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Please see General Disclaimers on the last page of this report.

Current Environment ............................................................................................ 1

Industry Profile ...................................................................................................... 9

Industry Trends ................................................................................................... 14

How the Industry Operates ............................................................................... 20

Key Industry Ratios and Statistics ................................................................... 28

How to Analyze a Computer Services Company ........................................... 29

Glossary ................................................................................................................ 34

Industry References ........................................................................................... 36

Comparative Company Analysis ...................................................................... 38

This issue updates the one dated November 2013. The next update of this Survey is scheduled for December 2014.

Industry Surveys Computers: Commercial Services Scott Kessler, Information Technology Sector Equity Analyst

JUNE 2014

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S&P CAPITAL IQ INDUSTRY SURVEYS (ISSN 0196-4666) is published weekly. Redistribution or reproduction in whole or in part (including inputting into acomputer) is prohibited without written permission. To learn more about Industry Surveys and the S&P Capital IQ product offering, please contact our Product Specialist team at 1-877-219-1247 or visit getmarketscope.com. Executive and Editorial Office: S&P Capital IQ, 55 Water Street, New York, NY 10041. Officers of McGraw Hill Financial: Douglas L. Peterson, President, and CEO; Jack F. Callahan, Jr., Executive Vice President, Chief Financial Officer; John Berisford, Executive Vice President, Human Resources; D. Edward Smyth, Executive Vice President, Corporate Affairs; Charles L. Teschner, Jr., Executive Vice President, Global Strategy; and Kenneth M. Vittor, Executive Vice President and General Counsel. Information has been obtained by S&P Capital IQ INDUSTRY SURVEYS from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, INDUSTRY SURVEYS, or others, INDUSTRY SURVEYS does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Copyright © 2014 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved. STANDARD & POOR’S, S&P, S&P 500, S&P MIDCAP 400, S&P SMALLCAP 600, and S&P EUROPE 350 are registered trademarks of Standard & Poor’s Financial Services LLC. S&P CAPITAL IQ is a trademark of Standard & Poor’s Financial Services LLC.

INDUSTRY SURVEYS COMPUTERS: COMMERCIAL SERVICES / JUNE 2014 1

CURRENT ENVIRONMENT

Slow growth, but growth, in IT services

Growth in the information technology (IT) services segment over the last few years has been slow due to fiscal issues in Europe, followed by budget cuts in both the public and private sectors, indications of weakness in China, budget disruptions (including sequestration) in the US, and delayed decision-making by corporations in the light of economic uncertainty. In addition, growth is not expected to pick up rapidly over the next year, though there have been some signs of improvement in recent months. In the February 2014 issue of its Worldwide Black Book, International Data Corporation (IDC), a global provider of IT data, analysis, and consulting, forecasted that growth in worldwide spending on IT services would slow to 4.6% in 2014 from the 4.8% in 2013. IDC cited challenges in emerging economies and moderating gains in smartphone and tablet shipments as primary reasons for the deceleration. Excluding mobile phones, worldwide IT spending is expected to grow 3.4% in 2014 versus 2.9% last year. IDC expects spending on both servers and storage to increase by 3% this year, compared with declines of 4% and 0.5%, respectively, in 2013.

IHS Inc., a company that provides economic and financial analysis, forecasting, and market intelligence, projects worldwide economic growth of 3.0% in 2014 and 3.5% in 2015. The growth rate for China is expected to moderate over the next few years, and average 7.5% in 2014 and 7.6% in 2015. In 2013, China’s gross domestic product (GDP) growth remained flat at 7.7%, which is significantly down from 9.3% in 2011, and the lowest since 2004. There is growing pressure for an economic restructuring of China, the aim of which would be more sustainable and balanced economic development. Further, the persistent European crisis and fiscal challenges, along with the somewhat sluggish US economy, has perhaps restrained the export-led growth in China. With China’s growth likely to slow, the Asia-Pacific region might take a hit. However, it would still be the fastest-growing region after Latin America. We believe that IT spending budgets for 2013 were flat to modestly lower, and we do not foresee major increases for 2014. We see this lack of growth contributing to an ongoing cautious attitude by corporations when it comes time to spend. We have seen this already, with decisions on discretionary projects being delayed. The uncertainty in the economy is a major factor in companies putting off spending as well. Nonetheless, according to IDC, a modest rebound in spending is expected over the near term. Further, it believes that cloud services will lead growth in the IT industry for the next 25 years.

The world’s recovery out of the Great Recession experienced in 2008 and 2009 was a very gradual one for the IT services sector. Other areas within technology, however, experienced a period of rapid growth in 2010 following the inventory depletion during the downturn. The subsequent restocking phase was a boon to the hardware area. The IT services area did not partake in this growth spurt, though we note that it did not see the rapid pace of declines like other areas in the technology arena in late 2008 and 2009. This reflects the long-term nature that is typical of many contracts in the industry. As the economic recovery moves into its later stages, we believe we will begin to see IT spending shifting toward later-cycle segments, which includes IT services. We believe this expected shift is happening very slowly, given the lackluster pace of the recovery. What growth we are seeing is coming at an uneven pace, where some service areas will benefit more than others do.

In recent quarters, many customers of IT services firms have been hesitant to sign new long-term contracts for fear that the current economic activity would slow or stall out. Consequently, contract-signing cycles have elongated. We think that this will remain the case over the near term, particularly with companies that have dealings with government entities. Previously, consistent spending by the public sector made up for the sluggish pace of spending by the private sector. However, with worldwide economic concerns relatively high, the public sector does not seem to be as promising in the near term. Although contract signings are taking more time to complete, customers are eventually signing contracts. In 2011 and early 2012, there was an uptick in interest in services involving either growth-oriented projects or projects that are more discretionary in nature. More recently, the pendulum has shifted toward contracts that provide more cost

2 COMPUTERS: COMMERCIAL SERVICES / JUNE 2014 INDUSTRY SURVEYS

savings and have shorter payback times. This is particularly true in Europe, where outsourcing as a means to reduce costs is becoming more accepted.

Over the longer term, we believe more robust growth will return to the industry, with some areas benefiting more than others. However, we do not expect IT services growth rates to return to the rapid pace of the 2003–2006 period in the near future, given the modest pace of economic recovery S&P Capital IQ expects over the next two years.

The pace of economic growth varies among locales According to IHS, the global economy declined 1.7% in 2009, before rebounding to growth of 4.3% in 2010, 3.1% in 2011, and 2.5% in 2012. However, in 2013, the growth rate moderated slightly and averaged 2.4%. Real GDP rates varied widely in 2013 across the different markets. Strength was concentrated mainly in Asia, with China (up 7.7%), Indonesia (+5.8%), Vietnam (+5.4%), and India (+4.6%) leading the way in 2013. In contrast, the developed nations in the West were among the slowest growers last year, with the UK (up 1.8%), Germany (+0.5%), and the US (+1.9%) showing modest gains.

Looking ahead, S&P Capital IQ projects real US GDP growth of 2.8% in 2014 and 3.2% in 2015. For 2014, IHS expects a 2.5% pace of growth for the US, and a 3.0% rate for the world economy. It anticipates pockets of higher growth, primarily in emerging markets, including China (7.5%), Indonesia (5.2%), and India (5.4%). Areas of slower growth are concentrated among the advanced economies, especially in Western Europe, such as Germany (2.1%), France (0.6%), and the UK (2.7%).

Government budget fights For countries everywhere, budget battles are nothing new, but the most recent ones have been particularly difficult. In the US, sequestration—across-the-board budget cuts—took effect March 1, 2013, when Congress could not come to an agreement on budget cuts. Although sequestration has had less onerous near-term consequences than either political party anticipated, if left unchecked, it will have a more serious impact in the future. In March 2013, the Congress did finally manage to pass a budget for the 2013 fiscal year (ending September 2013). Congress was subsequently unable to enact regular appropriations or a continuing resolution for fiscal 2014, which led to a shutdown of the federal government from October 1 through October 16, 2013. The shutdown ended when an agreement to extend funding for a few months was signed. This lack of a long-term formal agreement on spending creates uncertainty about budgets and makes dealing with the government as a customer particularly challenging. On March 4, 2014, US President Barack Obama submitted the fiscal 2015 budget request to Congress. Congress has offered some alternative proposals, and we see a less acrimonious appropriations process.

Delayed decisions Another issue facing IT services firms is the increased level of indecision on the part of clients. The problem is two-fold. First, companies are more uncertain about gauging the level of demand that they will see, given an economy that is growing in fits and starts at best. Companies have to find a balance between expanding to prepare for growth and cutting costs to guard against falling demand. The extra layers of approval needed are another hindrance to getting contracts signed in a timely fashion. It has become far more common for executives at the highest levels, such as CEOs and CFOs, to be closely involved in spending decisions.

SELECTED AREAS PERFORMING WELL, BUT SOME STILL LAG

Despite the end of the recession a few years ago, there has been no dramatic uptick in spending, although some modest growth has returned. Companies that had been reluctant to give up the hard-earned cash they had built up during the downturn have loosened their purse strings slightly. We believe that the decision-making will continue to remain slow, given reduced spending by the public sector across various economies, and enterprise clients that have not substantially increased their spending. In addition, the economy continues to be hampered by slightly improving (but still high) levels of unemployment (which Standard & Poor’s Economics thinks will hover around 6.4% in 2014 and 5.8% in 2015), financial institutions that have remained hesitant to grant loans, and a general sense of uncertainty, given the expected modest pace of growth in developed markets. (Standard & Poor’s Economics operates separately from S&P Capital IQ).


According to IDC, the growth rate for the overall IT services category increased to 2.0% in 2010, 7.3% in 2011, and 1.8% in 2012. IDC projects that the worldwide IT services market will grow at a compound annual growth rate (CAGR) of 3.8% for 2012–2017.

Pockets of rapid growth Within the larger IT services segment, some areas are likely to experience faster growth as the world’s economies ramp up in the expectation of future growth. These segments are generally the ones that did not turn down as dramatically when business demand weakened. (For our thoughts on the long-term outlook and more detailed descriptions of these areas, see the “Industry Profile” section of this Survey.)

Hosted application management. Although this area is small relative to the other services markets, hosted application management is growing rapidly. According to a December 2013 report, IDC expected the segment to grow 6.8% in 2013 and 7.7% in 2014, and an estimated 7.6% CAGR for 2012–2017. In this area, outsourcers host a client’s software in its own datacenter. This frees the customer from the burden of maintaining the hardware necessary to run the programs.

Network consulting and integration. This area is growing fast within the broader area of systems integration services. It includes services related to planning and building both local area and wide area networks (LANs and WANs) and other communications networks that will allow voice and data applications to be used across a common infrastructure. In September 2013, IDC expected the 2013 and 2014 growth rates for this area to be 6.5% and 6.6%, respectively, with a CAGR of 6.3% for 2012–2017.

Hosting infrastructure services. This is another relatively small, but fast-growing, segment within the overall services universe. In December 2013, IDC expected the growth rates for this area to be 7.9% for 2013 and 8.6% for 2014, with a CAGR of 8.4% for 2012–2017. Hosting infrastructure services includes such activities as when an outsourcer manages and maintains the hardware that supports a client’s website.

Application management. This is an area that is especially appealing to customers as it lowers the cost of their enterprise application management and does so with a higher degree of expertise. The segment is estimated to grow at 5.7% in 2013 and 5.9% in 2014, with a CAGR of 5.2% for 2012–2017, according to the November 2013 report by IDC.

Business consulting. A large area that is growing quickly is business consulting, which is expected to grow by 7.1% both in 2013 and 2014, with a CAGR of 7.3% for 2013–2018, according to the April 2014 report by IDC. In 2013, this segment grew by 6.9% versus 3.4% in 2012. Business consulting consists of providing advisory services to clients regarding management issues. This type of consulting is far broader than the more specific IT consulting, and involves setting an organization’s overarching strategy and goals.

Cloud computing services. The areas of cloud computing and mobility services are expected to contribute significantly to the IT services industry in the coming years. These services are connected with other technologies such as mobile services, wireless networks, and data analytics. According to a report released by IDC in August 2013, public IT cloud services will grow at a CAGR of 23.5% for 2012–2017. Further, IDC thinks that by the end of this decade, 80% of the industry growth will be driven by cloud services and other third-platform technologies.

Some areas will be slower to grow A few areas are expected to see slower growth in 2014 after their modest showings in 2013. The slower growth areas have a couple of things in common. First, they tend to be areas that are more discretionary. Second, they tend to involve services that are longer-term in nature and may have extended payback periods.

Hardware deployment and support. With a modest amount of new hardware being rolled out during the recovery from the recession, this segment increased at a modest 1.0% rate in 2011, according to IDC. We trace this meager rate to a tepid computer refresh cycle in the enterprise market. As of December 2013, IDC looked for a growth of 2.6% in 2013 and 2.8% in 2014, with a CAGR of 2.9% for 2012–2017.


IT consulting. IT consulting tends to be one of the first items cut when budgets get tight, as it is often considered largely discretionary. IT consulting involves a service provider providing an analysis or assessment of the clients’ IT operations or strategy. As of December 2013, IDC expected growth of 2.7% in 2013 and 3.9% in 2014, with a CAGR of 4.0% for 2012–2017.

Information services (IS) outsourcing. IS outsourcing is the second-largest segment of the services industry, according to IDC. Given its size, its modest long-term growth rate is not surprising. As of December 2013, IDC expected the growth rate to be 1.0% in 2013 and then rise to 1.6% in 2014, with a CAGR of 1.0% for 2012–2017. We think the slow growth can be traced to companies’ unwillingness to enter into long-term contracts, given the uncertain economic situation of the past few years.

SMALLER MERGERS DOMINATE THE SCENE

One of the strongest ongoing themes within the services segment over the past few years had been consolidation. In general, companies were looking outside their own walls for ways to augment their growth. However, mergers have actually cooled off significantly in the services industry; there was a visibly slower pace of mergers and acquisitions (M&A) activity in the previous two or three quarters in the business process outsourcing (BPO) sector.

Going forward, IDC believes that most M&A activity will be focused on acquiring niche, industry-specific business process (banking, financial services, and insurance—also known as BFSI—healthcare, retail, and more) or big data analytics capabilities. We think that companies are, for the time being, shifting their focus to internal growth and building out infrastructure and new service lines, as the industry shifts toward new technologies, such as cloud, mobile, and various forms of social media platforms and applications.

The move into services The bigger players, such as Dell Inc. and Hewlett-Packard Co. (HP), which have been operating in the hardware space, are now focusing on the software and services segments. These moves have been largely propelled by financial factors in the hardware segment, such as declining revenues and low operating margins. The PC market, a major component of the hardware market, is experiencing weak unit volume growth, at best. Since late 2010, the numbers of PCs shipped have slowed dramatically, due to slow-growth economies and technological advancements in smart phones and tablets that have displaced some demand for laptop PCs as a way to get Internet connectivity on the go.

Additionally, revenues from services tend to be less variable than traditional hardware sales, reflecting the long-term nature of contracts. This more consistent income stream is attractive to companies that have traditionally been subject to the cyclicality of the market. Along with these factors, the major incentive remains the shifting of focus from lower-margin to higher-margin operations.

During 2013, International Business Machines Corp. (IBM) made several acquisitions to fill out its offerings. In February 2013, IBM completed the acquisition of StoredIQ. The addition of StoredIQ enabled IBM to enhance its big data offerings to organizations for more effective governance. In March 2013, IBM acquired Star Analytics Inc., which provides process automation and integration of applications across hybrid computing environments. This is in line with IBM’s growth strategy to expand its business analytics and optimization software and services capabilities, an area of the company expected to reach $20 billion in revenues by 2015. In July 2013, IBM acquired SoftLayer Technologies Inc., a cloud computing company that will help in enhancing its cloud services division. IBM expects its cloud-based revenues to reach $7 billion (annually) by the end of 2015. In September 2013, IBM acquired Trusteer Ltd., a cyber-security software provider. With this acquisition, IBM expects to develop its data security offering. Then, in January 2014, IBM completed the acquisition of Aspera Inc., a leading provider of fast-track file transfer software. The acquisition is expected to boost IBM’s industry solutions business. In April 2014, IBM acquired Silverpop, a software and marketing technology provider. Silverpop helps marketers to understand customer behavior and to devise related strategies.

Aside from the desire of companies to add a services component to their offerings and to expand their existing service offerings, several other factors lead us to believe that there will be further deals. First,


interest rates remain at historically low levels, and this has made it very attractive for large corporations to take on debt. Second, during the recession, many companies prioritized expense management and made the (prudent) decision to hang on to their cash. This lack of capital and investment spending by enterprises has led to a surfeit of cash on many companies’ balance sheets. The availability of cash, combined with intensifying competition and the desire to offer customers a multitude of offerings, is leading to the ongoing consolidation activity in the industry, in our view.

The small move into new service areas Smaller acquisitions remain common among IT services firms of all sizes for a number of reasons. First, making acquisitions is a way for companies to offer new services to their customers; and, second, acquisitions allow companies to move into different industry verticals.

The passage of the Patient Protection and Affordable Care Act (ACA) in March 2010 provided for penalties for institutions not using specified electronic health records (EHR) after 2015 and downward revisions to Medicare payments beginning in 2015. As a result, there has been a marked increase in the use of technology in the healthcare sector. To tap into this opportunity, a large number of acquisitions have taken place in the healthcare IT sector over the last few years.

In October 2012, ExlService Holdings Inc., a provider of outsourcing services, acquired Landacorp, a provider of healthcare solutions and technology for an undisclosed amount. Landacorp has more than 50 million members under management, for whom it provides clinical data to payers, providers, and accountable-care organizations.

In November 2012, CACI International Inc. acquired Emergint Technologies Inc., a technology solutions provider to national health organizations. Strengthening its healthcare IT capabilities, CACI in January 2013 acquired IDL Solutions Inc., an IT solutions, applications, and mission-critical systems support provider to civilian agencies and other healthcare IT clients.

In January 2013, ManTech International Corp. acquired ALTA Systems Inc., which has an Enterprise Systems Development (ESD) contract with the Centers for Medicare and Medicaid Services (CMS).

In February 2013, Genpact Ltd. acquired US-based Jawood, a solutions and service provider to the healthcare payer industry.

Besides the healthcare IT sector, IT services firms made acquisitions in other sectors as well. In December 2012, Paychex Inc., a payroll and human resource solution provider for smaller businesses, acquired ExpenseWire, which provides expense report automation solutions for small to medium-sized enterprises. In October 2012, Computer Sciences Corp. (CSC) acquired Columbia 42Six Solutions LLC. 42Six specializes in software development for big data processing and analytics, and provides advanced applications support to the US government intelligence community and the Department of Defense.

Captives in focus During the economic downturn and subsequent rebound, larger companies looked to raise capital by shedding their own captive outsourcing operations. Citigroup Inc., for example, sold two of its captive operations. In October 2009, UBS AG sold its India Service Centre Private Ltd. to Cognizant and simultaneously entered into a multi-year services agreement. The trend continued in 2010, as ExlService Holdings Inc. acquired American Express Co.’s Global Travel Service in March. Affiliated Computer Services (now wholly owned by Xerox) completed the acquisition of ExcellerateHRO LLP (EHRO), a global benefits administration provider, from Hewlett-Packard in August. In each of these cases, the acquirer received a ready-to-go operation and a built-in new client that it can leverage to its existing clients and use to help win new clients.

However, in 2011 the trend began to reverse somewhat, and multinational companies are again looking at setting up captive operations, given the incentive to source work from low-cost locations. According to Everest Group, an outsourcing consulting firm, banks were retaining core operations with their captives, while outsourcing standardized work to IT firms. According to an article in the Economic Times on January 31, 2013, multinational corporations were again setting up captive centers due to greater regulatory oversight in the US and


Europe, especially in the banking and financial services sector, and tight control over intellectual property. The article noted that multinationals set up 70 new Indian captives and expanded 11 existing ones in 2012.

According to a survey conducted by McKinsey & Co. and Nasscom in April 2012, 52% of companies with captives in India intended to increase their offshore penetration by 15%–30% over the upcoming two to three years. Further, the captives are now carrying out more complex work than just mere back-office work. These captives are also helping in setting up units in other parts of the world. For example, Fidelity Worldwide International’s captive unit in India, which has been in existence for 10 years, is helping the company set up centers in China and Africa. Additionally, an Economic Times article dated January 31, 2014 noted that IT companies like Cognizant, Wipro Ltd., and Genpact Ltd. were showing keen interest in buying captive units of their multinational clients. The article further highlighted that in 2012, there were 760 captive units in India, and going forward this number is expected to increase. We wonder whether the May 2014 election of Narendra Modi as Prime Minister will support and contribute to growth.

SALARIES IN INDIA REMAIN A CONCERN

A long-term trend within the employment market in India has been the increasing demand for skilled, English-speaking workers. Raising the staffing levels for both experienced and new-to-the-market workers is a necessity for companies experiencing rapid growth. During the recession, however, salaries were relatively steady as demand slackened and the economy cooled.

The wage inflation experienced by the IT services industry in the mid-2000s returned in 2011. The wage hikes that happened in the spring of 2011 (and generally occur annually each spring), were in the low teens for many of the outsourcing companies with workers in India. (In contrast, wage hikes for US-based workers were in the low single digits.) According to the Compensation Trends Survey 2014, conducted by Deloitte Human Capital Advisory Services in March 2014, the overall median salary increase was 11.8% in 2013–2014 for workers in India in the information technology sector.

For 2014–2015, Deloitte expects the median annual increase to be 11.6%, marginally lower than in the previous year. It further expects the increase across various sectors to decline compared with the previous year due to uncertain market conditions. We think that salary inflation in India continues to be a concern. We note that national elections set to conclude in May 2014 could lead to economic reforms.

According to Aon Hewitt’s Annual Salary Increase Survey, salary increases for Indian IT companies are expected to average 10.2% in 2014, which is slightly more than the overall salary hike of 10% expected across various industries in India. In February 2014, Tata Consultancy Services, the largest IT company in India, announced an increase of 10% in the salaries of employees based in India, and increases of 2%–4% for those working in client locations. Infosys, the No. 2 player in the sector, announced average salary hikes of 6%–7% for its employees in India and 1%–2% for overseas employees. In 2013, Wipro raised the salaries for its employees across the board in the range of 6%–8%. The next salary hike for 2014 is expected to be announced in June.

Even though the salaries in India are rising at a much faster pace than those in the US, the cost advantage is expected to last for a number of years. According to an analysis by Everest Group, the total cost for a Global Information Center (GIC) involved in IT-ADM work in a tier-I Indian city is 55%–70% less than its parent based in a tier-II US city. The Everest Group believes that wage inflation will not wipe out cost savings for a GIC in the near term, as the net cost inflation is only 6%–8%, versus 12%–15% generally.

Over the long term, however, cost inflation is a concern. The upward pressure on wages can put companies in a difficult situation. Much of the work in the IT services sector (aside from the work that is automated) is directly based on human output. If this primary input becomes more expensive, a company has two choices, neither one good. First, it can attempt to raise prices to its customers. This can be difficult, as clients tend to sign contracts with a price in place. In addition, any price increase could push potential clients into the waiting arms of numerous competitors that offer similar services. A second choice is to absorb the increase. Unless a company is able to offset this increased cost by cutting expenses elsewhere, such a move would lead to lower profitability.


For two of the largest Indian IT services providers, employee cost as a percentage of revenue grew on an average by 2%–3% from 2007 to 2010. With salaries expected to increase at the same level in the near future, companies experiencing less than double-digit top line growth might not be able to sustain these higher employee costs without losing on margins. According to Ernst & Young, operations in India have a benefit of employee cost arbitrage of around 40% over the US and other European countries. However, with the current growth pattern, salaries will soon come at par with other developed nations, forcing companies to start operations within their home countries.

Going hand-in-hand with rising salaries are often increased levels of attrition, as competitors use higher salaries to woo workers from rival companies. The attrition rate for Indian outsourcers is generally in the mid-teens. For example, the rate was 17.8% for Infosys in 2013. Companies try to stem rising attrition rates with increased wages, promotions, equity compensation awards, and additional training.

Companies are also changing their business models to cope with the rise in salaries. It has been reported that Indian outsourcing companies are reducing the number of new graduates they hire, and are moving away from a labor-intensive model as the industry shows signs of maturation. In addition, demand for typical talents such as coding has declined somewhat, and companies now require more varied and flexibility skills. At HCL Technologies, for example, just 20% of those offered jobs in 2011 were still with the company in 2013 (the company made no associated offers in 2012).

THE OUTLOOK FOR THE IT SERVICES INDUSTRY IMPROVES, BUT SELECTIVELY

Prospects for the IT services industry over the next five years seem relatively promising, with strong growth in selected services. However, in the near term, global economies are grappling with a high degree of uncertainty, which is causing customers to delay their IT spending decisions. In general, corporations and most governments have become more accepting of outsourcing as a means to lower costs, enhance customer service, gain access to new areas of expertise and skill, and improve flexibility. Outsourcing also allows corporations to shift resources away from more peripheral tasks and focus on their core competencies. We see growing potential related to Europe.

We believe the worst is behind the industry, although that does not mean that we expect growth to return to the robust pace that the IT services industry enjoyed a decade ago. Providers of these services posted earnings growth in 2012 and 2013, and we expect this trend to continue into 2014. They are benefiting from growth of outsourcing, the prevalence of electronic transactions, and entry into international markets. However, we remain concerned that intensifying competition, pricing pressures, increased regulation, and anticipated revenue loss for clients in major end markets like financial services could result in business delays or price erosion.

For example, the difficulties experienced by the financial services industry over the past few years could continue to hurt the industry. This sector is particularly important to the Indian outsourcers: according to our estimates, they derive 25% to 45% of total revenues, on average, from the banking, insurance, and securities and investment services sectors. On the other hand, recent legislative changes to healthcare could make this area an active implementer of IT services over the next few quarters. IDC expected spending in the US by the insurance vertical to rise 1.9% in 2013 and 4.4% in 2014, whereas spending by the healthcare vertical was expected to increase 9.6% in 2013 and 6.4% in 2014, according to a November 2013 study.

We believe that customers are still willing to spend on projects that lower their costs. Discretionary projects, where clients look for ways to stimulate demand and not just cut costs, showed some strength over the past few years. However, the growth in spending on discretionary projects might be aligned with the pace of overall growth of the economy, which is likely to continue to be less than robust in the coming quarters.

We believe that some horizontal services within the broader market will grow more quickly than others. Those more likely to have a shorter time to maturity and be more cost effective, like hosted application management and hosting infrastructure services, are segments that will likely have faster growth rates. According to the December 2013 study, IDC expected hosted application management to grow at 6.8% in 2013 and 7.7% in 2014. For hosting infrastructure services, IDC expected growth rates of 7.9% in 2013


and 8.6% in 2014. Areas that will likely show slower growth will be longer term and more discretionary in nature, such as IT consulting and hardware deployment and support, which IDC expected to grow in 2013 at modest rates of 2.7% (4.0% for 2014) and 2.6% (2.8% for 2014), respectively.

Mobility and cloud computing services, which are likely to see tremendous growth, are making headlines across the industry. According to an August 2013 report released by IDC, spending on public cloud services will grow at a CAGR of 23.5% from 2012 to 2017. Further, in 2017, public cloud services will account for 17% of IT in five product categories—applications, system infrastructure software, platform as a service (PaaS), servers, and basic storage. US federal agencies, for example, are going to rely on cloud computing services in a big way as they see tremendous savings resulting from their implementation.

While the budgets have been set, we think that companies are still taking longer than normal to sign contracts, perhaps as much as an additional three to four quarters. The delays can be more readily observed in the government sector. Given the continued logjams and infighting over the federal budget (as well as some state and local budgets), agencies remain hesitant to spend. Even when the budget levels are agreed on, appropriations bills (where agencies are told how to spend their allocation) will still need to be passed. All of this adds up to more uncertainty for companies that provide services to the government. The sector has seen a relatively dry spell in terms of no major deals being signed in the public sector. On the corporate side, we think delays are likely to continue, but the problems are not as pronounced.

We see modest near-term growth prospects, and believe some IT service companies will look to supplement growth via acquisitions and partnerships. We point to the acquisitions of Perot Systems by Dell Inc. (2009) and Affiliated Computer Services by Xerox Corp. (2010). Another strategy we think is gaining momentum involves focusing on smaller and shorter-duration IT service contracts, which often involve reduced upfront costs and provide a faster return on investment. In the government marketplace, we view increased spending on IT-related defense and homeland security initiatives (such as intelligence and cybersecurity) as positive factors, as well as interest in IT-related projects within the healthcare sector. In the near term, however, ongoing budget issues could influence results.

Longer term, we think computer services concerns will continue to benefit from the effects of an increasingly global economy, deregulation, an IT labor shortage, and e-business opportunities. In addition, corporations and governments will likely continue to need services and systems that can help boost productivity and cut costs. We think that cost-cutting initiatives will be a source of strength for the India-based outsourcing companies in the group.

Outsourcing companies have been largely successful in lowering their own cost structures to be in the best position to win contracts. The Indian outsourcing companies have a head start in this respect, given the lower salary requirements of potential employees compared with workers in the US. However, owing to fierce competition from major US players, Indian outsourcing companies will have to focus on building volumes while still not giving up on margins. Further, these companies will have to look at diversifying their operations toward geographies other than the US and Europe, given the near-term lackluster IT spending in these economies. They are diversifying their offerings as well, pushing into higher-margin services that have typically been the domain of larger, better-known firms. Domestic outsourcing companies may need to continue to lay off workers in the US and shift operations overseas or partner with offshore producers to keep pace, as has happened in many other industries.

One factor that may level the playing field somewhat is our expectation that salaries in India will continue to increase over the long term. The rising wages in India have led to the industry’s looking toward a global sourcing model. Companies in the sector have delivery centers all over the world, including the Philippines, Latin America, and Eastern Europe. The Indian outsourcing majors, such as Infosys and Wipro, have plans to double or triple their staffs in areas such as China in the next two to three years. The move will be caused by factors such as softness in the US and European economies, rising wages, high volatility in the Indian currency, and increasing competition. In general, we believe that the organizations that will be best positioned going forward are those with a diversified revenue stream across many services and geographies, and can effectively use inexpensive overseas labor to keep costs low.


INDUSTRY PROFILE

Outsourcing growth should improve over the long term

According to International Data Corporation (IDC), a global provider of information technology (IT) data, analysis, and consulting, the commercial computer services industry includes three subcategories: project-based services, outsourcing, and support/training services. Project-based services include consulting and systems integration. Outsourcing comprises business process outsourcing (BPO) services, information services (IS) outsourcing, network and desktop outsourcing, and other services. Support and training consists of hardware deployment and support, software deployment and support, and IT education and training.

According to a December 2013 report, IDC expects the entire industry to grow 4.4% (compounded annually) between 2012 and 2017, reaching revenues of $1.09 trillion. IDC estimates that the US accounted for about 40.5% of the worldwide market for computer services in 2012, a percentage that is expected to fall to 38.9% by 2017. According to January 2014 estimates from Gartner Inc., an IT research firm, worldwide IT spending grew 0.4% in 2013, which is lower than the 0.8% it had predicted in November 2013. For 2014, Gartner expects a 3.2% increase as of April 2014. Spending is expected to be higher than last year due to improving economic conditions worldwide.

Project-based services The project-based services segment includes business consulting, IT consulting, systems integration, network consulting and integration, and custom application development (each detailed below). IDC expects this area to grow at a 5.4% pace, compounded annually, between 2012 and 2017, according to a December 2013 report. For 2013, IDC expected the area to grow at 4.5%. IDC expects growth to improve to 5.4% for 2014.

According to IDC’s July 2013 report, the biggest providers of project-oriented services in 2012 were Accenture plc and Deloitte LLP, while International Business Machines Corp. (IBM) was the third largest.

Table B08: WORLDWIDE SERVICES SPENDING, BY FOUNDATION MARKET

WORLDWIDE SERVICES SPENDING, BY FOUNDATION MARKET(In billions of dollars)

CAGR %

2012 2013 2014 2015 2016 2017 2012- 17

Project-based 296.4 309.7 326.3 344.7 364.3 384.9 5.4Business consulting 80.1 85.6 91.5 98.2 105.6 113.8 7.3Netw ork consulting and integration 36.0 38.1 40.8 43.5 46.6 49.6 6.6Custom application development 38.2 39.8 41.5 43.4 45.3 47.2 4.3IT consulting 30.4 31.2 32.5 33.9 35.4 37.0 4.0Systems integration 111.7 115.0 120.1 125.7 131.4 137.4 4.2

Outsourcing 423.2 439.8 459.3 480.1 500.6 520.9 4.2Business outsourcing 159.1 167.9 177.3 187.4 198.0 209.1 5.6Application management 50.7 52.8 55.1 57.4 59.4 61.2 3.8Hosted application management 9.9 10.6 11.4 12.3 13.2 14.3 7.6IS outsourcing 121.1 122.4 124.3 126.3 127.3 127.5 1.0Netw ork and desktop outsourcing 47.0 48.1 49.8 51.8 53.8 56.0 3.6Hosting infrastructure services 35.3 38.1 41.3 45.0 48.8 52.8 8.4

Support and training 155.2 159.3 164.3 169.9 175.6 181.5 3.2Hardw are deploy and support 62.9 64.5 66.3 68.3 70.4 72.5 2.9Softw are deploy and support 68.9 70.8 73.2 75.8 78.4 81.1 3.3IT education and training 23.4 24.0 24.9 25.8 26.8 27.9 3.5

Total global services spending 874.8 908.9 949.9 994.7 1,040.5 1,087.3 4.4

CAGR-Compound annual grow th rate. Totals may not add due to rounding.Source: IDC's December 2013 forecast report.


Accenture’s revenues from this segment totaled $15.36 billion, while Deloitte had $15.26 billion in revenues. In 2012, Deloitte and Accenture recorded growth rates of 13.5% and 0.3%, respectively, in revenues from project-oriented services. For the top 10 vendors, total revenue grew at 2.2% in 2012 (latest available). Accenture, Deloitte, and IBM remain by far the leaders in this category, as no other company had more than $7.5 billion in revenues from the sale of these services. Other large project-oriented service vendors included Fujitsu Ltd., Computer Sciences Corp., and Lockheed Martin Corp.

Business consulting. Of the five project-based services categories, business consulting is the least related to information technology. When a company needs help with the redesign or repositioning of its goals and strategy, it can look to the outside for guidance. According to the latest available data from IDC, IBM generated more revenues from worldwide IT consulting than any other company, followed by traditional

consulting names such as Booz Allen Hamilton, Deloitte, and KPMG, as well as the more technology-oriented Accenture, CGI Group Inc., Hitachi, and Hewlett-Packard (HP).

IDC expects business consulting to grow at a 7.3% pace between 2012 and 2017. IDC further breaks down this segment into the following subcategories: strategy consulting, operational improvement consulting, internal audit consulting, and change and organization consulting.

Network consulting and integration. The next major area within the project-based services segments is network consulting and integration. When companies need a data network built, be it local, wide area, or wireless, they can reach out to providers that will design and build it for them. Heavyweights IBM and Cisco Systems Inc. are active in this area. As of December 2013, IDC believed that this segment would grow at a CAGR of 6.6% between 2012 and 2017.

Custom application development. Many services firms offer custom application development, delivering stand-alone customer code for their client when a company needs custom-built software (as opposed to a commercially available off-the-shelf product). A provider oversees all facets of the new code, from requirements gathering to build to quality testing. Between 2012 and 2017, IDC expects a CAGR of 4.3% for custom application development.

Table B10: WORLDWIDE BUSINESS CONSULTING REVENUE

WORLDWIDE BUSINESS CONSULTING REVENUES(In billions of dollars)

CAGR

COMPANY 2013 2014 2015 2016 2017 2018 2013- 2018

Americas 48.5 52.4 56.5 61.1 66.4 71.7 8.1Asia/Pacif ic 8.6 9.2 9.8 10.4 11.1 11.8 6.6Europe/Middle East/ Africa 28.5 30.1 32.0 34.1 36.3 38.6 6.2

Total Worldwide 85.6 91.7 98.2 105.6 113.8 122 7.3

CAGR-Compound annual grow th rate.Source: IDC's April 2014 forecast report.

Table B07: LEADING WORLDWIDE SERVICES VENDORS

LEADING WORLDWIDE SERVICES VENDORS(In millions of dollars, ranked by total services revenues)

- - - - - PROJECT- BASED - - - - - - - - - - - OUTSOURCING - - - - - - - - - SUPPORT & TRAINING - - -

2011 2012 % CHG. 2011 2012 % CHG. 2011 2012 % CHG.

IBM 13,610 12,951 (4.8) 32,534 31,617 (2.8) 15,881 15,716 (1.0)Hew lett-Packard 5,147 5,146 0.0 21,597 20,823 (3.6) 10,490 10,554 0.6Accenture 15,309 15,362 0.3 10,250 11,413 11.3 115 118 2.7Fujitsu Ltd. 7,444 7,441 0.0 9,412 9,531 1.3 3,536 3,357 (5.1)Deloitte 13,439 15,259 13.5 688 826 20.0 … … … Computer Sciences Corp. 6,419 6,266 (2.4) 7,170 7,068 (1.4) 287 285 (0.6)Capgemini 7,020 6,843 (2.5) 4,729 4,637 (1.9) 685 633 (7.5)NEC Corp. 5,807 6,338 9.1 2,620 2,845 8.6 2,919 2,896 (0.8)NTT DATA 4,830 4,879 1.0 5,835 6,082 4.2 1,047 1,095 4.6Hitachi Ltd. 5,792 6,219 7.4 1,644 1,697 3.3 3,221 3,234 0.4

Total 84,815 86,704 2.2 96,478 96,538 0.1 38,180 37,889 (0.8)Source: IDC's June 2013 forecast report.


IT consulting. IT consulting is more specific than business consulting, as it relates to companies looking for help improving the performance/structure/management of their IT systems. In 2012 (latest available), the leading company in this area, according to IDC, was IBM, followed closely by Booz Allen Hamilton. Growth in this area is anticipated to be at a modest 4.0% compound annual growth rate (CAGR) between 2012 and 2017, according to IDC.

Systems integration. One of the largest segments of the IT services market is systems integration. Since the beginning of the computing era, corporations have added more and more hardware and software systems to their businesses. Each additional component, however, may or may not be compatible with the

existing ones. When it becomes too difficult to manage the disparate systems effectively, it becomes necessary to link them together in a way that will help the organization better achieve its goals. Outsourcers that provide this service are typically able to handle all aspects of the integration, from planning to implementation to support. The largest players in the systems integration market are Accenture and IBM, followed by Fujitsu and NEC Corp. This area is expected to increase by 4.2% annually from 2012 to 2017, according to IDC.

Outsourcing This segment comprises BPO services, IS outsourcing, network and desktop outsourcing, application management, hosted application management, and hosting infrastructure services. IDC expects the broad outsourcing category to

increase 4.2% annually between 2012 and 2017, according to its December 2013 report. Outsourcing is the largest of the IT services segments, accounting for more than 48.4% of all spending in the category in 2012, according to IDC. IBM was the largest vendor in the outsourcing space in 2012, as it was in 2011. HP was second, with Accenture and Fujitsu a distant third and fourth, respectively.

BPO services. According to IDC, BPO is the largest single segment within the overall services universe. Typically, vendors in this area process their customers’ transactions and data using their own computer systems (often with proprietary software). They perform functions such as customer care, finance and accounting, human resources management, and procurement outsourcing. Other horizontal BPO functions include logistics, sales and marketing, and training. Numerous companies provide business process outsourcing, ranging from large companies that provide a host of other services as well (such as Computer Sciences Corp. and Accenture) to small, specialized firms (such as ExlService Holdings Inc. and Genpact Ltd.).

Alternately, BPOs can be vertically oriented: a company may specialize in a particular industry. Examples of this are companies that provide human resources BPO, such as Automatic Data Processing Inc. and Aon Hewitt. Another example would be WNS (Holdings) Ltd., which began as the in-house BPO provider to British Airways. Not surprisingly, this company has deep industry knowledge of the travel vertical.

Table B12: WW SYSTEMS INTEGRATION SERVICES REVENUE LEADERS

WORLDWIDE SYSTEMS INTEGRATIONSERVICES REVENUE LEADERS—2012

REVENUES MARKET

(MIL. $) SHARE (%)

Accenture 8,691.4 7.7IBM 6,400.1 5.7Fujitsu Ltd. 5,374.2 4.8NEC Corp. 4,690.5 4.2Hitachi Ltd. 4,625.4 4.1Lockheed Martin 4,559.0 4.1CSC 4,218.8 3.8Capgemini-CPM Braxis 3,761.2 3.4Deloitte 3,457.6 3.1SAIC 3,304.3 2.9Source: IDC.

Table B19: WORLDWIDE IT CONSULTING REVENUE LEADERS

WORLDWIDE IT CONSULTING REVENUE LEADERS—2012

AS % OF

TOTAL

REVENUES MARKET SERVICES

(MIL. $) SHARE (%) REVENUES

IBM 2,141 7.0 3.6Booz Allen Hamilton 2,102 6.9 36.5Deloitte 1,715 5.6 10.7Accenture 1,631 5.3 6.1Capgemini–CPM Braxis 1,201 3.9 9.9KPMG 1,059 3.5 24.8CGI-Logica 762 2.5 8.1Hitachi 736 2.4 6.6HP EDS 723 2.4 2.0Computer Sciences Corp. 645 2.1 4.7

Top 10 total 12,715 41.6 …

Total market 30,531 100.0 …

Source: IDC.


Worldwide BPO services spending reached $159.1 billion in 2012 and is expected to reach $209.1 billion in 2017, which equates to a CAGR of 5.6%, according to IDC.

IS outsourcing. The second-largest segment within the overall services market is IS outsourcing, according to IDC. This type of outsourcing occurs when a provider takes responsibility for the management

of a client’s infrastructure operations. These contracts tend to be long-term and often entail an outsourcer taking possession of a client’s hardware and sometimes of its employees. It is expected to be one of the slower-growing areas, according to IDC’s December 2013 report; specifically, growth is anticipated to be a meager 1.0% annually between 2012 and 2017. In our view, the slower growth can be traced to the relative maturity of the market.

Network and desktop outsourcing services. This is a more specific form of the outsourcing relationship: the outsourcer provides support and management of the client’s computer network and/or desktop systems, without a formal transfer of

ownership of the operations. Moving away from hardware toward software is the realm of application management. In this area, a provider will support and maintain a client’s applications. The attraction of both of these service offerings is that they allow clients to reduce costs, increase efficiency, and focus more intensely on business planning and strategic initiatives. Network and desktop outsourcing services is expected to grow at a CAGR of 3.6% between 2012 and 2017, according to a December 2013 report by IDC.

Application management. This segment provides everyday maintenance and support to enterprise applications at the customer’s end. This includes maintaining, enhancing, and monitoring customer’s applications. Companies such as IBM, Accenture, and Tata Consultancy Services provide application management services. As of December 2013, IDC forecast this segment to grow at a CAGR of 3.8% from 2012 to 2017.

Hosted application management. In this segment of the outsourcing space, the client’s applications are contained on the outsourcer’s hardware. Since the software resides within the outsourcer’s datacenter, the company can then provide the customer with support and management. There are numerous examples of companies in this area, including IBM, Tata Consultancy, and AT&T Inc. Of all the segments under the larger IT services umbrella, hosted application management is expected to grow the fastest over the 2012–2017 period, with a CAGR of 7.6%.

Hosted infrastructure services. This segment involves the management and maintenance of the hardware that supports a client’s web site or web applications. There are a large number of competitors in this area from many different market segments. Besides traditional IT services companies, there are also network operators (Level 3 Communications), cloud providers of infrastructure as a service (such as Amazon web services), hosting specialists (Savvis Inc.), and datacenter providers (ColoSpace). As is the case for many of the categories within the overall services segment, IBM was the largest provider in the first half of 2013, according to a December 2013 report by IDC, followed by AT&T, Rackspace Hosting Inc., Century Link- Savvis, Equinix Inc., and HP. As of December 2013, IDC expected hosted infrastructure services to increase at an 8.4% annual pace over the 2012–2017 period.

Table B11: LEADING WORLDWIDE IS OUTSOURCING VENDORS

LEADING WORLDWIDE IS OUTSOURCING VENDORS

2012

- - - - - REVENUES (MIL. $) - - - - - MARKET

COMPANY 2011 2012 % CHG. SHARE (%)

IBM 18,004 17,291 (4.0) 14.3Hew lett-Packard 12,125 11,612 (4.2) 9.6Fujitsu Ltd. 5,987 5,976 (0.2) 4.9Computer Sciences Corp. 5,347 5,266 (1.5) 4.3Atos 3,126 3,790 21.2 3.1NTT DATA 3,751 3,788 1.0 3.1Northrop Grumman 3,326 3,340 0.4 2.8Deutsche Telecom 2,998 2,787 (7.0) 2.3Capgemini 2,161 2,091 (3.2) 1.7NEC Corp. 1,541 1,621 5.2 1.3Others 63,926 63,523 (0.6) 52.5

Total 122,292 121,084 (1.0) 100

Source: IDC.


Support and training services The support and training segment is the smallest of the three, and includes IT education and training, hardware deployment and support, and software deployment and support. IDC expects growth for this area to be modest, averaging 3.2% annually between 2012 and 2017, which is slightly lower than its previous CAGR estimate of 3.3% for the same period, but higher than the CAGR estimate for the 2011–2016 period. IBM was again the largest supplier of support and training services in 2012, followed by HP.

IT education. IT education and support pertains to training and supporting the users of particular systems. Growth in IT education is expected to be 3.5% annually between 2012 and 2017. According to a January 2013 report from IDC, Cisco and HP are the leaders in this area, with IBM, Oracle, SAP, and Microsoft not far behind.

Hardware deployment and support. This broad category encompasses a wide array of deployment services and support services, including single-user devices, servers, storage, and peripherals. Growth in hardware deployment and support is expected to be 2.9% annually between 2012 and 2017.

Software deployment and support. Software deployment support is similar, except with packaged software. Growth is expected to be 3.3% annually between 2012 and 2017.

TYPES OF SERVICE PROVIDERS

Some computer service providers are independent enterprises engaged solely in the services business. Others are affiliated with diversified firms such as computer hardware and/or software vendors. Some participants, such as aerospace companies, are not primarily computer firms but provide services as an adjunct to their principal businesses.

Independent providers In general, independent providers run the gamut in terms of services offered, with some leaning toward some specific horizontal or vertical specialty.

Major independent service providers include Computer Sciences, Capgemini, and Cognizant. Many of the independent services providers have been acquired in recent years, including Electronic Data Systems (EDS), Perot Systems, and Affiliated Computer Services. Over the past decade, the remaining group has faced intensifying competition from companies primarily exposed to the hardware and software vendor market (as these companies have targeted the services sector as a driver of future growth). Many of the remaining large independent firms, such as Infosys Technologies Ltd. and Wipro Ltd., are located in India. (For more details on Indian outsourcers, see the “Industry Trends” section of this Survey.)

Despite the industry consolidation occurring elsewhere, two smaller segments of the industry have generally remained independent—the BPO companies (including Genpact Ltd. and ExlService Holdings Inc.), and the firms that provide services to the federal government, particularly the Department of Defense (including CACI International Inc. and Leidos Holdings Inc.). Leidos was formerly called SAIC. In September 2013, the parent company spun-off its technology-oriented operations as a newly constituted SAIC, and the prior company, with offerings centered on defense and healthcare, was renamed Leidos.

Hardware and software vendors Many hardware vendors, whose primary business is designing, manufacturing and selling computers, are also major players in computer services. Computer vendors mainly offer professional services that incorporate their hardware solutions. They sometimes facilitate sales by analyzing a customer’s needs, designing and implementing computer systems to satisfy those needs, and training the customer’s staff members in operating the new systems.

Computer giant IBM is the world’s largest computer services firm. IBM derived $57.6 billion—about 57.8% of its revenues in 2013—from its two Global Services segments, which focus on computer-related services. Other makers of enterprise computers, such as Unisys Corp., Oracle Inc. (through its January 2010


acquisition of Sun Microsystems Inc.), Hitachi Ltd., and Fujitsu Ltd., also offer computer services, as do vendors of high-end workstations and servers.

Vendors of PC hardware—such as HP, Dell Inc., and Acer Inc.—traditionally did not participate in the services sector in the past. They left service-related tasks to others—preferring to employ a lower level of technical skill to set up and operate stand-alone PCs—and focused on competing in their commodity markets. Now that the enterprise environment is increasingly geared toward PC networking, however, the area requires greater technical skill.

The shift toward services began with Compaq Computer Corp.’s mid-1998 acquisition of Digital Equipment Corp. (DEC) for about $9.6 billion in cash and stock. DEC’s significant presence in the computer services industry was a major draw for Compaq. An interest in services also contributed to HP’s acquisition of Compaq in 2001. HP continued to move deeper into the services segment with its purchase of EDS in 2008. Other PC manufacturers, including Acer and Dell (through its November 2009 purchase of Perot Systems Corp.), also have sought to increase their service offerings to distinguish themselves from competitors and to compensate for declining hardware prices.

Software vendors, especially those serving the more technical areas, are large providers of computer services. Some entered the services segment through mergers and acquisitions; others started as business consulting firms and later added a software component. For many companies, the goal has been to become an end-to-end provider. Typically, software companies offer consulting, training and implementation, and the percentage of revenues derived from services can vary widely. Database market leader Oracle Corp., for example, generated $3.1 billion (11.5% of total revenues) from its services businesses (including consulting, on demand and education) in the first nine months of fiscal year 2014 (ended February 28, 2014).

The common thread among most computer hardware and software companies is that the services’ portion of total revenues has grown. Indeed, since the late 1990s, services have become the largest source of revenues for many leading software companies. As technology becomes more complex, services become increasingly important to the customers of these hardware and software companies.

Hybrid firms Many companies have some sort of services offering incorporated into their business model. Given the wide range of services that fall under the greater IT services umbrella, the category of hybrid firms represents an extremely diverse group of companies. Companies that offer technology-related consulting services fall into the hybrid group, including Accenture and Booz Allen Hamilton. Other companies that are not necessarily technology-centric can also benefit from providing services to their customers. Telecommunications firms (such as Verizon Communications Inc. and AT&T Inc.), diversified conglomerates (Honeywell International Inc. and 3M Co.), defense contractors (Lockheed Martin Corp. and Northrop Grumman Corp.), and aerospace firms (Boeing Co. and European Aeronautic Defence and Space Co. NV, or EADS) all have technology services arms. We believe that more non-services companies will look to expand further into the services business, given its countercyclical nature and attractive margins.

INDUSTRY TRENDS

Computer technology continues to evolve at breathtaking speed. While the role of the computer services industry—helping users employ technology in a more efficient manner—remains essentially the same, industry functions have changed with the increasing complexity of computer systems. The expansion of the Internet and the development of enterprise networking systems and software applications have been major forces of change for the services business.

In today’s highly competitive marketplace, optimal use of IT can provide the key to corporate success. We believe that IT outsourcing is becoming more lucrative, as companies strive to cut costs. In our opinion, IT managers today have to do more with less, which leads us to believe that the long-term growth prospects for IT outsourcing companies remains attractive.


CLOUD COMPUTING: A KEY GROWTH DRIVER

Cloud computing services are expected to be one of the major growth drivers in the industry in the coming years. These services allow organizations to share resources and information over a network. Resource sharing results in huge cost savings for large organizations, which explains the growing popularity of cloud computing services. With the help of cloud computing, organizations can increase their operational capacity without the need for additional investment in equipment, personnel, and other such resources. These services are offered in multiple forms (i.e., public cloud, private cloud, community cloud, and hybrid cloud), depending on the needs of the entity using the services.

According to a report by IDC released in August 2013, the global cloud computing market will reach $107.2 billion in 2017, up from $37.3 billion in 2012. Within cloud computing, software as a service (SaaS), in particular, is being eyed as a major growth area. According to IDC, the global market for SaaS will reach around $62.0 billion by 2017, compared with $24.1 billion in 2012.

Within the global market, North America is to lead the way, with other regions such as Asia-Pacific and Western Europe also catching up. According to a study released by IDC in August 2013, the US will contribute 44% to the total revenues from public cloud computing services by 2017. Further, according to an October 2013 report from GovWin, demand for cloud computing services will increase to $6.1 billion in FY 2018 from $2.3 billion in FY 2013, representing a CAGR of 18%. Along with cloud computing, other connected technologies such as wireless networks, data analytics, and social networking will together form a strong platform for the industry’s long-term growth.

INTERNATIONAL OFFSHORING

For many years, both US and non-US corporations have looked overseas for lower-cost resources (including raw materials, manufacturing, and employees) in attempts to strengthen their competitive advantages and lower their cost structures. This trend, also known as international offshoring, has particularly affected industries involved in natural resources, textiles, automotive manufacturing, and, more recently, IT services. As a result of global sourcing, US and other global economies alike have benefited from increased competition, lower prices (due to lower inflation and higher real wages), technological innovation, increased personal consumption, and improved education.

Indian IT outsourcing companies Nowhere has the demand for offshore IT services risen as quickly as in India, whose growing population of educated, English-speaking workers has been sought after by US companies. India offers cheap labor compared with most Western nations and favorable tax laws in some locations, without the risk of intellectual property theft that is prevalent in other emerging markets. Tasks performed by the country’s skilled workers range from software development to consulting and back-office BPO.

The largest Indian IT services providers—Tata Consultancy Services Ltd., Infosys Technologies Ltd., and Wipro Ltd.—have evolved into billion-dollar companies; the latter two are listed on stock exchanges in the US via American Depository Receipts (ADRs). They serve as partners with multinational corporations and

Table B03: WORLDWIDE OFFSHORE IT SERVICES SPENDING BY IMPORTING REGION

WORLDWIDE OFFSHORE IT SERVICES SPENDING BY IMPORTING REGION(In millions of dollars)

CAGR %

2012 2013 2014 2015 2016 2017 2012- 2017

United States 31,191.6 34,789.3 38,390.6 41,878.2 45,300.8 48,776.4 9.4Canada 999.6 1,200.0 1,422.0 1,650.0 1,910.3 2,177.1 16.8Europe, Middle East, Africa 12,859.9 14,998.6 17,572.8 20,641.9 24,233.9 28,328.6 17.1Asia/Pacif ic 1,230.7 1,508.8 1,862.3 2,305.9 2,886.5 3,628.4 24.1

Total spending 46,281.8 52,496.7 59,247.6 66,475.9 74,331.4 82,910.5 12.4

CAGR-Compound annual grow th rate. Totals may not add due to rounding.Source: IDC's April 2013 forecast report.


offer a global delivery model that rivals solutions offered by leading global players such as International Business Machines Corp. (IBM), Hewlett-Packard Co. (HP), Computer Sciences Corp., and Accenture.

These companies generally started out by offering basic services, such as call centers. They were able to expand revenues rapidly due to their low cost per worker and government incentives, such as economic zones with tax rates under 15% in some cases. As these companies matured, they started to offer more value-added services, expanding into areas such as application development, product engineering, customer relationship management (CRM), systems integration, and consulting. These new offerings have found acceptance because of the companies’ low costs and the high level of skills possessed by their workers.

We estimate that Tata, Infosys, and Wipro generated combined services revenues of about $26.6 billion in their fiscal 2013 (all ended March 2013), an increase of about 15.2% from the prior fiscal year. Despite these companies’ growth over the past few years, the combined revenues from all three still add up to only about 38% of the revenues from IBM’s services in 2012. Their rate of growth is slowing, but because we expect their growth to continue to exceed that of the market as a whole in coming quarters, these Indian companies should continue to take market share from their larger competitors.

India’s IT services companies are expanding geographically, for two reasons. First, with more regional offices, India-based companies are better equipped to target local businesses. Most of the Indian outsourcers have established a presence in the US, for example, sourcing jobs on-site at clients’ locations when the need arises. Second, setting up subsidiaries in other developing nations gives them access to local talent. We have seen a diversification of talent throughout emerging markets, with the top Indian companies (as well as leading US IT services firms) focused on building presences in China, Malaysia, the Philippines, Brazil, and Eastern Europe. Indian companies are also expanding the countries where they offer services. While the outsourcers typically derive a vast majority of their revenues from the US, many have made a concerted effort to expand their revenue base geographically into other developed markets such as Europe and Japan. Their attempts to diversify are being taken to counter the volatility in the Indian currency and increasing competition.

US multinationals continue their push overseas Many US and international IT services companies have built up their offshore capabilities. We believe demand is being enabled by globalization, privatization, deregulation, and technological innovation, which have heightened global competition, thereby forcing companies to reduce costs and streamline their businesses in order to remain viable. This shift involves building facilities and hiring local employees to perform work previously done domestically. Savings result from decreased compensation expenses and lower tax rates.

Competition from Indian companies has pushed US companies to increase the size of their work forces abroad. For example, Accenture increased its overseas work force to more than 182,000 at the end of fiscal 2013 (ended August 2013), from 71,000 at the end of fiscal 2007. Although India is an important source of quality workers, we estimate fewer than half of Accenture’s offshore employees were located there at the end of its fiscal year. The rest were located in Eastern Europe, China, and the Philippines.

Not long after it acquired Electronic Data Systems (EDS) in August 2008, HP laid off 29,000 workers through 2013. In its December 2013 earnings call release, the company highlighted that it planned to lay off 5,000 more employees by the end of 2014. We suspect that many of the associated employees were from higher-cost areas such as the US. At the same time, however, HP expected to conduct related hiring, but in lower-cost areas. As a greater number of global IT services companies have built up a presence in India, prices and wages have increased.

At the same time, all companies operating in India have had to raise the wages of their employees in an effort to reduce attrition, which remains in the mid- to high teens for many. This trend subsided briefly during the recent recession, as employees were less inclined to switch jobs. Since then, we have seen a resumption of this trend. Many companies that gave no wage hike in 2009 reinstituted increases in 2010 in an effort to retain workers. In addition, we have seen the introduction of stock-based compensation, which is new to these companies, as a means of boosting productivity and retaining workers in the face of increased competition. Given this situation, we believe it is becoming even more important for companies to diversify their work forces geographically.


GOVERNMENT USE OF OUTSOURCING SERVICES

US government agencies at the federal, state, and local levels are projected to be among the fastest-growing vertical markets for IT services over the next few years. This pattern is true for governments all over the world. Particularly at the state and local levels, governments have had to tighten budgets and cut costs to make up for revenue shortfalls. Another factor is lower wages compared with the private sector; this has made it difficult for governments to attract and retain capable IT professionals for in-house projects. As a result, we believe that IT service providers should benefit, because their value-added offerings can help these clients run their operations more efficiently and reduce overall costs. Between 2013 and 2018, US government spending on information systems and services is expected to decline by 1.9% annually to reach $102 billion in 2018, according to a July 2013 study by GovWin. IDC estimates that the government sector accounted for 60% of the deal value of the top 100 outsourcing deals in 2012 (latest available), versus 36% in 2011 and 2010.

With federal agencies facing budget cuts, they are likely to reduce discretionary spending. Increased regulations on transparency, reporting and accountability, and human asset policies pose a great deal of uncertainty for them. In response, these agencies will depend on IT. Another reason for the projected growth in use of outsourcing by these agencies is a possible wave of retirement by workers. The US Office of Personnel Management, an independent management agency of the federal government, expects a large number of government IT workers to retire in the coming years. Many of these employees have been with their respective agencies for two decades or more, and their departures would represent a notable loss of knowledge. We believe that this loss could be a considerable opportunity for outsourcing companies.

Federal government raises IT spending At the federal level, defense and homeland security have been taking a large share of contracts for IT services. The wars in Iraq and Afghanistan have had a profound effect on spending by the Department of Defense (DOD), which has had to ratchet up spending on the war efforts due to the intense nature of the conflicts. The result has been little extra revenue left to spend on IT initiatives, despite added money that Congress is doling out to the DOD. Now that those wars have largely ended, there has been a shift in demand toward services such as intelligence and cyber security to aid in the fight against global terrorism. This strong demand by the federal government is evidenced by the presence of Northrop Grumman Corp., General Dynamics, and Lockheed Martin Corp. on IDC’s list of top 50 worldwide providers of IT services in calendar 2011 (latest available). We think that the US Department of Health and Human Services (HHS) will receive more attention in the future, as the baby boomers—the approximately 77 million Americans born between 1946 and 1964—move closer to retirement. The HHS administers Medicare, the health insurance program for the elderly and disabled, among other programs.

State and local governments look for cost savings Facing budget shortfalls, many states have sought to reduce expenses and improve efficiencies without cutting necessary social services. To balance these dual objectives, government employees have looked to outsource certain functions to IT service providers. S&P Capital IQ expects that the present fiscal environment will enable IT services companies to garner an increasing amount of new business from local government agencies. We also note that outsourcing companies that focus on contracts to the middle market are seeing growing opportunities for state and local government business related to Medicaid, employee pensions and benefits, and payroll.

According to a June 2013 report by GovWin (annual forecast), a provider of information solutions, spending on information systems and services by state and local governments will grow at a CAGR of 3.2% for the 2013–2018 period to reach $68.6 billion in 2018. State and local governments will rely on technology to drastically reduce the cost of their operations in education, general government services, and justice/public safety verticals. Local governments will depend more on federal funding for their IT spending programs. Although government spending on less costly services will drive the market downward, the upside is that government agencies will rely heavily on innovative IT solutions to cut costs.


Defense spending One area that had been seeing increasing spending over the past few years is the defense-related agencies. During the George W. Bush Administration, there was a steady increase in spending in general; companies that provided IT services to the Department of Defense and the Department of Homeland Security particularly benefited. Under the Obama Administration, there has been a shift away from large-scale weapons systems, such as the F-22 Raptor and selected missile defense programs. Benefiting from this change have been areas such as cyber security, and Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR). A number of IT services companies (including CACI International Inc., Leidos, and ManTech International Corp.) offer these kinds of services and have been benefiting from this additional spending. Despite likely budget cuts in the future, we think demand for the many services provided by the above-mentioned companies (as well as many others) will continue.

Healthcare In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act of 2010 (ACA). The law calls for increased taxes, fees, and cost-saving measures to pay for improved access to healthcare. One of the ways the Administration is seeking to lower costs is by using electronic health records (EHR). We believe their large-scale use is only now becoming more prevalent, but we think that a full-scale implementation is still a few years off. The use of EHRs is a big opportunity for IT services companies. Computer Sciences Corp. has a head start in this regard, as it is heavily involved in supplying information systems and services to the UK’s National Health Service, although that program has come under fire. (For additional information on the changes to healthcare legislation and programs, please see the Healthcare Industry Surveys.)

HARDWARE COMPANIES HEIGHTEN FOCUS ON SERVICES

As computer hardware has increasingly become a commodity, manufacturers have looked for other ways to leverage their base of intellectual expertise. In recent years, many have begun to focus on opportunities for growth in services markets, particularly as demand for traditional hardware has slowed. Their heightened focus on services has intensified competition in the market. We expect this competitive trend to continue even when economic growth begins to improve.

For example, IBM has signed outsourcing contracts with major corporations, such as Nissan Motor Co. Ltd. and General Motors Corp., and with US government agencies, such as the Department of the Interior and the Department of Justice. In fact, according to IDC, IBM won 10 of the top 100 outsourcing services contracts in 2012 (latest available), with an aggregate contract value of $4.6 billion, followed by HP, with six contracts totaling $4.0 billion, and Computer Sciences Corp., which won four deals with an aggregate contract value of $3.4 billion.

Consulting services Around the globe, deregulation, privatization, technological advancement, mergers and acquisitions, restructurings, globalization, and the Internet are dramatically altering business practices. These factors are driving companies to turn to consultants for help on current projects and preparation for the future.

Worldwide spending on consulting services (including business and IT consulting) will reach $150.9 billion by 2017, according to a December 2013 study by IDC. It estimates that the business consulting segment will grow at a compound annual rate of 7.3% between 2012 and 2017, with annual growth of 4.0% from IT consulting over that period. Business consulting is a broad field relating to numerous facets of management, such as developing an organization’s strategy and goals, and improving its operations. In contrast, IT consulting is more narrowly focused, as services companies help clients manage the IT portion of their business, with an eye toward improving performance and processes.

We believe that there is a growing trend among IT outsourcing companies to offer consulting to their customers. The reason behind the push, in our opinion, is the desire to offer a full slate of services. In addition, the operating margins associated with consulting are typically wider than those of other areas of


outsourcing. We think, however, that consulting carries slightly more risk, as spending in this segment is often considered discretionary and is thus subject to cutbacks in times of economic downturns.

Systems integration Rapid advances in computer and communications technologies have yielded less costly and more powerful hardware products. With today’s powerful desktop computers, parallel processing machines, dedicated servers, multimedia technologies, and networking capabilities, organizations are building efficient and cost-effective computer-based information systems. Systems integration is one of the largest segments in the IT services market. Projections from IDC show this area is growing at 4.2% compounded annually, between 2012 and 2017, to reach $137.3 billion. We note that the expected rate of growth is lower (by 0.6%) compared with the previous estimate for the same period, but higher (by 0.5%) compared with the estimate for 2011 to 2016. This is because companies are still open to taking on strategic projects, which are important for routine operations. Further, besides the objective of cost cutting, companies are also becoming increasingly interested in projects that offer innovative solutions. As technology has advanced and products have proliferated, end users tend to need third-party help to design, install, integrate, and maintain their equipment and software. Computer services firms, known as systems integrators, help organizations maximize the benefits of computer technology.

Computer services firms can provide the expertise necessary to set up and maintain an organization’s Internet link, intranet, or extranet. Services include procuring the necessary hardware, formatting and posting information on a website, creating a site tied to databases capable of disseminating and receiving volumes of information, and ensuring smooth maintenance and operation of the network.

INTRANET AND EXTRANET SYSTEMS ABOUND

Most organizations have been realizing the benefits of building companywide intranets—the “little Internets” that connect the computers within an organization. Computers hooked together in a network have significant advantages over stand-alone systems. An intranet lets individual users and groups share expensive peripheral devices (such as printers and mass storage devices), access data simultaneously, exchange files, and send e-mail messages. Intranets can give an organization the ability to distribute and share information quickly, easily, cheaply, and reliably.

The size and complexity of a computer network can range from a handful of users sharing a printer to huge commercial and government networks that supply data to thousands of users around the globe. Many organizations call on computer services vendors to help with the complex task of connecting different types of computers (mainframes, minicomputers, and personal computers and laptops, for instance) produced by varied hardware vendors, such as HP and IBM, to create a functional computing network.

Extranets, too, are very popular among corporations. Extranets are similar to intranets, but they also link a company’s computers to those of its partners, distributors, suppliers, and customers. Such networking can streamline communications and allow for major cost savings and efficiency improvements by enabling such applications as automated ordering, shipping, and billing.

E-COMMERCE

One of the fastest-growing Internet segments is electronic commerce (e-commerce, or business transactions conducted on the Internet). Sector growth should be driven by a continued rise in the number of people accessing the World Wide Web and the increased availability of high-speed access to the Internet. Services firms stand to benefit from this trend, as demand for their services rises among enterprises wishing to establish a web presence, improve existing Internet activities, or launch new initiatives.

E-commerce comprises three main sectors: retail or business-to-consumer (B2C); business-to-business (B2B); and consumer-to-consumer (C2C). Growth in the B2C area will be driven by growth in the number of Internet users, ongoing expansion by traditional retailers, the proliferation of high-speed Internet access, and improved Internet security.


B2B e-commerce involves corporations doing business with each other over the web. These transactions can range from small-scale purchases (e.g., office supplies and hardware) to large-scale business deals costing hundreds of millions of dollars (e.g., long-term purchase agreements, advertising, or online services). Services companies help clients in most US industries to mesh their Internet and e-commerce abilities by helping their customers focus on the design, editing, and restructuring of their websites to create an environment that is more customer-friendly and easier to use. For example, better and more detailed product descriptions, improved maneuverability, and enhanced graphics all encourage consumers to use a company’s website.

Expanded services can help users tie together e-commerce sites with front- and back-office systems, a task that is more complex than simply setting up an Internet site. For example, it entails linking up customer information, such as address, credit card number, or types of products purchased, with a company’s internal IT infrastructure. This is important for product tracking, inventory, billing, market research, etc.

Computer users—whether corporations or individual consumers—need to implement their Internet projects rapidly and reliably. Meanwhile, the increasing sophistication of these projects creates a need for programmers, designers, and business strategists. Due to the expense and difficulty of implementing and managing such programs internally, however, many companies and government agencies are turning more frequently to outside service providers.

APPLICATIONS: FROM BACK TO FRONT

Enterprise resource planning (ERP) is one of the largest segments of the software industry and a major market for services. ERP generally refers to high-end enterprise software applications that automate back-office business processes to help manage a corporation’s day-to-day operations. These processes include supply chain management—managing the flow of product across the supply chain, from procuring raw materials and manufacturing products to warehousing and distributing finished goods—as well as accounting and human resources.

Once a company has automated its back-office processes, such as billing, document processing, payroll, and accounting, doing the same for its front office becomes its next priority. Front-office functions are those that help companies attract and retain business—for example, tasks performed by the sales force and the customer service department. Software for this market may automate sales, marketing, call center, or field-service operations. As with back-office applications, the front-office software market also has a large services industry. Services include integration, consulting, and training; they generally fall under the heading of customer relationship management, or CRM.

Application software has become increasingly functional and sophisticated. To choose the appropriate software and use it efficiently, end users must be aware of their own needs and knowledgeable about available options. Computer services firms can help by determining the types of software required for various tasks, establishing custom software specifications and developing customized software, or selecting or modifying prepackaged software. Services firms also provide training and ongoing support.

HOW THE INDUSTRY OPERATES

Computer services are available in a variety of forms. However, they can be divided into two general categories: professional services and processing services.

PROFESSIONAL SERVICES

The professional services category is broad. It comprises outsourcing, systems integration, consulting, and custom software programming. Firms in this segment provide customized, rather than standardized, services; they assist companies in assembling, installing, and utilizing computer technology based on the customer’s individual needs. Among the largest providers of professional computer services are IBM, Accenture, Hewlett-Packard (HP), Fujitsu, and Computer Sciences. Large companies such as these dominate the market.


Outsourcing In this industry, outsourcing occurs when a client organization hires a computer services firm (or “outsourcing vendor”) to perform a portion of its data processing and data management tasks. As part of the contract, which is often many years in duration, the outsourcing vendor typically agrees to purchase the client’s computer center facilities (usually hardware and related infrastructure; sometimes the building is included as well) and hire the customer’s data processing employees.

The outsourcing market is a viable alternative to in-house information systems management. Major players include IBM, HP, Computer Sciences, Fujitsu, and Northrop Grumman. The success of outsourcing is evidenced by the numerous “megacontracts” that large corporations from a variety of industries have awarded in recent years—contracts valued at hundreds of millions or billions of dollars over several years.

These megacontracts involve varied types of services. Outsourcing services can include facilities management (in which the outsourcing vendor operates the client’s data center on-site), remote computing (in which processing is done off-site), communications network management, contract software programming, and software maintenance. Other niches include the outsourcing of human resources (HR) and document management. Because no company can depend on a single customer, service vendors generally manage more than one megacontract at a time.

Outsourcing appeals to clients that spend hundreds of millions of dollars each year on data processing. Through outsourcing, they can lower computer-related costs by realizing economies of scale and consolidating data centers. Such savings can significantly benefit a client’s bottom line. Outsourcing can also help a company achieve greater control of its data processing costs. Outsourcing vendors typically charge a fixed annual amount, with additional fees based on processing volume. With this kind of pricing schedule, client firms have better control of costs relative to current levels of business activity.

The client can save on taxes, because outsourcing fees are deductible as a current business expense. Owning computer hardware, in contrast, entitles a company to depreciation over only a certain number of years. Clients also receive an upfront capital infusion from selling their computer center assets to the outsourcing firm. This can be a welcome source of funds to companies in the midst of tough times. With the rapid changes in technology—new hardware platforms, distributed networks, open systems and standards, and an overabundance of software—companies often find it difficult to determine which hardware and software best suit their needs. Outsourcing relieves organizations of these burdens by letting them migrate to new, more powerful systems without capital expenditures.

To be a major player in the outsourcing marketplace, a vendor must have expertise and experience in computer operations, systems integration, software development, communications, and facilities management. If data processing is to be done on a remote basis, a sizable data center and an extensive communications network are required. Financial muscle is another prerequisite: a vendor must have sufficient capital to buy the customer’s computers and data facilities, and to hire the customer’s computer personnel. In some cases, an equity investment in the client may be necessary to obtain the client’s business.

To sell its services effectively, a vendor must understand business practices and industry needs, and it must build and maintain relationships. It should have experience in assessing costs and bidding on fixed-price contracts, as well as proposing sound technical solutions and creative financial arrangements. Given the skills, facilities, and financial wherewithal required to participate in this segment, the number of firms that can supply full-service outsourcing is quite small. These significant barriers to entry are likely to ensure that only the strongest will survive and keep growing.

Business process outsourcing (BPO). Business process outsourcing involves the outsourcing of functions that are necessary for a business to operate, including a broad array of back-office functions such as human resources, procurement, finance and accounting, customer care, logistics, engineering, research and development, sales and marketing, facilities operations, and management and training. As corporations continue to look to cut costs and focus on core operations, the push to outsource business processes is expected to intensify.


BPO has numerous benefits for the customer, including savings that can vary widely, depending on the extent of processes outsourced and the caliber of the service provider. We believe that a majority of the savings estimated stem from the use of offshore labor. Other gains from the use of BPO include efficiencies gleaned from proprietary workflow and process reengineering, greater access to specialized skills, and better service delivery. For companies in the financial, insurance, and healthcare sectors, with data and document management that is regulated by government record-keeping requirements, BPO provides additional benefits.

In the BPO sector, three important areas of growth are human resources and finance BPO, procurement outsourcing, and customer care.

Human resources BPO occurs when a corporation outsources its entire human resources department to one service provider. This area will benefit as corporations seek to trim costs and boost efficiencies related to payroll processing, and health and retirement benefits. These functions, which are subject to complex and changing regulations, were much more labor intensive before computerization. Today, these functions are being transferred to databanks and call centers, reducing expenses for corporate clients.

According to a May 2013 study by IDC, worldwide spending on human resources BPO and human resources processing services are expected to grow at compound annual growth rates (CAGR) of 4.8% and 4.2%,

respectively, from 2012 through 2017, reaching $60.3 billion and $24.5 billion. For the US market, IDC expects growth of 4.0% and 2.3%, respectively.

Table B17: WORLDWIDE HUMAN RESOURCES MANAGEMENT SERVICES SPENDING BY TYPE

WORLDWIDE HUMAN RESOURCES MANAGEMENT SERVICES SPENDING BY TYPE(In millions of dollars)

CAGR %

2012 2013 2014 2015 2016 2017 2012- 2017

Outsourcing services 67,681 70,722 74,027 77,505 81,102 84,856 4.6Processing services 19,954 20,725 21,584 22,507 23,478 24,516 4.2BPO services 47,727 49,997 52,443 54,998 57,624 60,340 4.8

Consulting services 40,183 43,738 47,483 51,494 55,544 59,782 8.3

Total spending 107,864 114,460 121,510 128,999 136,646 144,638 6.0

CAGR-Compound annual grow th rate. Totals may not add due to rounding.Source: IDC's May 2013 forecast report.

Table B06: WORLDWIDE BPO SERVICES SPENDING, BY VERTICAL MARKET

WORLDWIDE BPO SERVICES SPENDING, BY VERTICAL MARKET(In millions of dollars)

CAGR

2012 2013 2014 2015 2016 2017 2012- 07

Banking 7,754 8,061 8,350 8,666 9,043 9,486 4.1Communications & media 12,343 13,456 14,085 14,676 15,224 15,708 4.9Construction 517 543 559 586 621 659 5.0Consumer & recreational services 1,944 2,032 2,152 2,283 2,412 2,526 5.4Discrete manufacturing 10,343 10,721 11,065 11,436 11,826 12,206 3.4Education 894 904 947 989 1,027 1,058 3.4Government 7,995 8,218 8,709 9,163 9,551 9,856 4.3Healthcare 2,953 3,272 3,498 3,704 3,890 4,050 6.5Insurance 3,597 3,614 3,757 3,931 4,141 4,387 4.1Process manufacturing 8,343 8,523 8,818 9,157 9,518 9,869 3.4Professional services 4,510 4,897 5,185 5,460 5,712 5,927 5.6Resource industries 829 854 883 914 944 969 3.2Retail 4,751 5,022 5,255 5,484 5,700 5,894 4.4Securities & investment services 3,271 3,381 3,493 3,603 3,706 3,800 3.0Transportation 3,112 3,122 3,248 3,388 3,539 3,698 3.5Utilities 4,160 4,421 4,652 4,885 5,109 5,307 5.0Wholesale 1,551 1,577 1,648 1,726 1,802 1,867 3.8

TOTAL 78,867 82,619 86,305 90,051 93,767 97,267 4.3BPO-Business process outsourcing. CAGR-Compound annual grow th rate.Source: IDC's March 2013 forecast report.


Finance and accounting (F&A) BPO services are associated with a company’s need to manage the flow of money into, within, and out of the organization, according to IDC. F&A BPO services can involve the transfer of single or multiple processes. IDC expects global spending on such services to increase at a CAGR of 6.8% from 2012 through 2017, according to a May 2013 report.

Procurement outsourcing is another subgroup within BPO that is expected to expand. We look for spending in this area to be derived from industries such as retail, manufacturing, financial services, and utilities. According to IDC, worldwide BPO spending on procurement will increase by 13.1% per year from 2012 through 2017, to $5.5 billion.

Customer care is another area that utilizes BPO. Outsourcing this function allows companies to offer greater value to their customers while generating new sources of revenues. IDC expects global spending in this segment of BPO to grow at an annual pace of 5.8%, to $76.9 billion, through 2017, according to a May 2013 report.

Disaster recovery. The principal purpose of a commercial disaster recovery service is to provide duplicate data, software, and systems at an alternate processing site, in the event of equipment failures. IBM, HP, Pitney Bowes, and SunGard Data Systems are major providers.

Most companies employ a number of measures to ensure that they can continue functioning in case of disaster. Typical measures include: maintaining backup copies of critical data and software at off-site locations; continually updating those copies; arranging access to an alternate site where processing can be restored using the duplicate materials; and establishing a backup communications network through which remote locations can use the alternate site. Computer services firms can help clients set up and maintain such contingency plans.

Two kinds of commercial disaster recovery facilities are generally available. “Hot sites” are fully operational computer centers that are ready for immediate use by a customer that experiences a disaster. “Cold sites” are vacant computer rooms equipped with raised flooring, cabling, power, and air conditioning; they are ready to accept a customer’s own computer equipment when the need arises.

For obvious reasons, cold-site service is less expensive than hot-site service. It is also less effective, because several days or weeks may be required to obtain and install the necessary equipment at the facility. Companies that use a hot site can test their disaster recovery procedures regularly by processing at the vendor’s facility. Testing a cold site on a regular basis would be prohibitively expensive in most cases.

Another recovery alternative is self-backup using a duplicate data center. Some users believe that setting up a second data center to duplicate the hardware and software configurations of the primary data center is the most reliable approach to disaster recovery. However, it is also the most expensive. Probably the least costly alternative is to sign a reciprocal agreement with another company, in which each company agrees to provide emergency backup computer services for the other. However, this choice also may be the least reliable.

To a certain extent, disaster recovery services sell themselves; it takes just one unforeseen calamity to convince most corporations that disaster recovery plans are a necessity, not a luxury. This necessity arises from several factors. First, companies need to maintain dependable records. Second, auditors and regulators are increasingly requiring companies to prepare verifiable backup and recovery plans for their computer records. Finally, advances in electronic data processing have spurred many large companies to establish computer centers that geographically far-flung offices can access over the Internet. Increasing dependence on these centralized sites to process critical business data means that such companies are vulnerable to interruptions in computer operations due to fires, floods, or other calamities.

Systems integration Companies serving this sector produce unique computer systems that meet clients’ specific needs. The process is generally executed in various phases of a system’s life cycle: planning, design, construction, implementation, and operation. Systems integration owes its popularity to advancing technology, a shortage


of technical personnel, and the complexity of automating front-office processes. Its two major markets are government and commercial clients.

Government. The largest user of systems integration services is the US government. The federal agencies that require systems integration are few in number, but enormous in size. They include the Department of Defense (DOD), the National Aeronautics and Space Administration (NASA), the Environmental Protection Agency (EPA), the Federal Aviation Administration (FAA), and the National Oceanic and Atmospheric Administration (NOAA). US government procurement has traditionally been an important element in the growth of the systems integration market. We believe that the growth in the federal marketplace will continue to be significant. Both federal and state governments have spent years reducing the size of their workforces in an effort to rein in costs.

Commercial clients. In the commercial sector, the market for systems integration has slowed, but IDC expects growth to accelerate in each of the next five years. In an increasingly competitive marketplace, large global enterprises realize the importance of back-office and front-office applications. Because no two companies handle their business processes the same way, the IT system development requires considerable custom work that often surpasses the expertise of an organization’s in-house programming staff.

Many companies continue to look for ways to reduce costs in order to compete more effectively in today’s business climate. By integrating various internal systems, clients are able to run their operations more efficiently, which can boost their bottom line. Hardware vendors and major accounting firms, as well as dedicated systems integrators, all hope to ride the wave of growth in commercial systems integration.

Consulting Computer-related or IT consulting firms work with corporations to create and implement strategies to cope with the most complex business problems. These consultants combine industry-specific experience with technology expertise to help clients improve overall performance and competitiveness.

Many of the same factors driving demand for other technology services are fueling consulting services. In the private sector, companies are struggling to deal with continual changes in the regulatory environment, increased global competition, post-merger integration issues, and industry consolidation; at the same time, they are trying to develop strategies that maximize growth opportunities. In the public sector, pressure from taxpayers constantly requires governments to do more with less.

To compete more effectively, companies need to look for ways to expand revenues, cut costs, operate more efficiently, and manage risk more effectively while at the same time improving their customer service. Consulting organizations help their clients get a handle on these major issues.

Custom programming Custom programming firms provide clients with programmers on a temporary or per diem basis. Such firms are known as “body shops.” Fees typically correlate with the technical skill required.

Clients of these firms include organizations with current personnel that lack the needed expertise, as well as firms undertaking projects that require additional staff but not permanent new hires. Demand has been bolstered by a long-standing shortage of computer professionals, including programmers and systems designers. At the same time, the general demand for software applications has grown substantially faster than the productivity of computer programmers. The proliferation of prepackaged software and software application development tools has dampened demand for custom programming somewhat. However, increasingly complex and specialized needs by users will likely help drive the industry.

PROCESSING SERVICES

Processing services firms are those that collect, organize, and store a customer’s transactions and other data for record-keeping purposes. Generally, these firms use their own computer facilities and proprietary software. They achieve economies of scale by spreading the cost of hardware, software development, and


maintenance over a broad client base. The processing services marketplace can be divided into two categories: transaction processing and information services.

Many of the larger processing services firms specialize in particular fields. Automatic Data Processing Inc. (ADP), Ceridian Corp., Aon Hewitt, and Paychex Inc. are major players in payroll processing. HP (through its acquisition of EDS) is a leader in healthcare insurance claims processing. HP, First Data Corp., and Fiserv Inc. are the leading third-party data processing vendors for banks.

Transaction processing A transaction processing firm takes over another company’s back-office chores, which it performs on an ongoing basis. Among these chores are the routine, high-volume clerical operations that are the backbone of a business, such as payroll, insurance claims and financial information. Vendors offering transaction processing services typically calculate charges based on the number of transactions processed rather than the time it takes to process them. For the client, the advantages of computerization are efficiency, cost and time savings, and better access to information.

Payroll processing. The routine, high-volume nature of this back-office function makes it well suited to computer automation. It includes the preparation and generation of payroll checks and journals, employee earnings statements, departmental earnings and deduction summaries, quarterly and annual Social Security and income tax withholding reports and statements, employee earnings histories, tax-filing services, and pension fund and profit-sharing reports.

In the payroll processing field, the largest independent computer services processing vendor is ADP, a major supplier of employer and dealer services. In its fiscal year ended June 2013, ADP had revenues of $11.3 billion. In the first six months of fiscal year 2014 (ended December 31, 2013), ADP had revenues of $5.8 billion. Vendors in the human resources management space are Accenture, Aon Hewitt, and Paychex Inc.

The long-term prospects for third-party payroll processing remain favorable. However, this business can be sensitive to the economy. For example, in a recession, the unemployment rate increases, thus reducing the number of payroll checks that are processed. In addition, some companies that use payroll services may go out of business.

The Internet is playing a role in the growth of the payroll processing industry by improving service and thus helping to attract and retain customers. In addition, it expands companies’ choices regarding how to process their payrolls and gives them the ability to access that information whenever desired.

ADP claims that the Internet gives customers greater control of the process and alleviates the confusion that might arise when the task is done by a third party. ADP also says that the Internet helps to provide a higher level of service to employers and employees by offering payroll access anytime and anywhere. All of the major payroll processors (including ADP, Aon Hewitt, Ceridian, and Paychex) have moved some of their business onto the web, and they continue to explore other Internet initiatives.

Payment processors Payment processors are third-party technology providers whose network of banks, merchants, and acceptance locations provide the infrastructure over which many consumer and business payments are made across the globe. These payments are typically processed over large-scale processing platforms at relatively low marginal cost due to economies of scale.

Payment processors include some of the largest companies in the processing services space. Some of the best-known participants in the space have invested billions to support market acceptance of their services across thousands (and, in some cases, millions) of locations globally. We include credit and debit card networks such as Visa and MasterCard in this category, along with money transfer firms like The Western Union Co. and MoneyGram International Inc. Other vendors include reloadable prepaid card services provider, Green Dot. Vendors in this space provide their services to businesses and to consumers directly, and some of their brands are well known globally, reflecting significant investments.


Many payment processors serve the financial services industry, but some vendors have extended their services to individuals who are underserved or not served by the banking industry, or who have been priced out of the traditional financial services system due to rising costs. Providing financial services to these individuals should be a growing market as the traditional providers themselves face rising costs and have limited ability to either price for risk or garner certain other revenue streams.

We think payment processors are among the primary beneficiaries of the secular shift to electronic payment methods and away from paper-based payment forms, including cash and checks. We expect this shift to remain in place despite more onerous regulation in such key markets as the United States. A recovery in the global economy has spurred cross-border travel, and under-penetrated markets with limited payment infrastructure, such as India, are seen as avenues of growth for these vendors, who have been expanding overseas for some time. Many payment processors operate under long-term contracts and have significant recurring revenue streams, though we think competition remains intense.

Information services Firms in the information services (IS) business develop and update proprietary databases and sometimes offer access to fee-based information sources. Clients that want to retrieve information are charged usage and communications fees. Fueling demand in this market is the global competition facing companies in many industries, creating a greater need for accurate and timely information. Advances in database technology, which have yielded improvements in data collection, manipulation, and dissemination, are also fueling the industry by improving the capability and efficiency of information services companies.

Information services firms may provide their clients with several types of material. These include marketing information (market research on specific industries, direct mail marketing, product movement, and audience assessment), financial information (consumer and corporate credit data, financial and economic information, and stock quotations), news retrieval, and medical journal abstract retrieval.

Some information quickly becomes obsolete and must be updated continuously, which keeps information services providers in constant demand. In general, one or two firms may dominate a particular vertical market by having extensive access to information sources. This makes the business difficult to enter without going the mergers and acquisitions route.

Dun & Bradstreet Corp. and Equifax Inc. are leading information services firms. The former is a leading provider of information on many subjects, including retail packaged goods sales, consumer demographics, and commercial credit ratings. Equifax is a top supplier of risk-management services and information to the insurance industry; it also provides consumer credit to retailers and mortgage loan reports to financial institutions.

LONG-TERM CONTRACTS ARE THE NORM

Computer services firms typically enter into long-term relationships with their customers. They do so by signing contracts that specify the amount of time the designated services are to be provided and the monetary value of the services. Revenues derived from multiyear contracts can be accurately predicted by the computer services vendor and by financial analysts. Some computer services firms do business through annual or other short-term contracts that are renewed with great predictability at expiration. Computer services vendors undertake efforts to increase their “retention rates,” or percentage of contract renewals, which usually run well over 90%.

With their knowledge of revenues under multiyear contracts and of past retention rates for contracts coming up for renewal, computer services firms can predict with a high degree of confidence the amount of revenues that they will earn in a set time period. Based on these accurate revenue assessments, computer services companies can set and manage their expenses at the levels necessary to earn the required return in each period. As a result, it has been rare for computer services vendors to post results that differ materially from those expected by the company or stock analysts.


VERTICAL MARKETS

Today, organizations in virtually all areas of the economy—from manufacturing, energy, and transportation to healthcare, finance, and communications—enlist computer services vendors. While many commercial firms have common concerns, some computer services are developed for specific industries, or vertical markets, including three key markets: the federal marketplace, financial and insurance services, and healthcare information services.

Federal marketplace As the nation’s largest single consumer of computer services, the US government is an important source of business for many computer services firms. The government’s needs are significant and varied. The services for which it contracts range from traditional systems integration and outsourcing to advanced technical undertakings and complex project management. In particular, the government needs help in developing software for mission-critical systems for defense and civil agency applications. It also needs support for management information systems and technical assistance in network management, satellite communications, intelligence, aerospace, logistics and related high-technology fields, and basic systems engineering.

Increased levels of spending on defense and homeland security have created significant revenue opportunities for service providers. This situation, along with continued growth in the commercial market, bodes well for the industry going forward.

Financial and insurance services The financial services industry has been an early adopter in the field, as it has numerous processes that generally lend themselves to outsourcing. The industry can be broken down into three main components: banking, insurance, and securities and investment services.

Computer services firms can assist client organizations in a number of ways. They may help the client fulfill its data processing needs, or they may set up, install and maintain a network of automated teller, funds transfer or currency exchange systems. They also can provide debit and credit card services or process remittances. Cost pressures in the financial services industry are promoting growth in outsourcing.

In the insurance industry, companies such as Affiliated Computer Services provide software and services to automate insurance processing tasks. These functions include policy underwriting, claims processing, risk analysis, policy rating, premium calculation, and policy issuance, as well as accounting, financial reporting, and cash management.

In the securities area, ADP had been the largest provider of securities trade processing and real-time market information. In March 2007, however, the company spun off its Brokerage Services and Securities Clearing and Outsourcing Services businesses as a publicly traded company, creating Broadridge Financial Solutions Inc. This company provides investor communication, securities processing, and clearing and outsourcing solutions. In fiscal 2013 (ended June), it processed about 85% of the share votes (proxy materials and vote processing) in the US, distributed more than two billion investor communications and processed roughly $5.0 trillion in daily equity and fixed-income trades.

Table B05: US IT SERVICES BY VERTICAL SECTOR

US IT SERVICES BY VERTICAL SECTOR(In millions of dollars)

SECTOR 2011 2012 2013 2014 2015 2016 2017

Public sector 65,364 64,014 64,045 64,805 65,606 66,127 66,265Manufacturing & resources 51,978 54,696 56,939 58,908 60,689 62,264 63,549Financial Services 39,969 42,299 43,254 44,333 45,417 46,498 47,505Distribution & services 39,120 41,004 42,581 43,848 45,113 46,345 47,489Infrastructure 29,919 32,282 34,187 35,608 36,852 37,969 38,866

Total spending 226,350 234,295 241,005 247,502 253,677 259,203 263,674Source: IDC's October 2013 forecast report.


As of November 2013, IDC estimated compound annual growth rates of 4.05%, 4.7%, and 3.0% in US computer services spending for the banking, insurance, and securities and investment services segments, respectively, between 2012 and 2017.

Healthcare information services With the rapid growth of managed care, hospitals are becoming more cost-conscious. A significant portion of the cost of running a hospital involves storing, collecting, and moving information. Thus, hospitals often ask computer services firms to design, implement, manage, and maintain the crucial information systems needed to compete successfully in this rapidly changing, highly regulated industry. By decreasing paperwork and speeding information flow, such systems increase the efficiency of healthcare companies. This helps explain why the healthcare information services industry is growing rapidly.

An example of such a system involves pharmaceutical prescriptions. When a doctor writes a prescription for a patient, the information could appear instantly on a computer screen at the patient’s bedside, in an inventory report at the pharmacy where it would be ordered, and as a billing record in the pharmacy’s accounts receivable department. Such systems might also include a database of information, such as patients’ histories of adverse reactions to certain drugs and drug interaction warnings.

We believe healthcare is an area that has been slow to adopt new technologies. In our opinion, there have been questions regarding the compatibility of systems, the privacy of patient data, and who should be responsible for the costs of an integrated system. However, the Obama Administration has made this an area of focus. IDC as of November 2013, projected that this segment will grow at a compound annual rate of 5.8% between 2012 and 2017 in the US.

THE COMPETITIVE LANDSCAPE

Each computer services market segment is dominated by several large vendors that use their size, reputation, expertise, and marketing prowess to secure the biggest contracts awarded by the largest organizations. These are the companies that are likely to bid successfully on the largest contracts in this industry.

Computer services firms are entrusted to install, manage, or otherwise refine an organization’s computer networks or perform crucial processing tasks. Therefore, it is rare for a small, unknown computer services firm with limited operating experience to win business with a Fortune 1000 company or other large organization. Opportunities do exist, however, for smaller vendors to service the computing needs of small office, home office, and personal computing markets, where the jobs are less complex.

The computer services industry continues to consolidate as large vendors acquire smaller firms to gain expertise or reach critical mass in particular market segments or geographic areas. In addition, smaller computer services firms may seek to acquire or merge with other firms as a way of building the size and technical skill levels necessary to compete for larger contracts.

The push to outsource functions in foreign locations (known as “offshoring”) is adding to the market’s competitiveness and fragmentation. Eastern Europe, Russia, Brazil, India, and China are rapidly increasing their respective shares of the outsourcing market. With its large, well educated, English-speaking population, India is experiencing demand for call centers, customer service back-office work, and software programming, and has become the preferred area of offshore IT services work (see the “Industry Trends” section of this Survey for more details.)

KEY INDUSTRY RATIOS AND STATISTICS

Growth in real gross domestic product (GDP). A measure of the change in inflation-adjusted market value of a nation’s output of goods and services, real GDP growth is a prime indicator of the relative strength or weakness of a nation’s economy. Computer services firms are somewhat insulated from the economic cycle’s ups and downs, as companies with multiyear contracts and high retention rates among existing clients tend to see a significant portion of their revenues recur. Nonetheless, undue economic


strength or weakness can affect computer services firms’ ability to gain new business. The economy’s long-running expansion in the 1990s provided a firm underpinning for continued growth in the computer industry as a whole.

In the United States, the US Department of Commerce reports real GDP each quarter. In 2010, 2011, 2012, and 2013, real GDP increased 2.4%, 1.8%, 2.8%, and 1.9%, respectively. As of March 2014, Standard & Poor’s Economics (which operates separately from S&P Capital IQ) was projecting that real GDP would increase 2.8% in 2014 and 3.2% in 2015.

Many leading computer services firms generate up to one-third of their revenues abroad; therefore, their performance can be affected by growth trends in the real GDP of foreign economies. Thus, analysts should monitor the strength of key economies in Europe, Asia, and Latin America by consulting international GDP figures, released quarterly by foreign governmental agencies.

Interest rates. The level of interest rates influences managers’ decisions regarding business acquisitions, capital expenditures, dividends, and stock repurchases. High or rising interest rates increase the cost of borrowing, making companies less likely to make significant capital expenditures. At such times, companies may delay or cancel plans to implement new technology systems, which can hurt computer services companies.

At present, interest rates are at very low levels compared with the late 1970s and the 1980s. Long-term interest rates, as indicated by the yield on 10-year US Treasury notes, averaged 4.6% in 2007, and then declined to 3.7% in 2008, 3.3% in 2009, 3.2% in 2010, 2.8% in 2011, 1.8% in 2012, and 2.4% in 2013. As of March 2014, Standard & Poor’s Economics was projecting that the interest rate on the 10-year note would average 3.0% in 2014 and 3.3% in 2015.

Unemployment and nonfarm payrolls. The Bureau of Labor Statistics compiles a monthly report on the US unemployment rate—the percentage of individuals unemployed and still seeking work—and also provides other data on the labor force. US unemployment averaged 4.6% in 2007 and 5.8% in 2008. It rose to 9.3% in 2009, and averaged 9.6% in 2010, 8.9% in 2011, 8.1% in 2012, and 7.4% in 2013. As of March 2014, Standard & Poor’s Economics was projecting the unemployment rate to average 6.4% in 2014 and 5.8% in 2015.

Chief among the employment numbers reported is the nonfarm payroll figure, which estimates the net number of new nonfarm jobs created in the prior month. A measure of economic strength, this figure is particularly relevant to computer services firms that provide payroll processing, because new jobs translate into more paychecks being issued each month. At the end of December 2007, total nonfarm payrolls (not seasonally adjusted) were 138.4 million. By the end of December 2009, however, nonfarm payrolls had declined to 129.7 million. Since then, there has been a slight rebound, with payrolls climbing to 130.8 million in December 2010 and to 132.9 million in December 2011. Nonfarm payrolls increased further to 135.1 million in December 2012 and to 137.4 million in December 2014. In March 2014, nonfarm payrolls averaged 137.9 million.

HOW TO ANALYZE A COMPUTER SERVICES COMPANY

Knowledge of general economic and business trends is essential in determining the computer services industry’s overall strength. What are the current trends? Which key factors are affecting the industry’s growth? The answers to such questions can help the analyst gain insights into the underlying forces shaping the market for computer services. To assess an individual company’s situation within this environment, it is important to consider both qualitative and quantitative factors affecting its condition.

QUALITATIVE FACTORS

An analyst can obtain a sense of the fundamental position of a services vendor by identifying the markets in which it competes and understanding their growth dynamics. What are the overall growth expectations for those markets? For example, IDC, an industry research firm, believes US spending on IT services by the


public sector vertical will increase at a compound annual growth rate of just 0.7% from 2012 through 2017, as of October 2013. Spending by the infrastructure industry, in contrast, is expected to grow at an annual rate of 3.8% during that same period.

It is important to note the vertical markets in which the company competes (public/government, financial, consumer, communications services) and the percentage of revenue that each market contributes. This information will help in assessing the likely impact that macroeconomic factors or market-specific risks may have on the company.

The company’s market segments should be evaluated with regard to the degree of competition in each. Are there many small competitors or a few large firms wielding significant resources? Who are the major competitors? How does the company stack up against them, and what are its particular advantages? One possible advantage is size, which is an important barrier to entry in the computer services industry. Large companies with vast resources dominate most segments of the computer services industry. Therefore, a company’s size relative to its competitors should be considered.

Management is another important qualitative factor. An analyst can uncover clues about the management team by looking at its history. What is its track record? How long have the high-ranking managers been with the company? If they took control only recently, what was their previous experience? It is also preferable for managers to own company stock or options. This helps to ensure that they have the incentive to do what is best for the shareholders—that is, create shareholder value.

QUANTITATIVE FACTORS

Once the qualitative questions have been answered, quantitative methods can be used to evaluate a company’s prospects. These methods stem from analysis of the firm’s financial statements—including the income statement and balance sheet—as well as its free cash flow.

The income statement The income statement yields information on the strength of a firm’s current business, including its revenues, gross margins, and expenses.

Revenues. A company’s sales growth should be compared with both its historical rates and those of its competitors to gain insight into possible future growth and changes in market share. If any major changes have occurred, it is important to determine why they happened and whether they are likely to endure or reverse in future periods.

For computer services vendors, revenues often come from contracts that are multiyear in duration or are renewed with predictability. Information related to contracts—specifically, their length and value—can help analysts project future revenues. However, customers often are allowed to renegotiate the terms of an agreement, depending on the nature of the contract and end-market conditions, which makes predicting future revenue streams less reliable. Average contract lengths also have been decreasing, which makes forecasting long-term cash inflows more challenging.

Gross margins. In the computer services industry, gross margins (total revenues minus the cost of services provided, divided by total revenues) vary widely. The gross margin can range from slightly more than 20% for certain outsourcing and contract management firms to 50% or more for certain processing firms, information providers, or other specialized services vendors.

Comparing a firm’s gross margin with its historical rates—as well as with those of its peers—can yield information on changes in the mix of services revenue that the company has taken in. It might also indicate the company’s efficiency in providing those operations. A vendor can improve its efficiency by implementing cost-saving technology in its business or by getting past initial costs associated with setting up operations for a new contract. A drop in the gross margin may reveal that a vendor has changed its bidding policies to use price as a competitive weapon to win contracts. Although this will reduce each contract’s profitability, it often increases the company’s overall business volume.


Expenses. When analyzing a computer services firm, it is important to review sales and marketing outlays, as well as research and development (R&D) costs. Sales and marketing expenses can indicate the extent to which a vendor is building its sales force or is spending to market its services. Tracking year-to-year growth in the absolute dollars spent on sales and marketing—and comparing these expenses as a percentage of revenue over defined time periods—can be useful in determining the adequacy of selling and marketing expenses. Comparisons can be made with the company’s own past record, as well as with those of its peers. If sales and marketing costs grow faster than revenues, operating margins are pinched. Alternatively, if revenues grow faster than selling and marketing expenses, operating margins expand.

The balance sheet Comparing the balance sheet of a computer services firm with its past results—or with the balance sheets of other industry vendors—yields information about a firm’s financial strength and the degree of financial leverage that it employs.

Computer services firms generally enjoy stable earnings. This results in a highly predictable cash flow and makes the repayment of debt relatively easy. Nonetheless, keeping some debt on the balance sheet may be beneficial, as it lowers a firm’s cost of capital. Too much debt, however, can limit a vendor’s ability to make strategic acquisitions. It also heightens the risk that an unexpected drop in business retention rates or new contract awards would severely constrain cash flow.

Free cash flow When valuing a computer services firm, an important measure is free cash flow—the amount of excess cash the company has available after paying off obligations. The analyst should determine how the company expects to use its free cash flow. The three possible strategies are to repurchase shares of the company’s common stock, pay dividends to shareholders, or reinvest the cash in the business, which includes the possibility of an acquisition. Generally, a company in a growth stage will pump its cash back into the business to fuel further growth. Mature companies that do not earn a high enough return on their invested capital may choose to direct the cash to their shareholders, either through dividends or share repurchases.

OTHER FACTORS TO CONSIDER

Additional factors that can affect a computer services company’s overall health include technological change, international business, acquisition strategies, contract backlogs and retention rate, and attrition rates.

Technological change Although a services firm can adapt to technological changes, such changes always entail risk. A services firm may lose a competitive advantage should other firms gain a reputation in new technology areas, or vice versa. Analysts should be alert to changes in computer services markets, the causes of those changes, and new areas that computer services firms are targeting. Discussions with computer services vendors can yield information on the size, growth rates, and attractiveness of new and emerging computer services markets, as well as on each firm’s related technologies, philosophies regarding those markets, and competitiveness.

International business The size and growth of opportunities available in international markets continue to attract computer services companies. Thus, overseas developments can affect a computer services company’s business. For example, an economic slowdown could hurt new business, especially large contracts that may be deferred until better economic times. The foreign markets served and the strength of operations in those markets varies by vendor.

Some of the larger domestic computer services companies derive a significant portion (30% or so) of their revenues abroad, while firms based abroad often derive a majority of their revenues (sometimes over 60%) from the US. Thus, many computer services companies are subject to foreign currency risk. For US-based firms, overseas sales are translated from local currencies into dollars; a strong dollar hurts reported earnings, while a weak dollar helps. The inverse is true for companies based overseas. Therefore, the analyst should be aware of where a company is based, the countries in which it does business, and the value of the dollar against those countries’ currencies.


US-based computer services firms are sourcing work overseas. Tapping into the less expensive labor resources of other countries has helped companies offer reduced prices to their customers. India has been a big beneficiary of this trend. However, this shift involves additional costs, such as infrastructure and travel, that can dilute the initial value of the shift overseas. Nonetheless, in the longer run, if a company is using these resources effectively, there should be a gradual widening of operating margins. An analyst should determine whether the company is using an offshoring strategy, and, if so, whether it is adding incremental value.

Acquisitions The computer services industry continues to consolidate. Companies seek to gain new areas of expertise, enter new geographic and vertical markets, and leverage their established sales organizations. Small companies have an added reason to go the acquisition route—they may see being acquired or acquiring others as a means of reaching critical mass. The analyst should assess a firm’s acquisition strategy to determine its future competitiveness.

Contracts and retention rate Contract backlogs (i.e., contracts that have been signed but not implemented) should be examined, as should the duration of those contracts. Analysis—of recent contracts awarded to a computer services vendor, of the firms competing for those contracts, and of the percentage of contract bids that the company has won—can indicate a vendor’s competitiveness.

An offshoot of contract backlogs, which applies primarily to companies that service the public sector (i.e., the federal government or state and local governments), is the funded backlog. The unfunded portion of the backlog refers to contracts that have been approved by the government agency but for which funds have not yet been appropriated.

Computer services firms involved with annual contracts, or with other contracts that are expiring but have been put up for renewal, have certain advantages. Being an incumbent vendor with first-hand knowledge of a customer’s business operations improves a company’s chances that its services will be retained. Because start-up costs associated with a computer services contract already have been largely absorbed, an incumbent provider’s bid will usually be very competitive, if not the lowest among all bidders. Users of computer services are also loath to displace incumbent vendors because of the disruption that any transition would have on their operations. This is particularly the case now that computer and processing operations are so crucial to organizational viability.

For incumbent vendors, all of these factors influence the predictability of their future revenue streams. The amount of business renewed when contracts expire, known as the “retention rate,” is a gauge to be watched. If a company’s retention rate falls or rises materially, there could be a fundamental change in the way the firm is performing its services, which could have an impact on future results.

If a company loses a major customer or contract, the analyst should find out the cause to determine if there is an underlying problem with the company’s business. When considering contract wins, it is important to keep in mind that sometimes companies underbid in order to win the business—possibly to gain a reputation from the status of dealing with a certain organization.

In such cases, the computer services vendor may not make much money—it may even take a loss—but it may hope to derive new business opportunities from the prestige of that particular win. Too many such bids, however, tend to weaken a vendor’s financial health—a condition referred to as the “winner’s curse.” Such underbidding may manifest itself in the gross margin line.

Attrition rates Not all companies in the computer services segment quote their attrition rates, but this number can provide insight into a company’s labor costs. In areas (such as India) where IT workers are in high demand, turnover tends to be high, as new employers entice workers away from their current positions with higher wages. This has two effects. First, after losing an employee, a company must replace that worker with someone who will likely be less productive as he or she climbs the learning curve. Second, it tends to put upward


pressure on labor costs, as employers bid up wages in an attempt to hire the most qualified candidates. Analysts should watch for companies with attrition rates that tend to be above 15% on a regular basis.

EQUITY VALUATION

When trying to determine the appropriate valuation for equities of companies in the IT services sector, we use a few different methods. The most common method used is the price-to-earnings (P/E) ratio. When we use the P/E ratio, we will most often compare the stock’s current level to its competitors within the field. Since there are numerous different segments within the overall IT services umbrella, it is important to know what specific area the company operates in for a more apples-to-apples comparison. A comparison to the stock’s historical range can also be beneficial.

Over the past few years, the IT services companies headquartered in India have enjoyed higher P/Es than their US-based counterparts. We believe this premium reflects the faster revenue and earnings growth rates at these companies. To capture this additional data point, we turn to the PEG, which is the P/E ratio divided by the earnings growth rate. This allows for a more direct comparison between older, slower growing firms and their faster growing peers.

Another metric we use is free cash flow, which we apply in two ways. First, we can discount the future expected free cash flows (which are essentially operating cash flow less capital expenditures and dividends) to come up with a present value. Second, by determining the size of the expected free cash flows, we have a better idea of how much capital the company will have at its disposal for other uses. This requires a bit more analysis to determine what the priorities of management are. Companies can use their free cash to pay dividends, buy back stock, pay off outstanding debt, or to reinvest back into this business. If a company’s priorities line up with the individual investor (e.g., a conservative investor looking for current income and a company that has a high dividend payout ratio), the stock may be a worthwhile investment.


GLOSSARY

B2B e-commerce—Business-to-business sales transactions conducted over the Internet.

B2C e-commerce—Business-to-consumer sales transactions conducted over the Internet.

Big data—Data sets so large and complex (often including structured and unstructured data) that they’re difficult to process using traditional database management tools or data processing applications.

Business process outsourcing (BPO)—When a corporation contracts out the operations and responsibilities of specific (usually noncore) business function (or process) to a third-party service provider, typically to cut costs and shift its focus to core business functions. Frequently outsourced functions include human resources (e.g., payroll, training, welfare and benefits, and hiring), procurement, customer relationship management, supply chain logistics, finance and accounting, and manufacturing, among other operations.

Client/server—A model of networked computing in which one primary computer (the server) acts as a central storage area for data and software that can be accessed and manipulated by people at other connected computers (usually personal computers or workstations).

Compatibility—The ability of a computer to operate and share data and programs with other computers, which may belong to the same organization or to other vendors, and which may or may not be on the same platform.

Customer relationship management (CRM)—A strategy whereby a business focuses on improving service to its customers through automated processes, personal information gathering and processing, and by offering self-service to customers.

Database—A computer-based collection of information or data files, organized and presented to serve a specific purpose.

Database management software (DBMS)—Software that allows the storage and manipulation of large sets of related data.

Data center—A centralized repository, either physical or virtual, for the storage, management, and dissemination of data and information organized around a particular body of knowledge or pertaining to a particular business.

Distributed processing—Data processing in which some or all of a client firm’s computer processing, storage, control, and input/output functions are deposited in different places and connected by transmission facilities.

E-commerce—Buying and selling goods over the Internet.

Enterprise resource planning (ERP)—A system that integrates all aspects of a company’s business, including manufacturing, logistics, planning, sales, and marketing.

Hardware—The physical components of a computer system (e.g., monitors, CPUs, servers), as opposed to the software that makes the system or its applications run.

Information services (IS)—A segment of the computer services industry. It includes vendors that develop and allow access to proprietary databases or engage in the collection, manipulation, and dissemination of data.

Integrated system—Hardware units, peripherals, and software joined into a single coherent system designed (often customized) for a particular user’s needs. Data and voice communications, and networking capabilities may also be included.

Interactive computing—Immediate, two-way communication between a computer and its operators. An operator can modify or terminate a program and receive rapid feedback from the computer system for verification and guidance.

Internet—The world’s largest computer network, supported by a US backbone and various regional networks around the world. With the global connection of millions of computers spanning more than 150 countries, the Internet includes millions of databases, information sources, topic-specific bulletin boards, web pages, and news groups.


Intranet—An organization’s in-house network based on Internet technology, generally accessible only to members of that organization.

Network—A collection of hardware, communications facilities, and software that gives computers access to shared resources (e.g., databases) and peripheral devices (e.g., printers and modems).

Network consulting and integration services (NCIS)—Activities and skills associated with designing and building data networks.

Offshoring—The practice of outsourcing a business process to a company located in a foreign nation where costs are lower than in the home country. In the US, the trend is for companies to contract with firms in countries such as India, China, Russia, and the Eastern European nations.

Online transaction processing (OLTP)—The electronic processing of business transactions (e.g., sales, reservations, inquiries, debits, and credits) as they occur.

Outsourcing—Hiring a computer services company to perform some of an organization’s data processing and data management tasks.

Program—A sequence of instructions that directs a computer to accomplish specific tasks (e.g., an application).

Server software—A program that runs on a networked computer and responds to requests from client programs on other networked computers. Web server software responds to requests from web browsers.

Software—Computer programs that either direct the operation of a computer (system software) or accomplish user tasks (application software).

Systems integration—The process whereby a computer services provider designs and implements a fully functional, connected system that meets a client’s specific needs.

Transformational outsourcing—The process by which computer services firms help organizations move away from a traditional mainframe system to a client/server environment.


INDUSTRY REFERENCES

PERIODICALS

Bloomberg BusinessWeek http://www.businessweek.com Weekly; news about various business topics.

Certification Magazine http://www.certmag.com Monthly; provides technical, training, and certification resources to aid IT experts in advancing their careers.

Computerworld http://www.computerworld.com Weekly; source of technology news and information for IT influencers worldwide.

eWeek http://www.eweek.com Weekly; technology news, analysis, and evaluations.

InformationWeek http://www.informationweek.com Weekly; news and features on the computer industry for the business technology executive.

InfoWorld http://www.infoworld.com Weekly; provides information on emerging enterprise technologies for senior technology decision makers.

MARKET RESEARCH FIRMS

Aon Hewitt www.aonhewitt.com Provides information and research on human capital.

Forrester Research Inc. http://www.forrester.com Projects and analyzes the impact that changes in technology will have on large companies, consumers, and society.

Gartner Inc. http://www.gartner.com Researches and analyzes developments and trends in the information technology industry.

GovWin http://govwin.com Provides market information, consulting, and sales management tools to clients to obtain and manage government business.

IDC http://www.idc.com Provides information technology data, analysis, and consulting.

IHS Inc. http://www.ihs.com Provider of economic, financial, and political information to support planning and decision-making.

Kelly Services www.kellyservices.co.in Provides research and services in the staffing, full-time placement, and outsourcing area.

Mercer http://www.mercer.com Provider of human resources and financial advice, products, and services.

Ovum http://www.ovumkc.com Provides research and advice to decision makers in the technology, telecom, and other business sectors.

TRADE ORGANIZATIONS

IEEE Computer Society http://www.computer.org World’s leading organization of computer professionals, dedicated to advancing the theory, practice, and application of computer and information processing technology. It is the largest of the 39 societies of the IEEE (formerly the Institute of Electrical and Electronics Engineers) and publishes numerous technical magazines and journals.

National Association of Software and Service Companies (NASSCOM) http://www.nasscom.in The premier trade body and the chamber of commerce of the information technology software and services industry in India.

TechAmerica http://www.techamerica.org Represents the US information technology industry, encompassing companies involved with computers, software, telecommunications products and services, the Internet, online services, systems integration, and professional services.


US Chamber of Commerce http://www.uschamber.com Represents the interests of three million US companies before Congress, government agencies, and the courts.

GOVERNMENT AGENCIES

Bureau of Economic Analysis (BEA) http://www.bea.gov Agency within the US Department of Commerce that collects economic data.

Bureau of Labor Statistics (BLS) http://www.bls.gov Agency within the US Department of Labor with the mandate to collect labor statistics.

Office of Advocacy, US Small Business Administration http://www.sba.gov/advo Federal agency created to protect, strengthen, and represent the nation’s small businesses.

US Department of Commerce (DOC) http://www.commerce.gov Cabinet-level department responsible for a variety of government agencies that monitor and regulate US commerce.

US Office of Personnel Management http://www.opm.gov Agency to ensure that the federal government has an effective civilian workforce.

ONLINE RESOURCES

CNET News http://www.news.com Comprehensive guide to news, information, and events related to technology companies.

CRN http://www.crn.com Also known as “Computer Reseller News”; strategic information and business tools for solution providers and other channel professionals.

Datamation http://www.datamation.com News and analysis for the IT manager.

EDGAR Database http://www.sec.gov/edgar/searchedgar/webusers.htm Site maintained by the US Securities and Exchange Commission, which provides access to corporate documents, such as 10-Ks and 10-Qs.

UBM TechWeb (formerly TechWeb) http://www.techweb.com Comprehensive guide to news, information, and events related to technology companies.


COMPARATIVE COMPANY ANALYSIS

Operating Revenues

Million $ CAGR (%) Index Basis (2003 = 100)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2008 2003 10-Yr. 5-Yr. 1-Yr. 2013 2012 2011 2010 2009

DATA PROCESSING & OUTSOURCED SERVICES‡ADS [] ALLIANCE DATA SYSTEMS CORP DEC 4,319.1 3,641.4 3,173.3 A 2,791.4 A 1,964.3 D 2,025.3 D 1,049.1 15.2 16.4 18.6 412 347 302 266 187ADP [] AUTOMATIC DATA PROCESSING JUN 11,310.1 D 10,665.2 9,879.5 8,927.7 D 8,867.1 8,776.5 7,147.0 4.7 5.2 6.0 158 149 138 125 124BR † BROADRIDGE FINANCIAL SOLUTNS JUN 2,430.8 2,303.5 2,166.9 2,210.1 D 2,154.9 2,227.4 NA NA 1.8 5.5 ** ** ** ** NACATM § CARDTRONICS INC DEC 876.5 A 780.4 624.6 A 532.1 493.4 493.0 NA NA 12.2 12.3 ** ** ** ** NACSC [] COMPUTER SCIENCES CORP # MAR NA 14,993.0 D 16,123.0 A 16,042.0 D 16,063.0 A 16,739.9 14,767.6 NA NA NA NA 102 109 109 109

CVG † CONVERGYS CORP DEC 2,046.1 A 2,005.0 D 2,262.0 2,203.4 D 2,704.9 2,785.8 2,288.8 A (1.1) (6.0) 2.0 89 88 99 96 118CLGX † CORELOGIC INC DEC 1,330.6 D 1,567.6 1,338.5 D 1,623.3 A,C 5,881.4 6,169.0 6,140.8 (14.2) (26.4) (15.1) 22 26 22 26 96CSGS § CSG SYSTEMS INTL INC DEC 747.5 756.9 734.7 549.4 A 500.7 472.1 559.3 2.9 9.6 (1.2) 134 135 131 98 90DST † DST SYSTEMS INC DEC 2,652.6 2,576.6 2,385.2 A 2,255.1 A 2,217.9 C 2,285.4 A 2,416.3 0.9 3.0 2.9 110 107 99 93 92EXLS § EXLSERVICE HOLDINGS INC DEC 478.5 442.9 A 360.5 A 252.8 185.9 181.7 D NA NA 21.4 8.0 ** ** ** ** NA

FIS [] FIDELITY NATIONAL INFO SVCS DEC 6,070.7 5,807.6 D 5,745.7 5,186.2 D 3,769.5 A,C 3,446.0 D 1,830.9 A 12.7 12.0 4.5 332 317 314 283 206FISV [] FISERV INC DEC 4,814.0 A,C 4,482.0 4,337.0 4,133.0 4,077.0 D 4,739.0 D 3,017.9 A 4.8 0.3 7.4 160 149 144 137 135GPN † GLOBAL PAYMENTS INC # MAY NA 2,375.9 A 2,203.8 1,859.8 1,642.5 A,C 1,601.5 A 629.3 A NA NA NA NA 378 350 296 261HPY § HEARTLAND PAYMENT SYSTEMS DEC 2,135.4 2,013.4 D 1,996.9 1,864.3 1,652.1 1,544.9 A NA NA 6.7 6.1 ** ** ** ** NAJKHY † HENRY (JACK) & ASSOCIATES JUN 1,129.4 1,027.1 966.9 836.6 A 745.6 742.9 A,C 404.6 A 10.8 8.7 10.0 279 254 239 207 184

ONE § HIGHER ONE HOLDINGS INC DEC 211.1 A 197.7 A 176.3 145.0 75.5 A 44.0 NA NA 36.8 6.8 ** ** ** ** NAMA [] MASTERCARD INC DEC 8,346.0 7,391.0 A 6,714.0 5,539.0 A 5,098.7 4,991.6 A 2,230.9 14.1 10.8 12.9 374 331 301 248 229MMS § MAXIMUS INC SEP 1,315.2 A 1,050.1 A 929.6 831.7 D 717.3 D 745.1 D 558.3 A 8.9 12.0 25.2 236 188 167 149 128NSR † NEUSTAR INC DEC 902.0 A 831.4 620.5 A,C 526.8 A 480.4 488.8 A 111.7 A 23.2 13.0 8.5 808 744 556 472 430PAYX [] PAYCHEX INC # MAY NA 2,326.2 2,229.8 2,084.3 2,000.8 2,082.8 1,294.3 A NA NA NA NA 180 172 161 155

SYKE § SYKES ENTERPRISES INC DEC 1,263.5 1,127.7 A,C 1,169.3 D 1,158.7 A,C 846.0 819.2 480.4 10.2 9.1 12.0 263 235 243 241 176TTEC § TELETECH HOLDINGS INC DEC 1,193.2 A,C 1,163.0 A 1,179.4 A 1,094.9 A 1,167.9 1,400.1 1,001.1 A 1.8 (3.1) 2.6 119 116 118 109 117TSS [] TOTAL SYSTEM SERVICES INC DEC 2,132.4 A 1,871.0 1,809.0 1,717.6 A,C 1,688.1 D 1,938.6 1,053.5 A 7.3 1.9 14.0 202 178 172 163 160PAY † VERIFONE SYSTEMS INC OCT 1,706.8 1,886.3 A 1,309.5 A 1,001.5 844.7 921.9 339.3 17.5 13.1 (9.5) 503 556 386 295 249V [] VISA INC SEP 11,778.0 10,421.0 9,188.0 A 8,065.0 A 6,911.0 6,263.0 NA NA 13.5 13.0 ** ** ** ** NA

WU [] WESTERN UNION CO DEC 5,542.0 5,664.8 5,491.4 A 5,192.7 5,083.6 A,C 5,282.0 NA NA 1.0 (2.2) ** ** ** ** NAWEX † WEX INC DEC 717.5 623.2 A 553.1 390.4 A 318.2 393.6 158.3 16.3 12.8 15.1 453 394 349 247 201XRX [] XEROX CORP DEC 21,435.0 D 22,390.0 22,626.0 21,633.0 A 15,179.0 17,608.0 15,701.0 C 3.2 4.0 (4.3) 137 143 144 138 97

IT CONSULTING & OTHER SERVICES‡ACN [] ACCENTURE PLC AUG 30,394.3 29,778.0 27,352.9 23,094.1 23,171.0 25,313.8 13,397.2 8.5 3.7 2.1 227 222 204 172 173ACXM † ACXIOM CORP # MAR NA 1,099.4 1,130.6 D 1,160.0 1,099.2 1,276.6 1,010.8 A NA NA NA NA 109 112 115 109CACI § CACI INTL INC -CL A JUN 3,682.0 A 3,774.5 A 3,577.8 A 3,149.1 A 2,730.2 2,420.5 A 843.1 A 15.9 8.8 (2.5) 437 448 424 374 324CBR § CIBER INC DEC 877.3 D 884.4 D 990.3 D 1,071.3 1,037.7 1,191.6 A 692.0 A 2.4 (5.9) (0.8) 127 128 143 155 150CTSH [] COGNIZANT TECH SOLUTIONS DEC 8,843.2 7,346.5 6,121.2 4,592.4 3,278.7 2,816.3 368.2 A 37.4 25.7 20.4 2,402 1,995 1,662 1,247 890

FORR § FORRESTER RESEARCH INC DEC 297.6 292.9 283.6 250.7 233.4 240.9 126.0 9.0 4.3 1.6 236 232 225 199 185IT † GARTNER INC DEC 1,784.2 1,615.8 1,468.6 1,288.5 1,139.8 1,279.1 D 858.4 7.6 6.9 10.4 208 188 171 150 133IGTE § IGATE CORP DEC 1,150.9 1,073.9 779.6 A 280.6 193.1 218.8 D 287.8 14.9 39.4 7.2 400 373 271 97 67IBM [] INTL BUSINESS MACHINES CORP DEC 99,751.0 A 104,507.0 A 106,916.0 A 99,871.0 A 95,758.0 A 103,630.0 A 89,131.0 A 1.1 (0.8) (4.6) 112 117 120 112 107LDOS † LEIDOS HOLDINGS INC # JAN 5,772.0 D 11,173.0 D 10,997.0 D 11,061.0 10,846.0 10,070.0 NA NA (10.5) (48.3) ** ** ** ** NA

MANT § MANTECH INTL CORP DEC 2,310.1 2,582.3 A 2,870.0 A 2,604.0 A 2,020.3 1,870.9 701.6 A 12.7 4.3 (10.5) 329 368 409 371 288SAIC † SCIENCE APPLICATIONS INTL CP # JAN 4,121.0 4,781.0 4,733.0 NA NA NA NA NA NA (13.8) ** ** ** ** NATDC [] TERADATA CORP DEC 2,692.0 2,665.0 2,379.0 A 1,936.0 1,709.0 1,762.0 NA NA 8.8 1.0 ** ** ** ** NAVRTU § VIRTUSA CORP # MAR NA 333.2 277.8 A 218.0 164.4 A 172.9 NA NA NA NA ** ** ** ** NA


Operating Revenues


Ticker Company Yr. End 2013 2012 2011 2010 2009 2008 2003 10-Yr. 5-Yr. 1-Yr. 2013 2012 2011 2010 2009 OTHER COS WITH SIGNIFICANT COMPUTER SERVICES OPERATIONSCPWR † COMPUWARE CORP # MAR NA 944.5 1,009.8 928.9 892.2 A 1,090.5 1,264.6 A NA NA NA NA 75 80 73 71EEFT EURONET WORLDWIDE INC DEC 1,413.2 A 1,267.6 C 1,161.3 1,038.3 A 1,032.7 D 1,045.7 D 203.6 A 21.4 6.2 11.5 694 623 570 510 507EFX [] EQUIFAX INC DEC 2,303.9 D 2,160.5 A 1,959.8 1,859.5 D 1,824.5 1,935.7 1,225.4 A 6.5 3.5 6.6 188 176 160 152 149G GENPACT LTD DEC 2,132.0 A,C 1,902.0 A 1,600.4 A,C 1,259.0 A 1,120.1 1,043.1 NA NA 15.4 12.1 ** ** ** ** NAHPQ [] HEWLETT-PACKARD CO OCT 112,298.0 A 120,357.0 127,245.0 126,033.0 114,552.0 118,364.0 A 73,061.0 4.4 (1.0) (6.7) 154 165 174 173 157

INFY INFOSYS LTD -ADR # MAR 8,249.0 7,398.0 6,994.0 A 6,041.0 4,804.0 A 4,663.0 A 1,062.6 A 22.7 12.1 11.5 776 696 658 569 452ITG § INVESTMENT TECHNOLOGY GP INC DEC 530.8 504.4 572.0 570.8 A 633.1 763.0 334.0 4.7 (7.0) 5.2 159 151 171 171 190LMT [] LOCKHEED MARTIN CORP DEC 45,358.0 A 47,182.0 A 46,499.0 A,C 45,803.0 D 45,189.0 42,731.0 31,824.0 A 3.6 1.2 (3.9) 143 148 146 144 142NOC [] NORTHROP GRUMMAN CORP DEC 24,661.0 25,218.0 26,412.0 D 34,757.0 33,755.0 D 33,887.0 D 26,206.0 D (0.6) (6.2) (2.2) 94 96 101 133 129ORCL [] ORACLE CORP # MAY NA 37,180.0 A 37,121.0 35,622.0 A 26,820.0 A 23,252.0 10,156.0 NA NA NA NA 366 366 351 264

IGATY IGATE COMPUTER SYSTEMS -ADR DEC NA NA 759.3 A 701.7 A 655.9 718.9 NA NA NA NA ** ** ** ** NAPRGS § PROGRESS SOFTWARE CORP NOV 334.0 D 335.2 D 533.7 530.3 496.8 518.3 A 309.1 A 0.8 (8.4) (0.4) 108 108 173 172 161SAPE SAPIENT CORP DEC 1,305.2 A 1,161.5 1,062.2 A 863.5 666.7 A 687.5 A 194.4 21.0 13.7 12.4 672 598 546 444 343ULTI ULTIMATE SOFTWARE GROUP INC DEC 410.4 332.3 269.2 227.8 D 196.6 178.6 60.4 A 21.1 18.1 23.5 679 550 446 377 325WIT WIPRO LTD -ADR # MAR 7,237.8 6,864.6 D 7,309.3 A 6,972.2 A 6,050.2 5,004.2 A 1,345.5 18.3 7.7 5.4 538 510 543 518 450

WNS WNS (HOLDINGS) LTD -ADR # MAR NA 460.3 A 474.1 C 616.3 582.5 539.3 A NA NA NA NA ** ** ** ** NA

Note: Data as originally reported. CAGR-Compound annual grow th rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. **Not calculated; data for base year or end year not available. A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data reflect an accounting change. D - Data exclude discontinued operations. E - Includes excise taxes. F - Includes other (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a fiscal year change.


Net Income


Ticker Company Yr. End 2013 2012 2011 2010 2009 2008 2003 10-Yr. 5-Yr. 1-Yr. 2013 2012 2011 2010 2009

DATA PROCESSING & OUTSOURCED SERVICES‡ADS [] ALLIANCE DATA SYSTEMS CORP DEC 496.2 422.3 315.3 195.6 176.7 243.4 67.3 22.1 15.3 17.5 737 627 468 291 263ADP [] AUTOMATIC DATA PROCESSING JUN 1,364.1 1,388.5 1,254.2 1,207.3 1,328.2 1,161.7 1,018.2 3.0 3.3 (1.8) 134 136 123 119 130BR † BROADRIDGE FINANCIAL SOLUTNS JUN 212.1 125.0 171.8 225.1 223.3 192.2 NA NA 2.0 69.7 ** ** ** ** NACATM § CARDTRONICS INC DEC 23.8 43.6 70.2 41.0 5.3 (70.0) NA NA NM (45.4) ** ** ** ** NACSC [] COMPUTER SCIENCES CORP # MAR NA 497.0 (4,243.0) 706.0 817.0 1,115.2 519.4 NA NA NA ** 96 (817) 136 157

CVG † CONVERGYS CORP DEC 58.5 28.2 328.3 (74.7) (77.3) (92.9) 171.6 (10.2) NM 107.4 34 16 191 (44) (45)CLGX † CORELOGIC INC DEC 130.2 123.5 52.5 53.7 199.7 (26.3) 451.0 (11.7) NM 5.4 29 27 12 12 44CSGS § CSG SYSTEMS INTL INC DEC 51.4 48.9 42.3 22.4 41.9 61.4 (26.3) NM (3.5) 5.1 NM NM NM NM NMDST † DST SYSTEMS INC DEC 352.6 324.0 183.1 318.5 241.6 242.9 320.8 0.9 7.7 8.8 110 101 57 99 75EXLS § EXLSERVICE HOLDINGS INC DEC 48.1 41.8 34.8 26.6 15.8 11.1 NA NA 34.0 15.0 ** ** ** ** NA

FIS [] FIDELITY NATIONAL INFO SVCS DEC 491.2 540.4 493.8 447.6 101.3 117.4 203.1 9.2 33.1 (9.1) 242 266 243 220 50FISV [] FISERV INC DEC 650.0 597.0 491.0 506.0 473.0 346.0 315.0 7.5 13.4 8.9 206 190 156 161 150GPN † GLOBAL PAYMENTS INC # MAY NA 216.1 188.2 210.2 207.2 37.2 62.4 NA NA NA ** 346 301 337 332HPY § HEARTLAND PAYMENT SYSTEMS DEC 74.7 64.4 43.9 34.5 (51.8) 41.8 NA NA 12.3 16.1 ** ** ** ** NAJKHY † HENRY (JACK) & ASSOCIATES JUN 176.6 155.0 137.5 117.9 103.1 105.3 49.4 13.6 10.9 14.0 358 314 278 239 209

ONE § HIGHER ONE HOLDINGS INC DEC 14.1 36.9 31.9 25.1 14.2 6.4 NA NA 17.2 (61.7) ** ** ** ** NAMA [] MASTERCARD INC DEC 3,116.0 2,759.0 1,906.0 1,846.0 1,462.5 (253.9) (390.7) NM NM 12.9 NM NM NM NM NMMMS § MAXIMUS INC SEP 117.1 76.1 82.1 69.4 54.6 28.3 35.3 12.7 32.9 53.9 331 215 232 196 154NSR † NEUSTAR INC DEC 162.8 156.1 123.6 106.2 101.1 4.3 24.0 21.1 106.9 4.3 677 650 514 442 421PAYX [] PAYCHEX INC # MAY NA 569.0 548.0 515.3 477.0 533.5 303.0 NA NA NA ** 188 181 170 157

SYKE § SYKES ENTERPRISES INC DEC 37.3 40.0 52.3 19.7 43.2 60.6 9.3 14.9 (9.3) (6.7) 400 429 562 212 464TTEC § TELETECH HOLDINGS INC DEC 67.4 70.0 74.2 49.9 71.8 73.7 (30.5) NM (1.8) (3.8) NM NM NM NM NMTSS [] TOTAL SYSTEM SERVICES INC DEC 244.8 244.3 220.6 197.2 220.4 250.1 141.0 5.7 (0.4) 0.2 174 173 156 140 156PAY † VERIFONE SYSTEMS INC OCT (296.1) 65.0 282.4 98.8 (137.8) (425.3) 0.2 NM NM NM NM NM NM NM NMV [] VISA INC SEP 4,980.0 2,144.0 3,650.0 2,966.0 2,353.0 804.0 NA NA 44.0 132.3 ** ** ** ** NA

WU [] WESTERN UNION CO DEC 798.4 1,025.9 1,165.4 909.9 848.8 919.0 NA NA (2.8) (22.2) ** ** ** ** NAWEX † WEX INC DEC 149.2 96.9 133.6 87.6 139.7 127.6 34.6 15.7 3.2 53.9 431 280 386 253 403XRX [] XEROX CORP DEC 1,185.0 1,195.0 1,295.0 606.0 485.0 230.0 360.0 12.7 38.8 (0.8) 329 332 360 168 135

IT CONSULTING & OTHER SERVICES‡ACN [] ACCENTURE PLC AUG 3,281.9 2,553.5 2,277.7 1,780.7 1,590.0 1,691.8 498.2 20.7 14.2 28.5 659 513 457 357 319ACXM † ACXIOM CORP # MAR NA 57.6 43.4 (23.1) 44.5 37.5 58.3 NA NA NA ** 99 74 (40) 76CACI § CACI INTL INC -CL A JUN 151.7 167.5 144.2 106.5 95.5 83.3 44.7 13.0 12.7 (9.4) 339 375 323 238 214CBR § CIBER INC DEC (7.6) (3.0) (52.1) (77.2) 15.0 30.0 20.0 NM NM NM (38) (15) (261) (386) 75CTSH [] COGNIZANT TECH SOLUTIONS DEC 1,228.6 1,051.3 883.6 733.5 535.0 430.8 57.4 35.9 23.3 16.9 2,142 1,833 1,540 1,279 933

FORR § FORRESTER RESEARCH INC DEC 13.0 25.6 23.0 20.5 18.9 29.2 2.2 19.5 (14.9) (49.1) 594 1,167 1,050 936 861IT † GARTNER INC DEC 182.8 165.9 136.9 96.3 83.0 97.1 23.7 22.7 13.5 10.2 772 700 578 406 350IGTE § IGATE CORP DEC 129.8 95.8 51.5 51.8 28.6 29.3 (9.0) NM 34.7 35.4 NM NM NM NM NMIBM [] INTL BUSINESS MACHINES CORP DEC 16,483.0 16,604.0 15,855.0 14,833.0 13,425.0 12,334.0 7,613.0 8.0 6.0 (0.7) 217 218 208 195 176LDOS † LEIDOS HOLDINGS INC # JAN 84.0 523.0 (8.0) 569.0 500.0 447.0 NA NA (28.4) (83.9) ** ** ** ** NA

MANT § MANTECH INTL CORP DEC (6.1) 95.0 133.3 125.1 111.8 90.3 35.2 NM NM NM (17) 270 379 356 318SAIC † SCIENCE APPLICATIONS INTL CP # JAN 113.0 182.0 182.0 NA NA NA NA NA NA (37.9) ** ** ** ** NATDC [] TERADATA CORP DEC 377.0 419.0 353.0 301.0 254.0 250.0 NA NA 8.6 (10.0) ** ** ** ** NAVRTU § VIRTUSA CORP # MAR NA 28.4 20.0 16.2 12.1 12.1 NA NA NA NA ** ** ** ** NA


Net Income


Ticker Company Yr. End 2013 2012 2011 2010 2009 2008 2003 10-Yr. 5-Yr. 1-Yr. 2013 2012 2011 2010 2009 OTHER COS WITH SIGNIFICANT COMPUTER SERVICES OPERATIONSCPWR † COMPUWARE CORP # MAR NA (17.3) 88.4 107.4 140.8 139.6 49.8 NA NA NA ** (35) 177 216 283EEFT EURONET WORLDWIDE INC DEC 88.0 20.5 37.0 (38.4) 29.8 (194.0) 12.0 22.1 NM 328.5 734 171 308 (320) 249EFX [] EQUIFAX INC DEC 333.4 272.1 231.4 235.2 233.9 272.8 178.5 6.4 4.1 22.5 187 152 130 132 131G GENPACT LTD DEC 229.7 178.2 184.3 142.2 127.3 125.1 NA NA 12.9 28.9 ** ** ** ** NAHPQ [] HEWLETT-PACKARD CO OCT 5,113.0 (12,650.0) 7,074.0 8,761.0 7,660.0 8,329.0 2,539.0 7.3 (9.3) NM 201 (498) 279 345 302

INFY INFOSYS LTD -ADR # MAR 1,751.0 1,725.0 1,716.0 1,499.0 1,313.0 1,281.0 270.3 20.5 6.5 1.5 648 638 635 555 486ITG § INVESTMENT TECHNOLOGY GP INC DEC 31.1 (247.9) (179.8) 24.0 42.8 114.6 42.0 (3.0) (23.0) NM 74 (591) (429) 57 102LMT [] LOCKHEED MARTIN CORP DEC 2,950.0 2,745.0 2,667.0 2,645.0 3,024.0 3,217.0 1,053.0 10.9 (1.7) 7.5 280 261 253 251 287NOC [] NORTHROP GRUMMAN CORP DEC 1,952.0 1,978.0 2,086.0 2,038.0 1,573.0 (1,281.0) 808.0 9.2 NM (1.3) 242 245 258 252 195ORCL [] ORACLE CORP # MAY NA 10,925.0 9,981.0 8,547.0 6,135.0 5,593.0 2,681.0 NA NA NA ** 407 372 319 229

IGATY IGATE COMPUTER SYSTEMS -ADR DEC NA NA 73.5 133.2 119.8 101.4 NA NA NA NA ** ** ** ** NAPRGS § PROGRESS SOFTWARE CORP NOV 39.8 32.6 58.8 48.6 32.8 46.3 27.1 3.9 (3.0) 22.0 147 120 217 179 121SAPE SAPIENT CORP DEC 77.7 65.2 73.6 43.8 88.1 62.5 (4.9) NM 4.5 19.1 NM NM NM NM NMULTI ULTIMATE SOFTWARE GROUP INC DEC 25.5 14.6 4.3 3.0 (1.1) (2.9) (9.2) NM NM 74.5 NM NM NM NM NMWIT WIPRO LTD -ADR # MAR 1,299.4 1,125.5 1,095.1 1,189.4 1,021.8 676.5 237.7 18.5 13.9 15.5 547 474 461 500 430

WNS WNS (HOLDINGS) LTD -ADR # MAR NA 21.4 12.5 9.8 3.7 8.1 NA NA NA NA ** ** ** ** NA

Note: Data as originally reported. CAGR-Compound annual grow th rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. **Not calculated; data for base year or end year not available.


Return on Revenues (%) Return on Assets (%) Return on Equity (%)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009

DATA PROCESSING & OUTSOURCED SERVICES‡ADS [] ALLIANCE DATA SYSTEMS CORP DEC 11.5 11.6 9.9 7.0 9.0 3.9 4.0 3.7 2.9 3.7 71.7 119.9 316.8 132.2 53.0ADP [] AUTOMATIC DATA PROCESSING JUN 12.1 13.0 12.7 13.5 15.0 4.3 4.3 4.1 4.6 5.4 22.2 22.9 21.8 22.4 25.5BR † BROADRIDGE FINANCIAL SOLUTNS JUN 8.7 5.4 7.9 10.2 10.4 10.6 6.4 9.3 9.9 8.0 25.5 15.2 21.4 26.2 27.0CATM § CARDTRONICS INC DEC 2.7 5.6 11.2 7.7 1.1 2.6 5.9 12.0 8.9 1.1 12.0 33.7 91.2 207.4 NA CSC [] COMPUTER SCIENCES CORP # MAR NA 3.3 NM 4.4 5.1 NA 4.4 NM 4.3 5.1 NA 16.8 NM 10.1 13.7

CVG † CONVERGYS CORP DEC 2.9 1.4 14.5 NM NM 2.9 1.3 14.8 NM NM 4.4 2.0 25.3 NM NMCLGX † CORELOGIC INC DEC 9.8 7.9 3.9 3.3 3.4 4.3 4.0 1.7 0.9 2.3 11.8 10.2 3.8 2.3 6.8CSGS § CSG SYSTEMS INTL INC DEC 6.9 6.5 5.8 4.1 8.4 6.0 5.9 5.0 3.1 8.0 14.8 16.3 16.5 10.0 23.1DST † DST SYSTEMS INC DEC 13.3 12.6 7.7 14.1 10.9 10.9 9.5 5.4 10.2 8.9 31.2 34.1 22.3 43.7 55.4EXLS § EXLSERVICE HOLDINGS INC DEC 10.1 9.4 9.6 10.5 8.5 10.7 10.3 10.2 9.6 6.8 13.5 13.4 13.2 11.7 8.4

FIS [] FIDELITY NATIONAL INFO SVCS DEC 8.1 9.3 8.6 8.6 2.7 3.6 3.9 3.5 3.2 0.9 7.4 8.2 7.7 6.1 1.7FISV [] FISERV INC DEC 13.5 13.3 11.3 12.2 11.6 7.2 7.0 5.8 6.1 5.3 18.6 17.9 15.1 16.2 16.8GPN † GLOBAL PAYMENTS INC # MAY NA 9.1 8.5 11.3 12.6 NA 7.4 6.2 7.8 11.2 NA 18.6 16.0 20.6 21.7HPY § HEARTLAND PAYMENT SYSTEMS DEC 3.5 3.2 2.2 1.9 NM 8.7 9.1 7.6 6.1 NM 31.8 30.0 22.2 22.5 NMJKHY † HENRY (JACK) & ASSOCIATES JUN 15.6 15.1 14.2 14.1 13.8 10.9 9.9 9.0 9.0 10.0 17.2 16.6 16.9 17.1 16.8

ONE § HIGHER ONE HOLDINGS INC DEC 6.7 18.6 18.1 17.3 18.8 6.7 20.1 21.6 28.1 39.3 21.6 40.7 30.8 525.2 NA MA [] MASTERCARD INC DEC 37.3 37.3 28.4 33.3 28.7 23.3 23.8 19.5 22.6 21.0 43.3 43.2 34.4 42.4 53.9MMS § MAXIMUS INC SEP 8.9 7.2 8.8 8.3 7.6 15.1 12.1 15.0 14.4 12.2 23.9 18.4 23.0 21.8 19.1NSR † NEUSTAR INC DEC 18.0 18.8 19.9 20.2 21.1 10.7 10.7 11.7 15.4 17.3 26.3 27.2 22.5 19.3 22.7PAYX [] PAYCHEX INC # MAY NA 24.5 24.6 24.7 23.8 NA 9.0 9.2 9.7 9.2 NA 33.7 35.3 35.6 34.8

SYKE § SYKES ENTERPRISES INC DEC 2.9 3.5 4.5 1.7 5.1 4.0 4.8 6.7 2.7 7.2 6.0 6.8 9.0 3.8 10.4TTEC § TELETECH HOLDINGS INC DEC 5.6 6.0 6.3 4.6 6.1 8.0 8.8 10.5 7.7 11.0 14.2 14.8 16.4 11.2 17.8TSS [] TOTAL SYSTEM SERVICES INC DEC 11.5 13.1 12.2 11.5 13.1 8.6 12.6 11.6 10.8 13.5 16.3 17.9 17.4 16.3 20.3PAY † VERIFONE SYSTEMS INC OCT NM 3.4 21.6 9.9 NM NM 2.2 16.7 9.9 NM NM 5.2 40.3 83.0 NMV [] VISA INC SEP 42.3 20.6 39.7 36.8 34.0 13.1 5.7 10.7 9.0 7.0 18.3 7.9 14.2 12.3 10.6

WU [] WESTERN UNION CO DEC 14.4 18.1 21.2 17.5 16.7 8.2 11.1 13.7 11.9 13.1 78.1 111.8 157.8 194.4 491.5WEX † WEX INC DEC 20.8 15.6 24.2 22.4 43.9 4.6 3.6 6.1 4.9 9.0 17.3 12.7 21.1 17.5 38.0XRX [] XEROX CORP DEC 5.5 5.3 5.7 2.8 3.2 3.9 3.9 4.2 2.1 2.1 9.7 10.0 10.6 6.1 7.3

IT CONSULTING & OTHER SERVICES‡ACN [] ACCENTURE PLC AUG 10.8 8.6 8.3 7.7 6.9 19.6 15.8 15.9 14.2 12.9 72.1 63.6 67.8 62.2 58.6ACXM † ACXIOM CORP # MAR NA 5.2 3.8 NM 4.1 NA 4.8 3.4 NM 3.3 NA 9.4 7.2 NM 8.2CACI § CACI INTL INC -CL A JUN 4.1 4.4 4.0 3.4 3.5 6.2 7.1 6.3 5.0 4.9 12.8 13.6 11.6 9.8 10.0CBR § CIBER INC DEC NM NM NM NM 1.4 NM NM NM NM 1.9 NM NM NM NM 3.1CTSH [] COGNIZANT TECH SOLUTIONS DEC 13.9 14.3 14.4 16.0 16.3 16.7 17.5 17.5 18.5 18.7 22.4 23.9 23.4 23.5 23.2

FORR § FORRESTER RESEARCH INC DEC 4.4 8.7 8.1 8.2 8.1 2.9 5.2 4.9 4.5 4.1 5.2 8.7 8.2 7.0 6.1IT † GARTNER INC DEC 10.2 10.3 9.3 7.5 7.3 10.7 11.1 10.3 7.7 7.2 54.7 67.9 74.2 64.3 181.9IGTE § IGATE CORP DEC 11.3 8.9 6.6 18.4 14.8 5.2 3.7 2.9 19.4 13.7 140.7 91.9 17.9 23.6 16.9

IBM [] INTL BUSINESS MACHINES CORP DEC 16.5 15.9 14.8 14.9 14.0 13.4 14.1 13.8 13.3 12.3 79.1 85.2 73.4 64.9 74.4

LDOS † LEIDOS HOLDINGS INC # JAN 1.5 4.7 NM 5.1 4.6 1.7 8.3 NM 9.9 9.7 4.0 21.8 NM 23.8 22.9

MANT § MANTECH INTL CORP DEC NM 3.7 4.6 4.8 5.5 NM 5.3 8.0 9.3 10.5 NM 8.4 13.0 14.0 14.9SAIC † SCIENCE APPLICATIONS INTL CP # JAN 2.7 3.8 3.8 NA NA 8.3 13.8 NA NA NA 23.2 29.1 NA NA NATDC [] TERADATA CORP DEC 14.0 15.7 14.8 15.5 14.9 12.2 14.7 15.7 17.4 16.9 20.7 25.6 26.3 28.7 30.1VRTU § VIRTUSA CORP # MAR NA 8.5 7.2 7.4 7.4 NA 9.8 7.7 7.0 6.0 NA 12.1 9.4 8.3 7.3


Return on Revenues (%) Return on Assets (%) Return on Equity (%)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 OTHER COS WITH SIGNIFICANT COMPUTER SERVICES OPERATIONS

CPWR † COMPUWARE CORP # MAR NA NM 8.8 11.6 15.8 NA NM 4.2 5.3 7.2 NA NM 8.8 11.5 15.7EEFT EURONET WORLDWIDE INC DEC 6.2 1.6 3.2 NM 2.9 5.6 1.3 2.5 NM 2.1 15.2 3.9 7.2 NM 5.9

EFX [] EQUIFAX INC DEC 14.5 12.6 11.8 12.6 12.8 7.4 6.8 6.7 6.7 6.9 15.7 15.0 13.6 14.3 16.1

G GENPACT LTD DEC 10.8 9.4 11.5 11.3 11.4 8.7 7.1 8.6 7.8 7.4 18.4 13.7 12.7 10.6 12.5

HPQ [] HEWLETT-PACKARD CO OCT 4.6 NM 5.6 7.0 6.7 4.8 NM 5.6 7.3 6.7 20.6 NM 17.9 21.6 19.3

INFY INFOSYS LTD -ADR # MAR 21.2 23.3 24.5 24.8 27.3 19.4 21.5 23.6 22.8 25.0 22.9 24.8 27.0 26.1 28.7ITG § INVESTMENT TECHNOLOGY GP INC DEC 5.9 NM NM 4.2 6.8 1.4 NM NM 1.1 2.5 7.5 NM NM 2.8 5.2

LMT [] LOCKHEED MARTIN CORP DEC 6.5 5.8 5.7 5.8 6.7 7.9 7.2 7.3 7.5 8.8 119.0 527.9 113.3 67.5 86.5

NOC [] NORTHROP GRUMMAN CORP DEC 7.9 7.8 7.9 5.9 4.7 7.4 7.6 7.3 6.6 5.2 19.4 19.9 17.5 15.5 12.8

ORCL [] ORACLE CORP # MAY NA 29.4 26.9 24.0 22.9 NA 13.6 13.1 12.7 11.3 NA 24.7 23.9 24.2 22.0

IGATY IGATE COMPUTER SYSTEMS -ADR DEC NA NA 9.7 19.0 18.3 NA NA 6.3 15.0 14.5 NA NA 7.5 18.4 18.2PRGS § PROGRESS SOFTWARE CORP NOV 11.9 9.7 11.0 9.2 6.6 5.1 3.7 6.5 5.6 4.2 6.9 5.2 9.0 7.8 6.3SAPE SAPIENT CORP DEC 6.0 5.6 6.9 5.1 13.2 8.9 8.6 11.0 7.2 16.8 14.0 13.0 16.0 10.1 24.2ULTI ULTIMATE SOFTWARE GROUP INC DEC 6.2 4.4 1.6 1.3 NM 4.5 3.5 1.5 1.4 NM 16.9 14.6 5.4 4.6 NMWIT WIPRO LTD -ADR # MAR 18.0 16.4 15.0 17.1 16.9 15.8 13.5 13.0 15.2 15.7 23.8 20.8 19.9 24.4 27.9

WNS WNS (HOLDINGS) LTD -ADR # MAR NA 4.6 2.6 1.6 0.6 NA 4.0 2.4 1.8 0.7 NA 7.3 4.5 3.7 1.7

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year.


Debt as a % of

Current Ratio Debt / Capital Ratio (%) Net Working Capital


DATA PROCESSING & OUTSOURCED SERVICES‡ADS [] ALLIANCE DATA SYSTEMS CORP DEC 2.3 1.8 1.7 1.6 1.1 86.5 87.9 93.1 97.4 85.4 123.5 142.6 161.4 174.1 NMADP [] AUTOMATIC DATA PROCESSING JUN 1.1 1.1 1.1 1.1 1.1 0.2 0.3 0.5 0.7 0.8 1.0 0.9 1.9 1.8 2.2BR † BROADRIDGE FINANCIAL SOLUTNS JUN 1.7 1.9 1.0 2.0 1.4 37.2 36.5 12.5 27.3 25.6 155.4 142.8 NM 64.1 55.6CATM § CARDTRONICS INC DEC 1.0 0.9 0.7 0.6 0.5 65.8 70.5 76.8 82.7 96.5 NM NM NM NM NMCSC [] COMPUTER SCIENCES CORP # MAR NA 1.7 1.1 1.8 2.0 NA 42.6 34.1 23.8 36.0 NA 107.5 428.2 71.3 85.3

CVG † CONVERGYS CORP DEC 3.6 3.8 2.5 1.5 1.1 4.0 3.8 7.4 8.6 4.8 7.8 7.4 21.3 50.9 89.4CLGX † CORELOGIC INC DEC 1.2 1.1 1.2 1.2 NA 41.8 39.0 40.2 24.0 18.5 783.7 NM 657.2 386.4 NACSGS § CSG SYSTEMS INTL INC DEC 2.3 2.1 2.1 1.6 2.9 39.3 42.7 48.3 53.0 38.2 93.1 113.3 133.0 178.4 71.4DST † DST SYSTEMS INC DEC 0.8 0.7 0.7 0.9 0.5 21.7 26.3 48.0 44.3 37.3 NM NM NM NM NMEXLS § EXLSERVICE HOLDINGS INC DEC 3.3 2.8 2.3 3.4 4.7 0.4 0.8 1.5 0.2 0.1 0.8 2.0 4.5 0.3 0.1

FIS [] FIDELITY NATIONAL INFO SVCS DEC 1.4 1.5 1.2 1.3 1.3 37.0 36.2 38.2 40.5 24.6 639.0 720.4 NM NM 699.3FISV [] FISERV INC DEC 1.2 1.3 1.0 1.6 1.1 46.6 44.3 45.4 46.5 48.4 NM NM NM 637.5 NMGPN † GLOBAL PAYMENTS INC # MAY NA 1.7 1.5 1.3 1.4 NA 40.4 14.3 15.7 20.6 NA 174.6 57.5 66.5 92.3HPY § HEARTLAND PAYMENT SYSTEMS DEC 1.1 0.8 1.1 1.2 0.8 33.3 17.3 22.5 29.9 5.3 396.6 NM 234.1 179.4 NMJKHY † HENRY (JACK) & ASSOCIATES JUN 1.1 1.2 0.9 0.9 1.0 0.6 8.9 11.7 24.8 0.0 20.7 159.9 NM NM 0.0

ONE § HIGHER ONE HOLDINGS INC DEC 0.7 1.1 2.1 2.3 0.3 56.6 59.2 5.8 0.0 0.0 NM NM 17.1 0.0 NMMA [] MASTERCARD INC DEC 1.8 1.9 1.8 2.1 1.6 0.0 0.0 0.0 0.0 0.6 NM NM NM NM 1.2MMS § MAXIMUS INC SEP 1.9 2.3 2.4 2.2 2.3 0.2 0.3 0.4 0.4 0.0 0.6 0.6 0.7 0.7 0.0NSR † NEUSTAR INC DEC 2.5 3.3 2.3 4.0 3.7 47.6 43.2 48.5 0.7 2.1 230.6 156.8 302.4 1.2 3.4PAYX [] PAYCHEX INC # MAY NA 1.1 1.1 1.1 1.1 NA 0.0 0.0 0.0 0.0 NA 0.0 0.0 0.0 0.0

SYKE § SYKES ENTERPRISES INC DEC 3.0 2.8 3.2 3.0 2.7 13.3 13.0 0.0 0.0 0.0 28.8 30.1 0.0 0.0 0.0TTEC § TELETECH HOLDINGS INC DEC 2.5 2.9 2.8 2.5 2.8 17.5 18.1 12.2 0.1 0.4 35.9 32.5 20.8 0.2 0.7TSS [] TOTAL SYSTEM SERVICES INC DEC 2.2 2.5 1.7 3.2 3.7 43.7 11.3 4.5 13.6 14.4 402.5 55.8 23.6 45.6 34.8PAY † VERIFONE SYSTEMS INC OCT 1.4 2.0 1.7 2.9 2.5 42.2 45.1 14.1 63.5 83.1 397.5 221.7 46.3 93.4 133.7V [] VISA INC SEP 1.8 1.5 2.7 2.5 2.1 0.0 0.0 0.0 0.1 0.2 0.0 0.0 0.0 0.6 0.9

WU [] WESTERN UNION CO DEC NA NA NA NA NA 72.3 74.3 71.9 74.8 83.0 NA NA NA NA NAWEX † WEX INC DEC NA NA NA NA NA 42.0 17.9 20.5 37.3 22.1 NA NA NA NA NAXRX [] XEROX CORP DEC 1.5 1.4 1.2 1.3 2.2 35.3 38.6 36.7 39.0 55.9 244.4 315.2 463.0 355.0 169.4

IT CONSULTING & OTHER SERVICES‡ACN [] ACCENTURE PLC AUG 1.5 1.6 1.5 1.5 1.5 0.5 0.0 0.0 0.0 0.0 0.7 0.0 0.0 0.0 0.0ACXM † ACXIOM CORP # MAR NA 2.1 1.8 2.0 1.8 NA 24.9 26.3 37.1 41.9 NA 100.4 122.0 171.6 225.2CACI § CACI INTL INC -CL A JUN 1.0 1.4 1.8 1.3 2.3 18.5 29.9 22.6 17.2 38.5 NM 264.8 116.7 138.5 154.4CBR § CIBER INC DEC 1.5 1.6 1.5 1.6 1.8 0.0 4.9 10.0 15.5 13.9 0.0 18.8 44.6 58.8 63.9CTSH [] COGNIZANT TECH SOLUTIONS DEC 3.5 3.5 3.4 3.8 3.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

FORR § FORRESTER RESEARCH INC DEC 1.4 1.9 1.9 1.9 2.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0IT † GARTNER INC DEC 0.9 0.9 0.8 0.8 0.6 27.4 27.3 45.2 49.0 52.4 NM NM NM NM NMIGTE § IGATE CORP DEC 1.5 3.1 2.7 3.6 3.9 56.5 66.0 61.4 0.2 0.2 192.6 169.0 174.2 0.4 0.3

IBM [] INTL BUSINESS MACHINES CORP DEC 1.3 1.1 1.2 1.2 1.4 57.3 55.5 52.5 48.3 48.7 293.5 414.7 259.6 289.2 169.6

LDOS † LEIDOS HOLDINGS INC # JAN 1.8 1.7 1.4 2.2 1.9 44.5 32.9 37.3 42.6 32.5 169.6 100.8 110.1 88.0 74.2

MANT § MANTECH INTL CORP DEC 2.5 1.9 1.8 1.8 2.3 14.5 14.1 14.9 16.5 0.0 44.1 55.9 66.6 70.8 0.0SAIC † SCIENCE APPLICATIONS INTL CP # JAN 1.8 1.3 1.3 NA NA 56.5 0.2 0.6 NA NA 113.7 0.6 1.8 NA NATDC [] TERADATA CORP DEC 2.0 1.9 2.0 2.5 2.1 11.3 12.8 16.1 0.0 0.0 31.5 37.6 40.4 0.0 0.0VRTU § VIRTUSA CORP # MAR NA 4.0 3.2 4.4 4.0 NA 0.0 0.0 0.0 0.5 NA 0.0 0.0 0.0 1.0


Debt as a % ofCurrent Ratio Debt / Capital Ratio (%) Net Working Capital

Ticker Company Yr. End 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 OTHER COS WITH SIGNIFICANT COMPUTER SERVICES OPERATIONS

CPWR † COMPUWARE CORP # MAR NA 1.1 1.1 1.2 1.2 NA 1.7 3.8 0.0 0.0 NA 47.2 82.7 0.0 0.0EEFT EURONET WORLDWIDE INC DEC 1.1 1.2 1.0 1.3 1.3 22.6 34.9 23.3 35.0 35.6 176.6 250.1 NM 184.1 193.0

EFX [] EQUIFAX INC DEC 1.0 0.8 1.2 1.3 0.8 30.9 40.1 33.4 33.6 34.9 NM NM NM 892.3 NM

G GENPACT LTD DEC 2.8 2.2 1.5 2.9 2.1 33.1 36.0 5.0 0.2 2.3 80.6 107.9 23.4 0.4 6.3

HPQ [] HEWLETT-PACKARD CO OCT 1.1 1.1 1.0 1.1 1.2 35.7 46.2 34.0 25.0 23.8 342.9 548.7 NM 319.1 146.6

INFY INFOSYS LTD -ADR # MAR 4.7 5.6 6.3 6.5 6.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0ITG § INVESTMENT TECHNOLOGY GP INC DEC NA NA NA NA NA 5.2 2.8 2.5 0.0 0.0 NA NA NA NA NA

LMT [] LOCKHEED MARTIN CORP DEC 1.2 1.1 1.2 1.2 1.2 55.6 99.4 86.6 57.5 55.0 278.5 362.2 328.9 296.3 284.8

NOC [] NORTHROP GRUMMAN CORP DEC 1.6 1.4 1.3 1.2 1.2 35.8 29.2 27.6 23.0 24.8 161.4 168.2 244.3 266.5 254.0

ORCL [] ORACLE CORP # MAY NA 3.2 2.6 2.8 1.8 NA 29.2 23.6 27.1 26.9 NA 64.2 54.9 59.1 93.5

IGATY IGATE COMPUTER SYSTEMS -ADR DEC NA NA 4.8 4.7 5.5 NA NA 0.0 0.0 0.0 NA NA 0.0 0.0 0.0PRGS § PROGRESS SOFTWARE CORP NOV 2.1 2.2 1.8 2.0 1.6 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.1 0.5SAPE SAPIENT CORP DEC 2.7 2.9 2.5 2.9 2.9 2.5 2.5 0.0 0.0 0.0 3.5 3.9 0.0 0.0 NMULTI ULTIMATE SOFTWARE GROUP INC DEC 1.2 1.1 1.1 1.2 1.1 1.5 4.2 2.5 3.2 2.9 4.4 10.7 7.2 8.8 17.8WIT WIPRO LTD -ADR # MAR 2.6 2.1 2.3 2.3 1.9 3.1 0.3 7.3 7.6 8.4 5.0 0.5 14.4 15.0 18.9

WNS WNS (HOLDINGS) LTD -ADR # MAR NA 1.1 1.2 0.9 1.0 NA 10.0 11.3 13.5 26.6 NA 157.5 96.5 NM NM



Price / Earnings Ratio (High-Low) Dividend Payout Ratio (%) Dividend Yield (High-Low, %)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009

DATA PROCESSING & OUTSOURCED SERVICES‡ADS [] ALLIANCE DATA SYSTEMS CORP DEC 26 - 15 18 - 12 17 - 11 21 - 14 22 - 7 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0ADP [] AUTOMATIC DATA PROCESSING JUN 30 - 20 21 - 18 22 - 18 20 - 11 17 - 12 60 54 56 56 48 2.9 - 2.0 3.0 - 2.6 3.2 - 2.6 5.1 - 2.9 4.0 - 2.9BR † BROADRIDGE FINANCIAL SOLUTNS JUN 23 - 13 25 - 20 18 - 14 14 - 11 15 - 8 41 63 43 34 17 3.3 - 1.8 3.2 - 2.6 3.2 - 2.4 3.0 - 2.3 2.2 - 1.2CATM § CARDTRONICS INC DEC 86 - 44 32 - 23 18 - 10 19 - 10 96 - 6 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0CSC [] COMPUTER SCIENCES CORP # MAR NA - NA 13 - 7 NM- NM 13 - 9 11 - 6 NA 25 NM 15 0 2.0 - 1.4 3.6 - 2.0 3.5 - 1.4 1.8 - 1.2 0.0 - 0.0

CVG † CONVERGYS CORP DEC 38 - 26 70 - 49 5 - 3 NM- NM NM- NM 42 60 0 NM NM 1.6 - 1.1 1.2 - 0.9 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0CLGX † CORELOGIC INC DEC 26 - 16 25 - 10 44 - 16 76 - 35 16 - 9 0 0 0 45 42 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 1.3 - 0.6 4.6 - 2.6CSGS § CSG SYSTEMS INTL INC DEC 19 - 11 15 - 9 17 - 9 35 - 25 16 - 10 28 0 0 0 0 2.5 - 1.5 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0DST † DST SYSTEMS INC DEC 11 - 8 9 - 6 15 - 10 7 - 5 10 - 5 15 11 17 9 0 2.0 - 1.3 1.7 - 1.3 1.7 - 1.2 1.7 - 1.3 0.0 - 0.0EXLS § EXLSERVICE HOLDINGS INC DEC 22 - 16 23 - 15 23 - 16 24 - 8 33 - 11 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

FIS [] FIDELITY NATIONAL INFO SVCS DEC 32 - 21 20 - 14 21 - 14 24 - 17 60 - 35 52 43 12 15 47 2.5 - 1.6 3.0 - 2.2 0.9 - 0.6 0.9 - 0.6 1.3 - 0.8FISV [] FISERV INC DEC 24 - 16 18 - 13 19 - 14 18 - 13 17 - 10 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0GPN † GLOBAL PAYMENTS INC # MAY NA - NA 19 - 14 22 - 16 21 - 13 21 - 11 NA 3 3 3 3 NA - NA 0.2 - 0.1 0.2 - 0.1 0.2 - 0.1 0.3 - 0.1HPY § HEARTLAND PAYMENT SYSTEMS DEC 25 - 14 20 - 14 22 - 14 21 - 14 NM- NM 14 14 14 4 NM 1.0 - 0.6 1.0 - 0.7 1.0 - 0.6 0.3 - 0.2 1.5 - 0.3JKHY † HENRY (JACK) & ASSOCIATES JUN 29 - 18 23 - 18 22 - 15 22 - 15 20 - 12 27 25 25 26 26 1.5 - 0.9 1.4 - 1.1 1.6 - 1.2 1.7 - 1.2 2.2 - 1.3

ONE § HIGHER ONE HOLDINGS INC DEC 41 - 23 28 - 13 37 - 23 48 - 23 NA - NA 0 0 0 0 NA 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 NA - NAMA [] MASTERCARD INC DEC 33 - 19 23 - 15 26 - 15 19 - 14 23 - 10 8 5 4 4 5 0.4 - 0.3 0.3 - 0.2 0.3 - 0.2 0.3 - 0.2 0.5 - 0.2MMS § MAXIMUS INC SEP 29 - 18 29 - 18 18 - 13 17 - 12 16 - 11 10 16 13 12 15 0.6 - 0.4 0.9 - 0.6 1.0 - 0.7 1.0 - 0.7 1.4 - 0.9NSR † NEUSTAR INC DEC 23 - 17 19 - 13 21 - 13 19 - 14 18 - 9 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0PAYX [] PAYCHEX INC # MAY NA - NA 22 - 19 22 - 17 23 - 17 25 - 15 NA 84 84 87 94 NA - NA 4.5 - 3.8 5.1 - 3.7 5.0 - 3.8 6.1 - 3.8

SYKE § SYKES ENTERPRISES INC DEC 27 - 16 20 - 14 20 - 9 61 - 25 25 - 12 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0TTEC § TELETECH HOLDINGS INC DEC 21 - 13 14 - 11 18 - 11 27 - 15 18 - 6 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0TSS [] TOTAL SYSTEM SERVICES INC DEC 26 - 17 19 - 15 18 - 13 18 - 13 16 - 10 31 31 27 28 25 1.9 - 1.2 2.1 - 1.6 2.0 - 1.5 2.1 - 1.6 2.5 - 1.6PAY † VERIFONE SYSTEMS INC OCT NM- NM 92 - 45 19 - 10 36 - 13 NM- NM NM 0 0 0 NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0V [] VISA INC SEP 29 - 20 48 - 31 20 - 13 24 - 16 29 - 13 17 28 12 12 14 0.9 - 0.6 0.9 - 0.6 0.9 - 0.6 0.8 - 0.5 1.0 - 0.5

WU [] WESTERN UNION CO DEC 14 - 9 12 - 7 12 - 8 15 - 11 17 - 8 35 25 17 18 5 3.8 - 2.6 3.6 - 2.1 2.1 - 1.4 1.7 - 1.2 0.6 - 0.3WEX † WEX INC DEC 27 - 17 30 - 21 17 - 10 21 - 12 9 - 3 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0XRX [] XEROX CORP DEC 13 - 7 10 - 7 13 - 7 27 - 17 17 - 7 24 19 18 39 30 3.3 - 1.9 2.8 - 1.9 2.6 - 1.4 2.2 - 1.4 4.1 - 1.7

IT CONSULTING & OTHER SERVICES‡ACN [] ACCENTURE PLC AUG 17 - 13 18 - 13 18 - 13 18 - 13 17 - 10 32 34 25 40 20 2.4 - 1.9 2.6 - 1.9 1.9 - 1.4 3.1 - 2.2 1.9 - 1.2ACXM † ACXIOM CORP # MAR NA - NA 25 - 16 35 - 17 NM- NM 26 - 13 NA 0 0 NM 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0CACI § CACI INTL INC -CL A JUN 11 - 8 10 - 7 14 - 10 15 - 11 16 - 11 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0CBR § CIBER INC DEC NM- NM NM- NM NM- NM NM- NM 26 - 9 NM NM NM NM 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0CTSH [] COGNIZANT TECH SOLUTIONS DEC 25 - 15 22 - 15 29 - 18 31 - 17 26 - 9 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

FORR § FORRESTER RESEARCH INC DEC 67 - 40 32 - 18 39 - 28 40 - 26 34 - 20 97 49 0 330 0 2.4 - 1.5 2.7 - 1.5 0.0 - 0.0 12.7 - 8.3 0.0 - 0.0IT † GARTNER INC DEC 36 - 24 29 - 19 30 - 22 34 - 18 23 - 9 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0IGTE § IGATE CORP DEC 24 - 8 17 - 13 40 - 18 27 - 10 20 - 4 0 0 0 28 21 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 2.9 - 1.0 5.2 - 1.1IBM [] INTL BUSINESS MACHINES CORP DEC 14 - 11 15 - 12 15 - 11 13 - 10 13 - 8 25 23 22 21 21 2.1 - 1.7 1.9 - 1.6 2.0 - 1.5 2.2 - 1.7 2.6 - 1.6LDOS † LEIDOS HOLDINGS INC # JAN 66 - 41 9 - 7 NM- NM 13 - 10 16 - 13 571 31 NM 0 0 13.9 - 8.7 4.7 - 3.4 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

MANT § MANTECH INTL CORP DEC NM- NM 14 - 8 13 - 8 15 - 10 19 - 10 NM 33 23 0 0 3.6 - 2.8 4.3 - 2.3 2.9 - 1.8 0.0 - 0.0 0.0 - 0.0SAIC † SCIENCE APPLICATIONS INTL CP # JAN 17 - 13 NA - NA NA - NA NA - NA NA - NA 24 NA NA NA NA 1.9 - 1.4 NA - NA NA - NA NA - NA NA - NATDC [] TERADATA CORP DEC 30 - 17 33 - 19 30 - 20 24 - 15 22 - 9 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0VRTU § VIRTUSA CORP # MAR NA - NA 16 - 10 27 - 15 25 - 12 21 - 10 NA 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

20092013 2012 2011 2010


Price / Earnings Ratio (High-Low) Dividend Payout Ratio (%) Dividend Yield (High-Low, %)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2013 2012 2011 2010 200920092013 2012 2011 2010 OTHER COS WITH SIGNIFICANT COMPUTER SERVICES OPERATIONSCPWR † COMPUWARE CORP # MAR NA - NA NM- NM 31 - 17 24 - 14 15 - 8 NA NM 0 0 0 4.9 - 3.9 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0EEFT EURONET WORLDWIDE INC DEC 28 - 13 59 - 39 28 - 19 NM- NM 43 - 13 0 0 0 NM 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0EFX [] EQUIFAX INC DEC 25 - 19 24 - 17 21 - 15 19 - 15 17 - 11 32 32 34 15 9 1.7 - 1.3 1.9 - 1.3 2.2 - 1.6 1.0 - 0.8 0.8 - 0.5G GENPACT LTD DEC 21 - 15 24 - 18 22 - 16 29 - 20 26 - 12 0 280 0 0 0 0.0 - 0.0 15.7 - 11.5 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0HPQ [] HEWLETT-PACKARD CO OCT 11 - 6 NM- NM 15 - 6 14 - 10 16 - 8 21 NM 12 8 10 3.8 - 1.9 4.4 - 1.7 1.9 - 0.8 0.9 - 0.6 1.3 - 0.6

INFY INFOSYS LTD -ADR # MAR 19 - 13 20 - 13 26 - 15 29 - 19 24 - 10 26 28 25 47 21 2.0 - 1.3 2.2 - 1.4 1.6 - 1.0 2.5 - 1.6 2.2 - 0.9ITG § INVESTMENT TECHNOLOGY GP INC DEC 25 - 11 NM- NM NM- NM 38 - 23 29 - 17 0 NM NM 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0LMT [] LOCKHEED MARTIN CORP DEC 16 - 9 11 - 9 10 - 8 12 - 9 11 - 7 52 49 41 36 30 5.6 - 3.2 5.2 - 4.3 4.9 - 3.9 3.9 - 3.0 4.1 - 2.7NOC [] NORTHROP GRUMMAN CORP DEC 14 - 8 9 - 7 10 - 7 10 - 8 12 - 7 28 27 26 27 34 3.7 - 2.0 3.8 - 3.0 4.0 - 2.7 3.4 - 2.6 5.0 - 2.9ORCL [] ORACLE CORP # MAY NA - NA 15 - 11 18 - 12 19 - 13 21 - 11 NA 13 12 12 16 NA - NA 1.2 - 0.9 1.0 - 0.7 1.0 - 0.7 1.4 - 0.8

IGATY IGATE COMPUTER SYSTEMS -ADR DEC NA - NA NA - NA 20 - 10 14 - 9 12 - 2 NA NA 0 139 7 NA - NA 0.0 - 0.0 0.0 - 0.0 15.6 - 10.0 2.9 - 0.6PRGS § PROGRESS SOFTWARE CORP NOV 37 - 28 48 - 33 35 - 19 40 - 23 36 - 18 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0SAPE SAPIENT CORP DEC 32 - 19 30 - 19 31 - 17 41 - 23 13 - 5 0 0 66 106 0 0.0 - 0.0 0.0 - 0.0 3.9 - 2.2 4.6 - 2.6 0.0 - 0.0ULTI ULTIMATE SOFTWARE GROUP INC DEC NM- NM NM- NM NM- NM NM- NM NM- NM 0 0 0 0 NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0WIT WIPRO LTD -ADR # MAR 24 - 13 25 - 16 35 - 19 34 - 23 33 - 7 25 24 29 25 12 1.9 - 1.0 1.4 - 0.9 1.5 - 0.8 1.1 - 0.7 1.7 - 0.4

WNS WNS (HOLDINGS) LTD -ADR # MAR NA - NA 28 - 20 47 - 28 76 - 40 NM- 34 NA 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0



Earnings per Share ($) Tangible Book Value per Share ($) Share Price (High-Low, $)


DATA PROCESSING & OUTSOURCED SERVICES‡ADS [] ALLIANCE DATA SYSTEMS CORP DEC 10.09 8.44 6.22 3.72 3.17 (26.00) (36.40) (33.25) (29.45) (23.18) 264.31 - 146.39 148.41 - 100.42 107.33 - 69.67 78.18 - 52.70 69.09 - 22.76ADP [] AUTOMATIC DATA PROCESSING JUN 2.83 2.85 2.54 2.41 2.64 5.17 4.64 4.53 5.19 4.72 83.82 - 57.75 59.96 - 50.89 55.12 - 44.72 47.17 - 26.46 44.50 - 32.03BR † BROADRIDGE FINANCIAL SOLUTNS JUN 1.74 1.01 1.38 1.66 1.60 (0.70) (0.58) (0.69) 1.95 2.56 40.36 - 21.84 24.94 - 19.75 24.84 - 19.01 24.02 - 18.51 23.22 - 12.55CATM § CARDTRONICS INC DEC 0.52 0.97 1.60 0.98 0.13 (6.93) (5.29) (6.04) (4.46) (6.12) 44.46 - 23.13 31.46 - 22.20 28.74 - 16.40 18.79 - 9.51 12.42 - 0.79CSC [] COMPUTER SCIENCES CORP # MAR NA 3.22 (27.38) 4.57 5.36 NA 1.81 (3.07) 13.50 8.21 56.20 - 40.33 40.63 - 22.18 56.61 - 22.80 58.00 - 39.61 58.36 - 31.11

CVG † CONVERGYS CORP DEC 0.57 0.25 2.73 (0.61) (0.63) 6.74 7.32 4.88 2.65 0.87 21.40 - 15.05 17.42 - 12.13 15.00 - 8.49 13.78 - 9.50 11.97 - 5.49CLGX † CORELOGIC INC DEC 1.37 1.20 0.48 0.49 2.11 (5.72) (5.18) (3.70) (0.29) (4.00) 36.19 - 21.40 29.50 - 12.44 20.97 - 7.64 37.42 - 17.10 34.19 - 19.33CSGS § CSG SYSTEMS INTL INC DEC 1.60 1.52 1.29 0.68 1.22 1.00 (0.59) (2.18) (3.50) 1.47 29.81 - 18.04 23.33 - 13.85 21.59 - 12.13 23.84 - 17.22 19.66 - 12.27DST † DST SYSTEMS INC DEC 8.15 7.22 4.01 6.78 4.87 14.90 11.40 3.72 11.76 8.29 91.69 - 61.30 63.06 - 46.22 59.41 - 40.48 46.77 - 35.45 47.49 - 25.70EXLS § EXLSERVICE HOLDINGS INC DEC 1.47 1.31 1.15 0.91 0.55 6.98 6.03 4.81 6.34 6.39 32.97 - 22.98 30.10 - 20.28 26.99 - 17.94 22.05 - 7.39 18.39 - 5.86

FIS [] FIDELITY NATIONAL INFO SVCS DEC 1.70 1.85 1.64 1.30 0.43 (14.16) (14.16) (16.47) (17.42) (8.69) 53.73 - 35.13 37.14 - 26.31 33.76 - 22.53 30.78 - 22.13 26.00 - 15.20FISV [] FISERV INC DEC 2.48 2.20 1.72 1.68 1.53 (14.70) (11.48) (11.93) (10.30) (10.94) 59.28 - 39.51 40.63 - 28.76 32.71 - 24.38 30.32 - 22.40 25.45 - 14.73GPN † GLOBAL PAYMENTS INC # MAY NA 2.78 2.39 2.63 2.56 NA (3.96) 2.00 0.79 1.09 65.13 - 43.73 53.93 - 39.37 53.67 - 38.26 54.50 - 34.61 54.52 - 27.48HPY § HEARTLAND PAYMENT SYSTEMS DEC 2.03 1.67 1.13 0.91 (1.38) 0.53 (0.32) 2.15 2.03 0.91 50.36 - 29.30 34.00 - 23.35 24.73 - 15.39 19.51 - 12.95 18.93 - 3.57JKHY † HENRY (JACK) & ASSOCIATES JUN 2.05 1.79 1.60 1.39 1.23 2.93 1.87 0.53 (1.28) 2.30 59.37 - 37.90 40.71 - 32.11 34.50 - 24.41 29.97 - 21.01 24.75 - 14.29

ONE § HIGHER ONE HOLDINGS INC DEC 0.30 0.68 0.58 0.46 0.26 (1.08) (0.59) 1.61 0.88 (9.00) 12.29 - 6.97 18.72 - 8.77 21.50 - 13.49 21.97 - 10.79 NA - NAMA [] MASTERCARD INC DEC 2.57 2.20 1.49 1.41 1.12 4.76 4.18 3.30 3.05 2.14 83.94 - 50.10 49.86 - 33.63 38.50 - 21.93 26.99 - 19.10 25.90 - 11.71MMS § MAXIMUS INC SEP 1.72 1.13 1.20 1.00 0.78 4.02 4.21 4.01 3.42 3.05 50.55 - 31.75 32.58 - 19.97 21.39 - 15.61 17.00 - 11.89 12.82 - 8.19NSR † NEUSTAR INC DEC 2.52 2.34 1.69 1.42 1.36 (5.35) (3.23) (6.21) 6.15 5.07 57.29 - 41.82 43.85 - 30.08 34.73 - 22.24 27.07 - 20.20 24.32 - 12.77PAYX [] PAYCHEX INC # MAY NA 1.56 1.51 1.42 1.32 NA 3.27 2.84 2.50 2.54 45.94 - 31.47 34.70 - 29.12 33.91 - 25.12 32.82 - 24.65 32.88 - 20.31

SYKE § SYKES ENTERPRISES INC DEC 0.87 0.93 1.15 0.43 1.06 8.20 7.10 9.27 8.69 10.30 23.29 - 13.95 18.61 - 12.81 22.88 - 10.56 26.26 - 10.85 26.91 - 13.16TTEC § TELETECH HOLDINGS INC DEC 1.31 1.28 1.31 0.83 1.14 6.11 6.45 6.26 6.39 6.41 27.07 - 17.53 18.23 - 14.04 23.46 - 14.10 22.00 - 12.17 20.89 - 7.05TSS [] TOTAL SYSTEM SERVICES INC DEC 1.30 1.30 1.15 1.00 1.12 (4.33) 2.94 3.43 3.04 4.04 33.44 - 21.53 25.06 - 19.35 20.50 - 15.44 17.75 - 13.41 17.71 - 11.33PAY † VERIFONE SYSTEMS INC OCT (2.73) 0.61 3.06 1.16 (1.63) (7.26) (5.73) 3.49 (0.15) (2.03) 36.13 - 15.34 55.89 - 27.33 58.88 - 30.25 41.47 - 15.62 17.09 - 3.65V [] VISA INC SEP 7.62 3.18 5.18 4.02 3.11 6.02 6.77 4.85 2.87 2.82 222.72 - 153.93 152.51 - 98.33 103.45 - 67.51 97.19 - 64.90 89.69 - 41.78

WU [] WESTERN UNION CO DEC 1.43 1.70 1.85 1.37 1.21 (5.29) (5.45) (5.09) (3.07) (3.32) 19.50 - 13.23 19.82 - 11.93 22.03 - 14.55 20.26 - 14.65 20.64 - 10.05WEX † WEX INC DEC 3.83 2.50 3.45 2.28 3.65 (3.20) (6.89) 1.29 (2.67) 2.39 101.58 - 66.43 75.76 - 51.59 57.13 - 35.74 46.97 - 27.63 32.72 - 10.72XRX [] XEROX CORP DEC 0.95 0.90 0.92 0.44 0.56 (0.22) (1.02) (0.58) (0.45) 3.08 12.28 - 6.97 8.84 - 6.10 11.79 - 6.55 12.08 - 7.67 9.75 - 4.12

IT CONSULTING & OTHER SERVICES‡ACN [] ACCENTURE PLC AUG 5.08 3.97 3.53 2.79 2.55 4.94 4.63 4.28 3.19 3.31 84.22 - 67.55 71.79 - 51.47 63.66 - 47.40 51.43 - 36.05 43.33 - 26.33ACXM † ACXIOM CORP # MAR NA 0.76 0.54 (0.29) 0.56 NA 2.58 2.47 1.19 0.05 38.71 - 16.43 18.99 - 12.04 18.83 - 8.94 19.99 - 12.19 14.41 - 7.06CACI § CACI INTL INC -CL A JUN 6.59 6.18 4.76 3.53 3.19 (11.72) (14.60) (2.23) (3.29) (6.28) 74.26 - 49.98 63.11 - 41.29 66.49 - 46.36 54.11 - 40.00 49.92 - 33.90CBR § CIBER INC DEC (0.10) (0.04) (0.73) (1.11) 0.22 0.93 1.11 1.12 1.12 0.71 4.99 - 3.00 4.76 - 2.70 6.98 - 2.71 4.84 - 2.51 5.66 - 2.03CTSH [] COGNIZANT TECH SOLUTIONS DEC 2.04 1.75 1.46 1.22 0.91 9.15 7.39 5.88 5.39 4.01 50.56 - 30.46 39.00 - 26.96 41.74 - 26.77 37.40 - 21.04 23.31 - 8.63

FORR § FORRESTER RESEARCH INC DEC 0.62 1.14 1.02 0.91 0.83 6.02 9.43 9.18 8.57 10.37 41.36 - 24.88 36.15 - 20.60 40.00 - 28.72 36.31 - 23.65 28.58 - 16.21IT † GARTNER INC DEC 1.97 1.78 1.43 1.01 0.88 (1.78) (2.41) (3.58) (3.51) (4.43) 71.49 - 46.52 51.45 - 34.39 43.39 - 31.98 34.00 - 18.07 20.27 - 8.33IGTE § IGATE CORP DEC 1.69 1.16 0.51 0.92 0.52 (8.32) (9.91) (10.49) 3.82 2.88 41.04 - 13.98 19.97 - 14.67 20.38 - 9.32 24.99 - 8.94 10.20 - 2.11IBM [] INTL BUSINESS MACHINES CORP DEC 15.06 14.53 13.25 11.69 10.12 (11.63) (12.68) (8.14) (4.54) (0.05) 215.90 - 172.57 211.79 - 177.35 194.90 - 146.64 147.53 - 116.00 132.85 - 81.76LDOS † LEIDOS HOLDINGS INC # JAN 0.98 6.16 (0.08) 6.04 5.04 (2.54) 2.73 2.10 6.65 7.74 64.36 - 40.18 56.80 - 41.22 70.60 - 44.24 79.04 - 59.48 81.68 - 63.76

MANT § MANTECH INTL CORP DEC (0.17) 2.57 3.64 3.45 3.13 6.14 3.66 2.80 1.87 7.11 30.45 - 23.20 37.16 - 19.74 46.26 - 29.33 51.83 - 34.69 60.62 - 32.86SAIC † SCIENCE APPLICATIONS INTL CP # JAN 2.35 3.79 3.79 NA NA (0.12) NA NA NA NA 39.88 - 29.40 NA - NA NA - NA NA - NA NA - NATDC [] TERADATA CORP DEC 2.31 2.49 2.10 1.80 1.48 3.56 2.95 2.68 5.50 4.13 69.65 - 39.16 80.97 - 47.33 62.71 - 41.59 43.83 - 26.80 32.24 - 12.75VRTU § VIRTUSA CORP # MAR NA 1.14 0.81 0.68 0.52 NA 7.99 6.63 7.34 6.40 38.49 - 15.93 18.63 - 11.23 21.79 - 11.87 16.82 - 8.08 10.69 - 5.00


Earnings per Share ($) Tangible Book Value per Share ($) Share Price (High-Low, $)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 OTHER COS WITH SIGNIFICANT COMPUTER SERVICES OPERATIONSCPWR † COMPUWARE CORP # MAR NA (0.08) 0.40 0.49 0.61 NA 0.75 0.59 1.20 1.05 12.74 - 10.19 11.16 - 7.35 12.25 - 6.97 11.99 - 6.99 8.95 - 5.18EEFT EURONET WORLDWIDE INC DEC 1.76 0.41 0.73 (0.75) 0.59 0.74 (0.97) (1.43) (0.57) (1.15) 50.00 - 22.94 24.00 - 15.91 20.56 - 13.55 22.71 - 12.36 25.30 - 7.57EFX [] EQUIFAX INC DEC 2.75 2.27 1.90 1.89 1.85 (9.54) (13.28) (7.56) (7.45) (8.91) 69.64 - 52.79 55.52 - 37.89 39.90 - 28.59 36.63 - 27.64 31.64 - 19.63G GENPACT LTD DEC 1.00 0.80 0.83 0.65 0.59 1.17 0.44 1.77 3.96 2.82 21.30 - 15.35 19.52 - 14.23 18.16 - 13.09 18.71 - 13.22 15.23 - 7.08HPQ [] HEWLETT-PACKARD CO OCT 2.64 (6.41) 3.38 3.78 3.21 (3.68) (6.70) (8.45) (2.67) 0.34 28.70 - 14.74 30.00 - 11.35 49.39 - 21.50 54.75 - 37.32 52.95 - 25.39

INFY INFOSYS LTD -ADR # MAR 3.06 3.02 3.00 2.62 2.30 13.15 12.07 11.11 10.37 9.05 58.33 - 38.91 60.86 - 37.93 77.92 - 46.12 76.88 - 49.55 56.19 - 22.61ITG § INVESTMENT TECHNOLOGY GP INC DEC 0.84 (6.45) (4.42) 0.56 0.98 9.64 8.85 7.58 7.12 7.91 20.87 - 9.12 12.36 - 7.43 19.87 - 8.94 21.55 - 13.15 28.90 - 16.80

LMT [] LOCKHEED MARTIN CORP DEC 9.19 8.48 7.94 7.26 7.86 (17.02) (32.18) (28.50) (20.01) (18.81) 149.99 - 85.88 95.92 - 79.05 82.43 - 66.36 87.18 - 67.68 87.06 - 57.41NOC [] NORTHROP GRUMMAN CORP DEC 8.50 7.96 7.54 6.86 4.93 (8.83) (12.77) (8.64) (2.54) (5.55) 116.19 - 64.20 71.25 - 56.59 72.50 - 49.20 69.80 - 53.50 57.31 - 33.81

ORCL [] ORACLE CORP # MAY NA 2.29 1.99 1.69 1.22 NA 2.30 2.18 2.04 0.21 38.34 - 29.86 34.35 - 25.33 36.50 - 24.72 32.27 - 21.24 25.11 - 13.80

IGATY IGATE COMPUTER SYSTEMS -ADR DEC NA NA 1.10 2.04 1.86 NA NA 9.21 9.10 10.20 NA - NA 21.00 - 16.68 21.62 - 10.91 28.33 - 18.11 21.93 - 4.25PRGS § PROGRESS SOFTWARE CORP NOV 0.73 0.52 0.89 0.76 0.55 5.42 6.83 4.77 5.51 4.11 26.95 - 20.41 24.76 - 17.01 31.47 - 16.71 30.15 - 17.64 19.84 - 9.79SAPE SAPIENT CORP DEC 0.56 0.47 0.53 0.33 0.69 2.94 2.59 2.39 2.53 2.46 17.95 - 10.58 13.88 - 9.01 16.25 - 9.00 13.44 - 7.60 9.02 - 3.25ULTI ULTIMATE SOFTWARE GROUP INC DEC 0.92 0.55 0.17 0.12 (0.05) 5.45 4.06 3.08 2.63 2.02 162.88 - 91.59 106.40 - 63.62 71.97 - 43.28 50.28 - 26.81 31.66 - 12.40WIT WIPRO LTD -ADR # MAR 0.53 0.41 0.40 0.44 0.37 1.89 1.52 1.53 1.49 1.13 12.66 - 6.91 10.25 - 6.74 14.07 - 7.70 14.99 - 10.08 12.31 - 2.70

WNS WNS (HOLDINGS) LTD -ADR # MAR NA 0.43 0.28 0.21 0.09 NA 2.40 1.64 0.46 (0.57) 22.61 - 10.33 12.19 - 8.49 13.05 - 7.82 15.95 - 8.46 17.25 - 3.10

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. J-This amount includes intangibles that cannot be identif ied.

The analysis and opinion set forth in this publication are provided by S&P Capital IQ Equity Research and are prepared separately from any other analytic activity of Standard & Poor’s.

In this regard, S&P Capital IQ Equity Research has no access to nonpublic information received by other units of Standard & Poor’s.

The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.

50 COMPUTERS: COMMERCIAL SERVICES / JUNE 2014

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