NelsonHall recently met with SQS top management and discussed key priorities in the short, mid- and long-term.

Short-Term: India and Delivery Network

A short-term priority remains the integration and development of the former Thinksoft Global Services, now SQS India BFSI. The acquisition of Thinksoft increased SQS’ headcount in India to 1.9k or 54% of the overall global headcount.

SQS continues to grow its Indian delivery capabilities, aiming to reach 5k personnel by 2017. The company is doubling office space in Pune, its historical site (addressing clients in insurance, manufacturing and other sectors), in Chennai, the home of SQS India BFSI (financial services, in particular banking), and also in Mumbai.

SQS In Mumbai has a team of 150 people, addressing for the most part Indian domestic clients such as State Bank of India, and Reserve Bank of India – but SQS is looking to develop its presence in Mumbai as an alternative recruitment location, giving access to a larger labor pool for offshore work.

The acquisition of Thinksoft has enriched SQS’ perspective of Indian sourcing from just delivery to also include more pre-sales support. The acquisition has also brought to SQS ~40 practices in banking and financial services with domain specialization around financial service sub-verticals, who participate in pre-sales activities along with SQS India BFSI’s own salesforce. SQS is intending to replicate this model in the manufacturing, retail & logistics sector.

SQS continues to develop its onshore and nearshore delivery factories. The company has complemented its existing factories in Görlitz, Cairo and Durban with a new nearshore center in Guessing, Austria, close to the Hungarian border. As with Görlitz, SQS has found in Guessing a place where it believes it can offer significant cost savings compared with higher cost locations in Western Europe. Guessing has a headcount of 50 and is expected to reach a similar size to Görlitz (~230) in the mid-term. SQS plans to maintain the size of its nearshore in the range of ~300 FTEs, adding other factories over time.

Meanwhile, with its pure onsite activities, which it markets under two models: staff augmentation (Regular Testing Services – RTS) and specialized services (Specialist Consultancy Services- SCS), SQS aims to reduce RTS activities that are performed as part of small contracts with no potential for additional growth. SQS is and has reduced its number of RTS-only clients, especially in Germany. The focus instead is on SCS, bringing higher service specialization and higher margins to its clients. Overall, SQS believes it will grow its onsite business moderately, with RTS declining while SCS will increase.

Mid-Term: North America

Acquiring further scale in North America is still SQS’ other priority. SQS is looking to reach €100m revenues in North America in the mid-term and to have more market visibility there. With SQS BFSI India, SQS more than doubled presence in the U.S. SQS derives ~5% (in H1 2014) of its revenues from North America (NelsonHall estimated revenues of €25m-€30m for 2014). SQS in the U.S. services two main verticals: manufacturing (through Siemens PLM software testing services) and banking and financial services (legacy Thinksoft). Further acquisition is likely to play an important role, for examples firms with QA consulting or with strong domain knowledge. To fund this acquisition, SQS can rely on its own financial resources: NelsonHall estimates that SQS will at end of 2014 have a net debt close to zero.

SQS in the U.S. is also exploring the possibility of opening a “rural” onshore center to address client concerns around data privacy and language capabilities.

The company also has hired additional sales personnel to develop its commercial activities in the U.S., and has adapted its sales model to the U.S. market, selling contracts based on expertise, e.g. SQS taking responsibility for determining the right level of effort, automation and test coverage.

Long-Term: Further Automation

In the longer term, SQS is looking for non-linear growth.

In several areas, the company has invested in a centralized testing service. Examples include testing services delivered from Pune around Siemens PLM Software, and around Avaloq and SAP software in banking. With these three ISVs, SQS offers a testing service where it is responsible for delivery, personnel management and automation. The company has developed IPs, largely in the form of test case repositories around Siemens, Avaloq and SAP. Another area where SQS provides a similar industrialized service is mobile app testing.

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SQS believes it now has scale in India and can grow its Indian headcount to 5k by 2017 fairly easily. The company continues to fine-tune its model there: a recent example being reducing the number of clients brought in from the Thinksoft acquisition and concentrating on growing revenues per account. This is similar to what SQS has done in Europe, especially in Germany.

The company’s next step is the U.S. where it needs to achieve higher scale. Once it has scale; SQS will benefit from managed testing contracts with high offshore ratios and therefore higher margins. This is a work in progress. SQS management seems eager to move fast. Certainly, the company has financial freedom now it is close to zero net debt.

SQS looking to adopt non-linear growth by increasing the level of automation in testing, both in testing execution and earlier in the life cycle. Test support services such as service virtualization and provisioning and management of test environments as well as test data provisioning are obvious first steps. Subsequent steps might include model-based testing. The only limit to further potential automation is technology itself: in the past years, the ecosystem of testing ISVs has proved dynamic and expanding in a lot of different directions. Automation will progress with technology maturity … and of course among with client adoption.

Another effort to drive non-linear activity in testing is around an industrialized standard service. This is similar to platform-based BPO. The problem with platform-based testing is that it needs to be executed across standard applications. This is where the problem lies: most applications tend to be client-specific. Platform-based testing will work better with application COTS that were implemented with minimal customization, which is unusual. Nevertheless, vendors such as SQS are in a position to identify applications that tend to be common in a given industry or most common industry packages and develop relevant IPs. Delivery will be centralized with clients not being involved in CV selection, simply buying a service. Obviously, there is still a long way to go here. SQS understood this approach several years ago, when it became a tier-one testing partner for Siemens PLM Software, first around Siemens’ PLM COTS and then for testing implementation of Siemens PLM COTS. SQS very much owns the future in its hands…