By Andrew Patterson
While online accounting software company Xero has dominated the business media spotlight this year following a stellar rise in its share price, a lesser known candidate worthy of a higher profile might be under-the-radar IT company Fronde which this year managed to double its profit to $2.7 million, while increasing revenues by 26 per cent to $60 million.
Founded in 1992, almost 25 years before Xero appeared on the scene, its shares are traded on the alternative Unlisted exchange trading in a range of $2.10 - $2.70; though less than 70,000 shares have changed hands since June.
Best described as a go-to provider for systems integration, construction, design and just about any other project involving IT, Fronde has built its business in recent years by helping businesses take advantage of the growing opportunities in the cloud.
And if the pickup in cloud conversion in recent years is anything to go by then Fronde could be on the cusp of an exciting period of growth in the near term.
The company’s website quotes William Ford Gibson, the writer who created the word “cyberspace” and foresaw the emergence of the information age, who said: “The future is here. It’s just not evenly distributed yet.”
Fronde CEO Ian Clarke says it’s an ethos the company attempts to share with its clients as a means of defining competitive advantage.
“At one level, we liberate our clients from the technology constraints that are limiting their expansion. So that may involve a challenge around workforce collaboration or a productivity challenge and we provide one of our partner toolsets for that. Or they may wish to develop a new channel to market and we’ll support the technology behind that, or a new customer relationship management system and we can deal with that too. So we have a multifaceted capacity across a range of areas within IT.
“Often we come across businesses that are spending all of their money just keeping their lights on in the technology space. Usually they want to divert some of that money away from one area and apply it in areas that will deliver real benefits. So we'll come along with our partners and help them divert that money from the base functions that they're undertaking, and reallocate it into places that can really improve their business performance.”
A multifaceted approach
Fronde both designs and creates bespoke systems as well as utilising systems developed by its various software partners.
“We have a deep pedigree in bespoke software development. If you have children with a student loan, we built the MSD student loans and allowances system and have supported that for the last 13 years. And similarly, each time you turn the lights on, the electricity is traded through the wholesale electricity market, and we integrated that system - twice in fact which rates as one of the more complex integration jobs that we’ve undertaken. If you’re a regular user of TXT-a-Park, we built that system seven or eight years ago as well."
“But on the other side, which is actually the fastest growing aspect of our business, we will involve our cloud partners. They are Amazon Web Services, and Google, and Salesforce, and NetSuite. We have their products that we can deploy for our clients to make the business go faster.”
Cloud integration driving growth
Fronde’s client base pretty much covers the spectrum.
“In New Zealand there's a dynamic that says a niche is hard to find; particularly if you're going to grow fast because it's not that big a country. Having said that, we have a lot of business in government and quite a few businesses in the utility space. In Australia we have a much better opportunity to develop more niche competencies, particularly in areas such as the travel industry or in insurance or financial services.”
With the growth of the sector has come an increased level of competitive activity, though when it comes to competition, Fronde does have some advantages.
“While it is competitive within the sector, we have relatively few direct competitors because many of those who could be in that category either have their own data centre which they need to utilize before they want to use a cloud data centre, or they have deep relationships with on premise software vendors which means they’re unlikely to move away from that incumbent revenue stream for a new revenue stream, because of the conflicts that creates.”
The growth of the cloud continues to be the dominating force within the IT sector with a significant pickup in activity in recent years as businesses seek to embrace the new offerings available. However, it seems many larger businesses are still dragging their heals when it comes to switching to cloud based capability.
“To be honest, in NZ I'm stunned at how slowly it's moving, given the business benefits that it generates in the enterprise space. If you look at small business in particular, they really get it, they understand the benefits that are available and they're adopting really fast, whereas, enterprise is slower to move, and government is even more slower to move. Of course there are reasons behind that with concerns about data sovereignty in particular foremost of those concerns.
“Security's another matter, and the security standards of people like Google and Salesforce and Amazon web services are extraordinarily high. And there'd be very few, if any, enterprises in this country that will match their security standards. So it is less about security, although it is about perceptions of security. It’s more about sovereignty, where the data actually resides, and there are some parts of our country, some sectors, which don't want to contemplate that, such as health.
“We work with clients to understand what parts of the enterprise, what data sets are immune to that sovereign challenge, which might be a public-facing website or it might be data which is widely, publicly available, and therefore, it doesn't matter where the data resides; it should reside where it's most efficient and effective to do so. So we help our clients to understand what their sovereign challenges are and what data sets and what workload should be moved to a public cloud.
“I believe the sovereignty issue is being resolved. It has gone away to a substantial extent in Australia with Amazon building two data centres there while Microsoft is also building data centres across the Tasman. Once that had happened, once flagship customers like Commonwealth Bank have substantially gone to AWS, then others will begin to follow their lead.”
Cloud delivers cost savings
Often the driver though will be the realisation of the material impact that a shift to the cloud can have on the bottom line which Clarke believes becomes the ultimate driver to switch to the cloud.
“There comes a point where enterprises will understand that if they're not there, then they don't enjoy what their competitors are enjoying. Their competitors are able to re-deploy expenditure that's going into maintaining legacy infrastructure and they quickly realise that if they stand still they're going to struggle to remain competitive. Now government clients are also beginning to understand that they can make public data much more easily available through public cloud, and they can mobilize services very readily and so there's a service delivery aspect which really enhances the achievement of their goals.”
Clarke firmly believes IRD should be considering a cloud based platform as part of its $1.5 billion overhaul of its IT systems.
“I doubt having the whole platform based in the cloud is going to be a starter, but absolutely there should be aspects of it that are cloud based. It's difficult to see why a public-facing website such as IRD’s for instance needs to be sovereign. I am sure there are things like their engagement with the public that could benefit from use of cloud technologies. So I think that the public cloud should be very much in the mix of the IRD’s transformation plan.”
The biggest issue facing the IT sector right now is staff recruitment or more to the point, having the staff available to recruit. Clarke doesn’t hold back believing the whole issue requires a radical rethink, particularly within the education sector.
“What we have is secondary schools not being resourced with enough skilled teachers in this area as well not being resourced with enough skilled career development people. But I think more fundamentally, parents are still regarding IT careers as either coding, or screwdrivers, or gaming, and they don't understand the sector at all. Importantly, they don't understand both the professional and financial rewards largely because it's taught as a technical career choice and not an academic career choice, and parents are still steering the most able children away towards academic pursuits. So in a nutshell, we have a fundamental intergenerational problem that most parents just don't understand IT.
“I don’t think we should assume the kids get it as well. I don’t believe they're getting enough exposure to IT and the whole technology sector which is one of the biggest problems. While they’re high users of technology understanding the career opportunities that exist is a completely different issue. It’s a big challenge for our sector and collectively we need to do a lot more to address the problem.”
But how do you get more people teaching IT in schools when the private sector is offering such attractive compensation packages?
“I don’t think I’ve got a solution for that, but we do know that there are people whose vocation is teaching and don't necessarily want to chase more money in IT because it's different, so I guess we need to work that angle and we need to work with firstly in addition to what needs to happen with people who are being are introduced to teacher training, we have to work with the people who are there.
“There's a couple of industry bodies who are actively getting their members into schools and actively lobbying ministers and government agencies about the need to further develop more IT career options at the secondary-school level. And I think we are some impact in that the language we were hearing from the ministers last year was about when there is more demand, we will make more places. And now there's a realization that actually there has to be a demand creation activity, which starts at secondary school. So there is some improvement.”
Growth obviously requires capital and right now Fronde offers an attractive proposition according to Clarke.
“We're currently figuring out right now how to get some more capital into our business. One report earlier in the year, which rated all public companies and SOEs in New Zealand on their return on capital employed placed us in the top three. We have an extraordinary high return on capital employed and we believe that will continue into the future.
“The long run plan for Fronde is to build an enduring brand and we have some of the unique qualities that will enable us to do that. We aren't seeking to be sold because we have plenty of opportunities ahead of us that will allow us to keep on creating value. We particularly want to grow our business in the Auckland region as well as in Australia.”
|Sector:||IT / Technology|
|Biggest market:||New Zealand|
|Fastest growing market:||Australia|
|International offices:||Australia & Philippines|