Activity serves to conceal IT woes Judging from recent deal activity and the persistent rumours of potential takeovers in UK IT services, the casual observer could be forgiven for thinking that the sector is brimming with potential. Canada's CGI group snapped up Logica for £1.7bn in May. That deal came hot on the heels of Vista Equity Partners" acquiring banking software company Misys for £1.27bn, which in turn came after Hewlett-Packard was generally thought to have overpaid with its $11bn bid for Autonomy last year. Takeover rumours still swirl around both Sage and Aveva, the surviving independents. The fundamentals of the sector, however, tell a different story. A new study by research consultants TechMarketView shows the UK IT services market stuck in real-terms recession until at least 2015. Public sector spending cuts and a slack economy are exacting the toll, triggering a predicted 1.1 per cent decline per year in real terms for the next three years. A deeper problem lurks in the sector's deflationary cycle. "It's not just the economy," says Anthony Miller, managing partner at TechMarketView. It's the whole structure of the IT marketplace. Trends like cloud computing, or "bring your own tech" to work - all the major trends that are driving the IT marketplace - are all designed to reduce the cost of computing." One investment banker who works in the technology sector argues that these trends weigh on UK companies because they are less competitive than overseas rivals such as Indian outsourcers Tata Consultancy Services and Infosys. "Margins for UK IT providers sit in the 6-7 per cent margin range," the person says. In India, they sit between 20 and 30 per cent. It's like a five-a-side team taking on an 11-a-side team. What then explains the buyers" interest? Investment bankers say this in part comes down to the fact that large North American technology groups, such as HP, are sitting on oversized offshore cash holdings and looking for expansion opportunities. Another reason may be the promise of cloud computing. That market in the UK grew rapidly in 2011, increasing almost 40 per cent to hit £1.2bn. This growth rate is likely to continue, according to TechMarketView, which predicts that cloud computing revenues in the UK will grow at a compound 35 per cent a year to £3.9bn by 2015. Despite the fast growth, there is often a gap between the hyperbole surrounding cloud computing and its usage. The platform accounted for only 2 per cent of the UK's software and IT services market in 2011, according to TechMarketView, although that is expected to jump to a 9 per cent share of the market by 2015. The reason for this gap is that there is still a reluctance among large companies to move "critical" business systems to the cloud, says Sam Kingston, UK managing director at T-Systems, the IT services arm of Deutsche Telekom. This problem has been exacerbated by the economic slowdown. "Organisations are extremely selective about their [IT] investments," says Mr Kingston. They are far more cautious and rigid in the application of their procurement processes than before. John Winstanley, a partner in technology consulting at Deloitte, argues that the gap between "cloud talk" and its actual usage by UK companies can be attributed to a matter of definition. "When large corporates look at a cloud service to run their core back-office, what you end up with is something that looks like a traditional IT outsourcing," says Mr Winstanley. Clients who make decisions around software such as Salesforce or Workday are doing so purely on functionality. It just so happens that the delivery method is cloud. But first and foremost, people are buying it due to the quality, not the means of delivery. Whatever its form, the cloud is here to stay, say its backers. "Every activity of mankind seems to be generating storage," says Tom Georgens, chief executive of the US data storage giant NetApp. We're not in an industry that's going away. For the UK IT services sector, the acquisitions of its biggest companies need not mean its doom. "It's not that [the UK] does not have an IT sector any more," says one banker. We just don't have many large-caps left.