European IT Services Market Sees Further Consolidation

The European market for companies providing IT services to enterprises is ripe for consolidation, according to a senior executive at the IT services arm of German telecommunications operator Deutsche Telekom AG.

“To operate successfully in this business, you need to be big; you need to have scale,” said Lothar Pauly, a member of the board at Deutsche Telekom and chief executive officer of the company’s IT services subsidiary, T-Systems International GmbH, in an interview in Berlin. “The European market has many smaller IT service providers that will need to grow in size or hook up with a larger partner to survive. We will be looking at acquisition opportunities in key markets.”

Last year, T-Systems agreed to buy Gedas AG, the computer services subsidiary of German car maker Volkswagen AG (VW), in what the IT service provider called a milestone in its path toward internationalization.

In addition to winning a seven-year €2.5 billion (US$3 billion) service contract from VW as part of the deal, the German service provider will also take over Gedas’s 12 subsidiaries, in countries including Brazil, China, Japan and the U.S.

Gedas provides a range of information and communications technology services, such as consulting, systems integration and network operation, to companies in the manufacturing and logistics sectors. Because of its close relationship with VW, the IT service provider has been able to acquire knowledge of business processes specific to the automotive industry.

Pauly put an end to speculation that the Gedas acquisition could prompt DaimlerChrysler AG, another big T-Systems customer, to end its contract. “A few days ago, we agreed to extend the contract for another three years,” he said.

T-Systems was established a few years ago following the merger of DaimlerChrysler AG’s IT outsourcing unit, Debis Systemhaus GmbH, and the systems integration activities of Deutsche Telekom.

This year, the German company seeks to land three IT services deals worth €50 million or more, according to Pauly.

Last year, DHL Express Vertriebs GmbH & Co. OHG was one of three big companies to outsource their IT operations to T-Systems, according to Pauly. The DHL contract includes servicing around 8,000 workstations, 500 servers and 50 central applications. T-Systems will also integrate around 300 DHL locations into a common data network.

In addition, T-Systems plans to increase business with small and medium-size businesses (SMBs) in Germany, according to Pauly. “With our numerous data centers and strong local presence, we are in a very good position to serve SMBs,” he said. “Our competitors are small, local IT service providers; there are no large big providers. IBM has more or less retreated from the SMB market in Germany.”

Responding to strong demand by companies of all sizes for VOIP (voice over Internet Protocol) service, T-Systems will push beyond its offerings for company campuses to the wide area network in Germany and its international markets, according to Pauly.

The increased focus on VOIP could cut into Deutsche Telekom’s traditional telephony business, he said, “But we need to cannibalize this business. Enterprises want VOIP, and if we don’t offer it, somebody else will.”

-John Blau, IDG News Service