Translation: Original published in Finnish on 03/21/2025 at 07:30 am EET

We examined Nordic, listed IT service companies with the 'Rule of 20' metric we launched, measured with which a few companies achieved excellent performance in 2024. On average, Finnish IT service companies fared worse last year than other Nordic companies. Overall, however, it can be said that 2024 was still challenging throughout the Nordics.

Source: Companies and Inderes

Nordic IT service companies performed better than Finnish ones

At the beginning of the year, we launched our own 'Rule of 20' for the IT service sector, which we believe works well or even as the best single metric to measure the operational performance of the IT services sector and especially companies. In general, we consider a level of 20 or more in the 'Rule of 20' to be an excellent performance, 15-19 to be good, 10-14 to be satisfactory, and less than 10 to be a poor performance. The market situation naturally influences how easy/difficult it is to reach good levels. However, when looking at a longer, over-the-cycle period, it is clear which companies have performed well and, on the other hand, which have performed poorly in the long run.

Other Nordic IT service companies navigated the challenging year 2024 relatively better than Finnish companies. The median for Finnish IT service companies was 1 and the average was 3 when measured by the 'Rule of 20', which is a weak performance, even though the market was difficult. The median of other Nordic IT service companies was 8 and the average was 10, which is almost a satisfactory level.  The median for the entire Nordic IT service sector was 7.

At the company level, Bouvet, Netcompany and Addnode performed best, achieving excellent results even though the market situation was also challenging in their main markets. Of the Finnish companies, Netum and Digia performed the best, but in our range looking over the cycle, they only achieved a satisfactory performance. Netum and Digia are ranked 5th and 6th in the Nordic table. Last week, we published a summary of the Finnish IT service sector for Q4 and the full year 2024, where we elaborated more on the continued challenging market situation.

Rule of 20 is based on organic growth and EBITA margin

We launched our own 'Rule of 20' for the IT service sector at the start of the year, which we believe is a good, if not the best, single metric to measure a company's operational performance. Traditionally, a similar calculation has been made for SaaS companies (Rule of 40), but due to the different business models, we apply a different scale and fine-tuned parameters to the IT service sector. To calculate the 'Rule of 20' for the IT service sector, we use the sum of organic growth and the EBITA margin.

Some companies make ongoing investments in intangible assets (e.g. software), which should be reflected in EBITA through amortization. In order to make the figures as comparable as possible, we believe that EBITA should only include the amortization of acquisitions. EBITA should be calculated using the formula:

Historically, organic growth of 10% and an EBITA margin of 10% could and still can be considered good/excellent performance, from which the 'Rule of 20' has been derived. This metric also considers the different strategic stages of companies. For example, if a company invests in growth at the expense of profitability, it can still achieve a good figure. The companies we monitor are mainly service companies and are, in our opinion, quite comparable in this sample, although the software business plays a minor role for some companies and a quite significant role for Tietoevry. When assessing profitability, it is good to note that low profitability is not in itself a barrier to shareholder value creation, and if the company can grow well organically and with consistent profitability, the total return to shareholders can nevertheless be excellent.

Historically, several companies have repeatedly achieved excellent performance

The current market situation is clearly more challenging than in the 10 years preceding the weak cycle, which makes it more difficult to reach the 'Rule of 20' in the short term. In 2018-23, the median 'Rule of 20' score for the IT service sector was 15, which is a good level, while the average was as high as 22, which is an excellent level. However, the average is boosted by the strong growth of two small companies (Digital Workforce and Witted) in their early years. Over the longer horizon of 2018-2023, the above-mentioned strong performers, as well as Netum and especially Gofore, delivered excellent performance. Gofore's excellence is underscored by its strong performance in a much larger size category, where growth is more difficult to sustain.

Source: Inderes, * growth only for 2020-2023