Service firms to struggle in 2009

Big and Small, Local or International - Operational Excellence a Global MandateThe big news this weekend was that U.S.
Written by Brian Sommer, Contributor

Big and Small, Local or International - Operational Excellence a Global Mandate

The big news this weekend was that U.S. manufacturing had plunged in December to the lowest level since 1980 and that new factory orders fell to a 60 year low. The outlook outside the U.S. may even be more dire.

For service firms, 2009 looks challenging, too. Here are some of the issues and companies to watch:

- Sabre-rattling in India/Pakistan – According to the CIA Fact Book, 52.8% of India’s GDP (gross domestic product) is services based. A significant amount of this is targeted to the provisioning of IT, call center and other services for non-Indian firms. This revenue is at risk because of the global downturn in business and more is at risk if these two nations cannot mend fences. The problems here though transcend more than religion and current events. India has grown significantly in recent years and it will need to show great maturity and leadership to maintain forward momentum.

- Unraveling of gains in India and elsewhere – The recent announcements regarding MphasiS’ decision to cut salaries of personnel by 20% to as much as 45% for some managers has got to be unsettling for those impacted by these cuts. But MphasiS won’t be alone here. We can expect other offshore service providers to make salary cuts. We can also expect U.S. service firms to freeze pay levels, reduce salaries, insist on unpaid time off and make layoffs, too.

- Several service firms will restructure, disappear or be acquired in 2009 – If your service firm isn't operationally excellent, run by forward looking and excellent managers, then it's already in trouble. Satyam, which has been covered significantly in recent postings, (Click here and here) will likely be acquired, get new management and/or face a restructuring. Bearingpoint has to meet some pretty aggressive payment obligations this spring (see these three stories: here, here and here). Booz & Co. will be flying solo without its government practice. It could be interesting to see how well they do without this piece of the firm. Unisys is still trying to turn itself around. Wachovia Capital Markets, LLC opined with this comment on Unisys this weekend:

Bottom-line: Reiterate Market Perform. A new CEO is now taking his turn at trying to turn the troubled company around by announcing his own cost reduction actions. The company has been in a restructuring mode for a number of years and has shown no evidence of being able to grow the top-line due to little competitive advantage in its end-markets, in our view.

The cracks are appearing everywhere. Service firms are being de-listed from stock exchanges, some have seen their share prices collapse, some are hiring advisors to help them be acquired, etc. If you track service firms, 2009 will no doubt be a very fluid year.

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