Adam Gifford: Returns coming in from a canny investment

When Investment New Zealand gave a $1.5 million grant to multinational computer services firm EDS there were howls of outrage from opposition politicians and raised eyebrows among local software firms.

Just over two years down the track Investment NZ's move looks pretty canny.

According to EDS New Zealand head Rick Ellis, $20 million of the company's $84 million in new revenue last year came from Best Shore - the scheme where Ellis and his team trawl through EDS's worldwide customer list and convince them to send bits of work down here.

The grant was conditional on EDS employing 360 people for Best Shore work within three years. The total is already up to 267, and should comfortably make the March deadline. Most of the work is done in Auckland, where more than 1100 of EDS's 2400 staff now live.

"We tended to be Wellington-centric by dint of our acquisition of Databank and GCS [previously Government Computing Services], but with Best Shore and the consolidation to Smales Farm on the North Shore, Auckland has eclipsed Wellington," Ellis said.

The other big factor in boosting revenue to a whopping $411.7 million was the seven-year, $570 million contract to manage Fonterra's information technology infrastructure, which kicked off on March 1.

Fonterra also supplied many of the Best Shore staff. Much of the work EDS is doing here for US customers involved technology from German vendor SAP.

Because it had that work coming on stream, EDS was able to soak up many of the SAP consultants coming on to the market late last year when Fonterra completed the local parts of its SAP implementation.

Even better, most of those are not call centre jobs, as originally envisaged, but more highly skilled and paid jobs in SAP application development and support and in migrating from mainframe legacy systems to more flexible Java or .Net environments.

Customers who tried out EDS New Zealand for a small project are starting to come back for more.

"This is now a sustainable business," Ellis said.

It is also holding its own against India, whose National Association of Software and Services Companies (Nasscom) last week predicted that software and IT services exports from India would rise more than 30 per cent to US$22.5 billion ($32 billion) in the year to next March. One million people now work in India's IT market.

"We are not competing against India. We are a good mid-range cost solution, and some clients have moved work from India to here for geopolitical reasons or because we have lower staff turnover, so we are more productive - especially where deep knowledge of English language is vital," Ellis said.

While it could be argued that EDS could have and probably would have built up Best Shore capacity without the Government dosh, the reality is that city, state and national governments around the world compete feverishly to attract business.

Act Party leader Rodney Hide may believe in the free market, but politicians in government seldom practise what they preach. Having that token support strengthens Ellis's hand when he asks EDS colleagues to steer business this way. And let's not forget, EDS has pumped $150 million into its New Zealand balance sheet since 2002.

Could the Government's money have had a similar impact if invested elsewhere?

That is where that terrible word "leverage" comes in. Starting an international services business can be a long, drawn-out, expensive business requiring location, or getting over there, and luck - or getting in front of the right people to tell them you can make their problems go away.

EDS can leverage. Carter Holt Harvey IT services subsidiary Oxygen has leveraged its relations within its parent, International Paper Group, to kickstart its international expansion. Most other firms start from scratch.

That is why the Cabinet is considering whether to dip into the Strategic Investment Fund for Outsource2NZ, a scheme that will allow several second-tier services firms to do business development in Britain, offering a sort of aggregated capacity.

Some relatively small investments can be highly effective. Investment NZ spent about $500,000 taking a dozen or so New Zealand technology companies up to the CeBIT conference in Hannover.

Its ICT manager, Paul Gestro, said a group of British investors followed up what they saw on the stand by making a trip to New Zealand, and are on the verge of investing $12 million in four companies. Investment NZ should be commended for its enterprise.