NelsonHall recently attended an Atos analyst summit which provided a follow-up to the 2014-6 three-year plan first outlined last November (see our blog “Atos Unveils 2016 Financial Objectives”). As a reminder, the financial targets for IT services are:

• 2014-2016 CAGR of 5% with half of this growth to come from acquisition
• A 100 to 200 bps improvement in adjusted operating margin by 2016

The two days focused on the two global service lines that remain after Worldline has been floated: Consulting & Systems Integration (C&SI, also contains applications outsourcing activities) and Managed Services (MS). The event sought to convey what Atos is doing in MS and in C&SI in order to meet its financial targets for IT services for 2014-2016. NelsonHall will be producing an updated Key Vendor Assessment on Atos next week which will outline the various initiatives in detail.

Consulting & Systems Integration

In a major reorganization, Atos is regrouping the Systems Integration (SI) and the Consulting & Technology Services (C&TS) units under one umbrella, C&SI. In total, C&SI has revenues of €3.1bn and a headcount of 31k, of which 8k in lower cost geographies (for fixed priced business, the offshore ratio is 30% currently with a target to reach 50%).

• SI is a recovery story; revenues were down just 0.7% at CC/CP in 2013, and margin was up 180 bps to 6.4%. Offshoring and lean management (13.5k personnel have been trained on lean techniques) are contributing to the margin improvement
• C&TS has been suffering declining revenues for some time and has been a drag on margins. 2013 revenues were down 5.6% organically, though adjusted operating margin improved 160 bps to 5.7%. C&TS is itself the amalgamation of two former units: Consulting Services (with its largest teams in France and the Netherlands, with smaller units in Iberia and the U.K.); and Technology Services, a staff augmentation unit largely in France, Netherlands and Spain.

Most C&SI business lines (CS, SAP, and Solutions) are also to become global, taking over P&L responsibility from country units. The change does not end here: Atos C&SI has created practices within its Solutions unit for testing, mobility, Oracle, cybersecurity and application development integration management, which also are of a global nature. This globalization is part of a wider standardization drive.

C&SI outlined a number of priorities, including:

• Winning large deals, an ongoing focus; the €350m (baseline) NSN ADM contract was the mega win of late 2012 driving transformation in 2013. C&SI also landed a ~€60m testing contract with a European automotive OEM, its largest standalone testing services win
• The introduction of an account management structure for 50 accounts that should help in developing business and coordinating the activities of the various practices
• Pursuing a verticalization effort, with vertical units developing industry-specific offerings and reshaping existing ones. Here, Atos is continuing an initiative that SIS had started before its acquisition
• Geographic expansion. The U.S. is a top priority (as it is for MS). Atos’ presence in the U.S. is currently dependent on European accounts that have a North American presence e.g. Siemens, NSN, Daimler, with a few big brand clients such as P&G and John Deere. C&SI is increasing its salesforce.

In Anglo-Saxon countries, or for deals with high offshoring ratios, C&SI has introduced its India Direct initiative, where account management, project management and functional expertise and business analysts are all based out of India.

C&SI, has like MS, rather bold financial ambitions in its 3.5%-4% CAGR target for 2014-2016 (which includes acquisition) and a desire to approach a 10% adjusted operating margin in the long-term.

What Are Our Takeaways on the New C&SI?

This is a major centralization effort by Atos, with impacts on delivery, service portfolio and investment decisions. And it is probably not one it could have made while it was still addressing everything that was involved in the integration of SIS businesses.

C&SI is looking to become more Indian in terms of centralization and also in delivery centricity. This is clearly important for service lines as testing, AM, and the SAP and Oracle practices. The increasing importance of both C&SI and MS as global service lines is also diminishing the historical influence of the various regions (the GBUs). We believe the reorganization will put Atos in a different place from competitors that continue to have a strong onshore presence and regional differences. Capgemini Technology Services is not a global service line but is aligned by geography (apart from its Apps 1 Financial Services and Apps 2 Telecom units). CGI is completely geography-oriented. T-Systems Systems Integration is aiming to align capabilities across geographies but remains geography-led.

By folding C&TS into SI, Atos is facilitating the deployment of consulting resources into the front end of transformational and AM engagements, a move that will help resolve issues such as utilization in CS, and also in presenting a single face to the client. The move will also help reduce G&A expenses.

The increased vertical focus is not a surprise. For a vendor of its size, Atos arguably is somewhat light in industry-specific offerings. We would like to see greater investment in this area, and expect this to become a more important priority from 2015 onwards.

To some degree, there are challenges in having what remains a complex organization with service lines leading but countries still having P&L responsibility to drive business locally. One of the obvious ones is lack of responsiveness in client facing activities.

In what is a major reorganization of all its IT services activities, Atos is certainly not being complacent. The integration of SIS is no longer a priority and the company is now able to focus more intensely on the next stage of its evolution: from what has been a group of regionally focused businesses to a more integrated company that can compete in both Europe and North America for deals that require global delivery. 

Dominique Raviart and Rachael Stormonth

See also "Atos Managed Services: Strong Progress on Margin Improvement; Further Acquisition Will Be the Key to Future Growth" at: http://research.nelson-hall.com/blogs-webcasts/nelsonhall-blog/?avpage-views=blog&type=post&post_id=159#sthash.YQsvDRS4.dpuf"

NelsonHall will soon be publishing an updated Key Vendor Assessment on Atos which looks at current initiatives in more detail.