Logica set to take axe to UK jobs

Logica is set to make significant UK job cuts this month as the new chief executive tries to bring his ailing company in line with changes in the IT services market.

Morale at the company is low, with staff facing an uncertain future until Andy Green's strategic review is made public on 22 April, according to an industry insider. "There are big problems; morale is really low and it's not clear where the company is going," the source said.

The appointment in October of Mr Green, the former head of strategy at BT, ended five months of speculation about Logica's future. The stock has fallen almost continuously since its £24- a-share heyday in 2000, and Martin Read, the former chief executive, was forced out after 14 years in May by unhappy shareholders. Logica's shares closed at 115.25p yesterday, a far cry even from last year's high of 190.75p.

Mr Green's strategy needs to address a number of related problems.

A series of European acquisitions, such as the £631m purchase of Unilog in 2005 and the £882m purchase of WM Data in 2006, have created a fragmented business with no clear identity. And the company's sales have suffered because it has not reacted to changing customer demands and the growing focus on business engagement rather than just technology.

Most seriously, it has been slow to adapt to the rise of low-cost IT skills in developing economies. Of the company's 39,000 staff, just under 5,800 work in the UK, compared with about 3,000 in offshore locations such as India, Morocco and the Philippines. This is a far cry from the general industry rule of thumb of a 60/40 onshore/offshore split.

"All IT service companies need a model where a proportion of staff work in lower-cost economies and Logica's numbers at the moment are just wrong," said George O'Connor, an analyst at Panmure Gordon. "There needs to be re-balancing of the business in favour of more off-shore locations and we anticipate job losses in the UK."

Although there are more staff working in the firm's Nordic, French and Dutch operations, the UK is particularly vulnerable. The company's full-year 2007 results, published at the end of February, showed overall revenue up three per cent, but a fall of 8 per cent in the UK, which accounts for slightly more than a fifth of the whole business.

"It is widely accepted that there will be job cuts, and with a greater focus in the UK given the weak performance here," said Matthew Palmer, an analyst at Dresdner Kleinwort. "A lot of the work that Logica does here is at the lower end – application development and maintenance and so on – which customers can get done up to 50 per cent cheaper by an Indian vendor."

Mr Green has the faith of the City and the firm's shares rose 9.9 per cent when he was appointed. But he faces an uphill task, and, with the pain of headcount reductions out of the way, the challenge is only just starting. "As well as turning the business around onshore, and spending money cutting staff, Andy Green needs to develop the offshore capacity, and, with stiff competition for talent in India, it won't be easy," Mr Palmer said.

There has been a lot of buying and selling of Logica shares in the last few months as major stockholders place their bets on the impact of this month's review on the share price.

A spokeswoman for Logica said details of Mr Green's plans will not be revealed before the review is published later this month.