared with its previous forecasts.

In May, IDC said it expected IT spending in the country for 2009 to contract 1.8%. It then expected to see initial signs of recovery in IT spending in the country only in early next year, with investments rebounding to pre-crisis level in the following year. But with the economy recovering sooner and faster than expected, the significantly improved outlook for the industry follows suit.

But Delesh points out the need for local players to capitalise on the changing global market landscape. He says local companies will have to start innovating and delivering state-on-the-art solutions that can help clients to reduce their expenses and maintain their competitiveness.

“Technology firms are entering unchartered territory. The key differentiating factor is not who has the winning solution or the cheapest tender, but who is able to provide guidance and services that can capitalise on all the changes that are influencing the marketplace,” Delesh says.

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