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Wizards of IT

Wizards of IT

A close analysis of top five listed information technology companies unearths a constituency of seasoned business people.

A close analysis of five successful IT brands unearths a constituent of hard-nosed and seasoned businessmen. The boss of computer services company UXC, Geoff Lord, is the former head of Elders Resources, IBA Health chairman Greg Cohen was one of the country's top tax lawyers, and Oakton chief executive Neil Wilson is a business strategist.

This expertise has injected much-needed credibility into a sector still regarded with suspicion because of the tech-wreck of 2000-02, and a general failure to deliver on over-hyped promises.

The residual caution is being eroded by a realisation that IT, despite being intangible, underpins and spurs the modern corporate world.

The five companies profiled have not only survived the wreck, but have emerged ahead of the pack.

Each has achieved more than 100 per cent revenue and profit growth in the past five years, which puts them on par with the performance of companies such as Woolworths and BHP Billiton.

Without the ability to achieve the scale or the access to capital of their counterparts in the United States, each has found a niche - share registries, or community-centric health care and taxation - and worked at it with gusto.

I A flair for shares

Around every corner, Computershare's share registry software seems to be lurking. It helps run the Woolworths annual meeting, it is used to administer the BHP Billiton shares on behalf of employees who take shares as part of their salary package, and it can be used to call all Rinker Group shareholders to gauge the level of acceptance for the Cemex takeover bid.

From its Melbourne base, the company manages share registries on behalf of 14,000 corporations around the globe.

Recent strong capital markets, both for fund-raising and merger and acquisition activity around the world, have stirred up huge demand for its services.

Despite the good times, the main theme in the past year under new chief executive Stuart Crosby has been to fine tune the company's cost structure so that if the high-margin corporate action and discretionary business slows down, it will still retain a robust profit position.

Computershare is a senior citizen compared with most Australian information technology companies. Chris Morris and Ken Milner founded the company in 1978, three years before IBM built the first personal computer.

A large slice of the business remains in the hands of a small clique of longstanding employees, which helps shelters it from the ruthless advances of international investors.

Global expansion was part of the business plan from the start. Computershare made it look easy, striking joint-venture agreements and gobbling up more than 50 competitors. Its biggest acquisition, the $400 million purchase of EquiServe in 2004, gave it 25 per cent of the North American share registry market.

Today, about 90 per cent of Computershare's income comes from outside Australia.

Crosby says this is one of the reasons he doesn't engage in political debates or lobbying in Australia. "Being Australian is very important for us culturally. But as a business, the truth is, Australia is not much over 10 per cent of what we are. If we're going to invest our time in lobbying, we would probably do it in markets that made more difference to us, like the United States."

Computershare's international expansion, he says, boils down to a lot of hard work. "For the last six years our acquisition agenda has been operating on someone else's timetable. [Companies] decided to sell their [share registry] assets so we were forced to pick up the opportunities that emerged. We had to execute or the opportunity would evaporate."

This left a mess in the operational structure that Crosby now has an opportunity to correct. "It's given us a chance to go back and execute things that can really make a difference to our cost structure," he says.

Computershare

Share registry software

Profit after tax: $145 million*

Revenue: $843 million*

Founded: 1978

Staff: 10,000

Overseas income: 90 per cent

Rivals: The merged Bank of New York and Mellon Fiancial; the Lloyds Bank Registry business bought by Advent International

*six months to December, 2006

II Wealth in health

"In business, you need luck on top of everything else," IBA Health chief executive Gary Cohen says. "Without it, what could have been a near-miss turns into a success."

For more than a year, the Sydney health software company has been negotiating a takeover of its United Kingdom rival iSoft. Twice the £140 million ($327 million) bid looked like it was going to succeed. And twice competitive forces derailed it.

The deal would diversify IBA, and convert it into a global health software provider. iSoft has a strong foothold in Europe and is the main software supplier for the UK government's £12.4 billion overhaul of the National Health System, said to be the world's largest IT project.

However, if the bid fails, the feeling is that IBA will lose nothing by walking away, although staff morale may take a hit. Funds collected in the rights issue and stored in trust have earned enough interest to cover the bulk of legal costs.

What's more, IBA has executed a successful expansion throughout Asia - China in particular - India, the Middle East and South Africa. The company has been savvy, picking partners with good connections and political influence. Income from international operations has grown from 38 per cent of total income to 60 per cent in the past year.

The benefit of concentrating on developing markets is that often they have no health IT systems to speak of. This means no problematic integration with aged proprietary systems. IBA's knack for picking subtle gaps such as this in the global IT market is one reason it has survived.

Early on, Cohen and his brother Brian (the software's inventor who remains the company's chief technology officer), recognised health as a niche area tailored to specific communities, that leading software brands could not dominate easily on a global scale. "In health, United States companies can't just transport their software and dominate internationally," Cohen says.

Health care is destined to become heavily dependent upon technology, despite its laggard adoption. The sector's consumption of software and services is growing at an annual rate of 10-12 per cent in most countries.

Finding managers with the correct blend of talent has been the hardest task, says Cohen, a former leading corporate tax lawyer. "Finding quality people is hard enough in IT. But in a specific niche like health, you need someone who understands hospital administration, clinical procedures, and can relate that to IT."

IBA Health

Health care software

Profit after tax: $11.8 million (IBA Health)*

Revenue: $36.3 million*

Founded: 1982

Staff: 500

Overseas income: 60 per cent

Rivals: iSoft, Cerner, McKesson, Mysis

*six months to Dec 2006

III String of pearls

After five years, UXC remains an enigma, mainly because of its unusual structure. It's like Neapolitan ice-cream - a conglomerate of 40-odd companies, run semi-autonomously and sectioned into three broad flavours: computer services, field solutions for the utilities sector, and a small creative arm.

This makes it something of a cheat among the top five ASX-listed IT firms, since only 60 per cent of its income is derived from IT services. Nonetheless, UXC's model says a lot about how the sector has changed. Where the mantra five years ago was "integrate, integrate, integrate", UXC's strategy is to acquire successful businesses and try to keep the characteristics that make them successful, recognising culture as an asset.

To get into an industry, UXC looks for a cornerstone business with a solid management team that has enthusiasm and vision, but for some reason is stuck in a structure that won't allow it to succeed.

This flies in the face of accepted practice, chairman Geoff Lord says. "Most business principles relate to economies of scale. If you have two factories, each 60 per cent full, we all get taught that you should close one factory and expand the other to handle all the production through one facility."

UXC is quirky in other ways, too. Although Lord is the driving force behind the model, he is no computer boffin. Lord earned his stripes at Elders IXL under John Elliott, and has a string of investments ranging from gyms and formal-wear hire to the Melbourne Victory soccer team.

He keeps his finger firmly on the pulse but resists the urge to micro-manage, which allows him to secure important people within the acquired entities. Each chief executive is on either a profit-share incentive or has equity in the business.

Red Rock Consulting is a good example of what this federated model can achieve. The Oracle software specialist joined UXC in 2003 with 60 staff, turnover of $13 million and profit of $2.5 million. Today, turnover exceeds $50 million, profit is about $13 million and headcount is more than 300.

Lord's ability to pick trends has put UXC in a position to capitalise on the shift from mega-IT outsourcing contracts to bite-size, but highly specialised, packets of work.

This concept, known as selective sourcing, calls for deep expertise in a narrow field of focus. The company only backs top-shelf software brands. It has taken a long time, but markets are starting to see merit in the model.

UXC Limited

IT services

Profit after tax: $9.4 million*

Revenue: $197 million*

Founded: 2002

Staff: 2700

Rivals: Telstra KAZ, ASG Group, Dimension Data

*six months to December, 2006

IV Another league

Oakton chief executive Neil Wilson said last year he would have 1000 employees by 2009, along with an established presence in Canberra and new service capabilities. Two years ahead of plan, he has delivered on all three targets.

Oakton's acquisition of Acumen Alliance for $35 million-plus in April doubled the size of the company and added a business consulting arm that despite lower margins complements its IT services expertise.

Wilson is careful not to erode the goodwill associated with the Acumen brand in Canberra. "Some customers have a very strong affinity with the Acumen brand and disrupting that early doesn't make sense," he says. "Nothing's going to dramatically change."

Government projects constitute 35 per cent of Oakton's income. All Acumen's top executives have been retained in what analysts say was a "smoothly negotiated merger", a tribute to Wilson's methodical style. Acumen's four independent back-office functions will be consolidated to increase margins, which are below the market average.

Oakton won't stay off the acquisition trail for long. "The clarity of our model - knowing what we do and don't want - means we can filter potential acquisitions pretty quickly," Wilson says. He is keen to stress that acquisitions are about accelerating Oakton's strategy, not creating it.

The other substantial alteration to Oakton's strategy is the creation of a 30-person operation in India to pursue larger IT contracts in the $3-5 million range.

At least 30 per cent of these larger projects can be executed overseas at a lower price. Over time, this share will increase. This change in tack shunts Oakton into a new competitive realm in Australia, up against brands such as Accenture, Infosys and HCL. Two trends play to its strengths. The first is the recognition that IT can underpin growth and is no longer just a cost. "If organisations look at their business plans for the next three years, it's unlikely that IT won't form a critical part of achieving them."

The second, a concept known as "the extended enterprise", looks at computer systems not just within a corporation but also at its external connections to customers, partners and suppliers. In retail supply-chain circles, it is being heralded as nirvana for the efficiencies it promises.

Oakton

IT services

Profit after tax: $9.17 million*

Revenue: $47 million*

Founded: 1989

Staff: 1000

Rivals: DWS Advanced Business Solutions, Accenture

*six months to December, 2006

V Unfinished business

MYOB is a vastly different company today to the one dreamed up in the spare room of a Melbourne rental apartment by university dropout Craig Winkler 16 years ago.

For starters, sales through retail chains including Harvey Norman, once a primary source of income, are down 20 per cent this year, due partly to market saturation. MYOB already owns 65 per cent of the small business accounting software market in Australia, so the window of opportunity for new sales, although hardly slamming shut, is closing.

Outgrowing MYOB tax software was once a landmark for small businesses. Throwing it out was a right of passage on the way to the league of medium-size companies.

MYOB now has to convince small business customers that it can grow with them up to 200 employees. "Clearly we're much more than accounting software in a box," Winkler says. "We're providing more and more things that don't rely on software."

The company's newly formed professional accounting arm in Kuala Lumpur, Malaysia, is a case in point. MYOB has a team of 50 accountants handling work during peak loads on behalf of its clients in Australia. Sixty accounting practices have signed up so far.

MYOB claims that 70 per cent of Australia's 10,000 accounting firms depend on its software. But a dominant footprint in the camp of both small-to-medium enterprises and their accountants has a downside.

"Any improvements in streamlining workflow between the two parties fell to us because we control both sides of the equation," MYOB Australia managing director Tim Reed says.

A number of MYOB's rivals are facing imminent and expensive technology upgrades and MYOB is eyeing potential acquisitions.

Wilson HTM financial analyst Simon Fritsch says MYOB's "lazy balance sheet" has room for purchases in the $100 million-plus range. The company is bolstered by a huge portion of recurring income (80 per cent of annual revenue) but zeroing in on a target is more challenging.

Global expansion remains the riskiest part of MYOB's growth strategy. MYOB's two-year Chinese venture has been expensive and challenging. The country's regional fragmentation runs counter to MYOB's national strategy, and retailers do little to push the MYOB tax brand. The operation is expected to turn a profit in late 2009, although Fritsch believes the strategy may not live up to expectations.

MYOB

Accounting software

Profit after tax: $17.3 million*

Revenue: $182.3 million*

Founded: 1991

Staff: 1200

Overseas income: 33 per cent

Rivals: Intuit and Sage

*full year to June 30, 2006

BRW

© Fairfax Business Media

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