Valuation of computer software companies

Valuation of computer software companies

The recent flurry of mergers and acquisitions aside, today the majority of companies which provide computer professional services ate still independent, entrepreneurial-based businesses.

Approximately 4,100 US. firms (other than sole proprietorships) supply computer professional services as their main activity in 1993. These services are characterized by three main activities: systems integration, custom programming consulting and training.

For over 1,800 of these firms, systems integration services is their primary offering. Of the estimated net increase of 400 firms over 1991, the majority came from the incorporation of sole proprietorships.

Today an increasing number of businesses a now opting to concentrate on their core operations and are farming out peripheral functions.

As an example, a number of businesses are outsource their payroll and tax processing operations, which is a boon to service companies such as Automatic Data Processing. In some instances, enterprises are selling off their entire data processing units — a real advantage to companies like General Motors’ big EDS subsidiary. Businesses are also moving to electronic commerce to accelerate the flow of information such as orders and invoices — welcome changes for concerns such as Sterling Software which supplies data interchange services.

Custom programming services have recently experienced a downturn due to the explosion of prepackaged software, graphic user interfaces, fourth-generation languages and computer-assisted software engineering tools.

On the other hand, the increase in software sales has greatly increased the need for outside professional training services. Today the trend is moving from software development to software enhancements and modifications as their main sources of revenue and to set up “help-desk” services.

In the training services arena, revenues have been growing most rapidly in computer-aided design/computer-aided manufacturing (CAD/CAM) and in computer-aided engineering (CAE), especially for the use of graphics software in the automotive and aerospace industries. System vendors are the primary suppliers of computer education and training for product-related services which comprise the biggest market segment.

Systems integration has turned out to be a profitable business for everyone including those specializing in data processing services, hardware and peripherals manufacture and software development. While U.S. Government procurement contributed significantly to the growth of integrated systems services, the Federal share of the market and been declining and is expected to continue to drop at least through next year.

Markets for applications of systems integration in the US. have been heavily concentrated in desktop publishing and telecommunications.

Copyright Quality Services Company Apr 29, 1996

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