IT services firms Logica and CMG have confirmed their agreement to merge in a move that may set off another round of consolidation in the IT services sector. They said that size will be increasingly important to the success of services companies.

Current customers would benefit from the size and capabilities of the merged organisation, according to the firms, noting that only four clients appeared among the top 20 customers of both businesses.

"We're going to be a bigger, stronger player," said Logica chief executive Martin Read. "We believe that our customers will feel more comfortable giving us bigger contracts. We were surprised by how little overlap there was in the customer base." Read added that Logica customers would benefit from CMG's human resources (HR) and payroll outsourcing knowledge.

CMG chief executive Alistair Crawford agreed with this assessment, arguing that Logica's skills in providing consultancy for core SAP enterprise resource planning systems would be complemented by CMG's wide experience in SAP-based HR applications. "There is a similar fit in our Oracle practices," he added.

Crawford predicted the merger may spark further consolidation. "The choices [facing IT services firms] are to shrink and become niche players - or merge," he said.

The combined company, LogicaCMG, hopes to make £60m of annual savings by reducing duplication. Six percent of jobs will be cut in territories where both firms operate, including the UK. LogicaCMG also expects to save money by combining wireless telecoms businesses.

The decision to join forces was broadly approved by industry analysts, who welcomed early decisions about the practicalities of merging, including the naming of the new management team. But concerns remain about the lack of capabilities for business process outsourcing (BPO).

"We would have preferred Logica to acquire a major outsourcer, thereby moving itself into BPO," said Judith Jordan of analyst firm Ovum Holway, a research firm that monitors the UK IT software and services sector.

BPO is the fastest-growing category of IT services, according to experts.

Meanwhile, analyst firm Gartner also predicted further consolidation in the services sector. "The recent merger between IBM and PwC Consulting is a clear signal to the market to expect similar-scale mergers in 2003," said Roger Cox, vice president at Gartner. "Even the largest [services providers] are now being hit."

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