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Services' next pot of gold: the euro

As Y2K fix profits start to dry up, a host of larger services companies are moving toward the next pot of gold: helping companies euro-proof their business and IT systems.

As Year 2000 fix profits start to dry up, a host of larger services companies are moving toward the next pot of gold: helping companies euro-proof their business and IT systems.

The euro began marching across Europe last month, though its use in this rollout is limited to noncash transactions. A second, larger wave of IT spending is expected before coins and bank notes are introduced in January of 2002.

Though the euro is struggling to compete in its new market, its impact on business is huge. Unlike Year 2000 projects, which often entail straight code fixes and a lot of straight technology work, the euro requires service firms to market a two-prong strategy to overhaul IT systems and corporate business plans.

Analysts say service companies tackling these consulting projects must couple business reengineering strengths with a strong regional presence in Europe and vertical expertise.

By now, many multinational and larger European companies are done with the consulting stages of their euro preparedness projects. Now, they are planning systems installations and software development projects, where service companies expect a lion's share of their revenue will come from, said CIBC Oppenheimer analyst Andrew Burns.

According to International Data Corporation, spending on combined euro-related IT and business services will rise from $4.2 billion expected this year, to top out at $7.5 billion in 2001. Spending is expected to drop to $2.5 billion by 2002. That spending in no way matches international corporate spending on Year 2000 projects, which is expected to reach several hundred billion, yet it does provide strong short-term revenue, which is expected to pick up in the second quarter of the year.

Companies poised to handle euro-related work include the Big Five consulting firms, as well as Electronic Data Systems, Computer Sciences, IBM Global, and Unisys. While EDS has bulked up its business consulting arm with its subsidiary A.T. Kearney, CSC has worked over the past year to consolidate its business consulting services, and Unisys has developed a strong European presence that IBM has boasted for decades as well.

While second and third-tier services firms are not the main players in this new market, they are targeting European business on a smaller scale. Boston-based Keane, for example, which now reaps about 30 percent of its revenue from its Year 2000 expertise, is marketing euro-related services through its U.K.-based subsidiary, Keane LTD.

Also, Compuware offers a suite of products that help companies make their mainframes and client/server systems euro compliant. This involves executing multiple test cases on existing systems, reformatting currency fields in databases to add euro information, adding interfaces, and other fixes.

Companies will be forced to handle currency conversion issues for the next three years, followed by a complete conversion to the euro in 2002. Deciding how and when to use which currency, in the interim, will confuse the best of companies, analysts said.

"Everything has to be done twice," said IDC analyst Marianne Hedin. "That changing back and forth [between the local and euro currency] makes tremendous challenges and in that rounding procedure you may lose a lot of money."

Companies selling cars in France, for example, will need to know how to change the way they do business under the euro instead of the franc, how the monetary conversion will affect profits, which vehicles to market across Europe, and how new competition will impact sales and consumer buying patterns. At the same time, firms' IT databases and front-end systems must be equipped to handle and convert historical and current financial data from local currencies to the euro.

For CSC's clients, the hardest issue to grasp was the idea of setting up offices to deal specifically with the monetary conversion issues, said Greg Wojcieszak, a partner in CSC financial services.

"If you're a retailer it's a huge change," he said. "This was about getting people to understand that 'geez, it's not just a [monetary] conversion."

Now that the first stage is over, companies must focus on fixing all of Europe's automatic teller machines, accounting practices, computer software, and back-end business systems and, more importantly, prepare for the cultural challenges of selling to all countries using one transparent currency, Wojcieszak said.

With the euro now here, service companies will need to teach firms to rebuild their businesses to compete globally.

"The euro is just the tip of the iceberg," said Julie Giera, analyst at Giga Information Group in Cambridge, Masachusetts. "This is about how do you recreate your business to compete with Germany, France, and England? What does it mean when you're competing only on price--when all that stuff that's hidden under the rug, that protectionism, is gone?"