Capgemini held its 2014 investor and analyst day this week. For the first time since the beginning of the 2008-2013 crisis, the company has talked about organic growth, a significant development on its focus in recent years on margin improvement. Capgemini’s guidance for 2014 is organic revenue growth of 2% to 4%. The company has now shared a mid-term target of 5% to 7% organic growth. This is a bold target, as does not take into account any economic improvements in Continental Europe (50% of Capgemini’s revenues come from Continental Europe). However, the company has not indicated a timeline for its 5% to 7% growth objective, and if not achieved within three to five years, it is a target that will be quietly buried.

Capgemini’ growth dynamics are based on continued growth in strategic offerings (contributing up to 5% in total Capgemini revenue growth), and adoption of offshore (up to 2%) and overall market competitiveness (up to 4%). Growth inhibitors include price erosion (-1%) and the impact of cloud (up to -2%).

The details that Capgemini shared about its plans for growth reveal a number of assumptions.

The company believes it has completed the transition to offshore in the more mature markets (U.S., U.K. commercial sector and Nordics), that represent 75% of revenues. This means that Capgemini is exiting the crisis with offshore delivery, finally, being a growth driver, rather than just a margin expansion engine. The Netherlands and France remain the two large geographies likely to be affected by revenue erosion over the next few years, as a result of offshoring.

Meanwhile, Capgemini is relatively optimistic about the impact on topline growth of cloud. IaaS is driving down spending in IT infrastructure management. This is an activity where Capgemini through its Infrastructure Services unit is selectively present, focusing on RIM/asset lite services, cloud brokerage and orchestration services, service integration and management, and professional services.

Capgemini is also at ease with the increase in SaaS adoption, highlighting (as Accenture has done) that SaaS still requires traditional technical services: configuration, development of additional functionality and integration with other applications; as well as triggering new consulting activities around big data and adoption of digital transformation-led business process re-engineering. The company has also developed its SAP services portfolio, expanding from core ERP services to SAP HANA/mobility and verticalized offerings, with together now represent 50% of SAP-related bookings. This is important as Capgemini has a SAP practice headcount of 13.5k, of which 800 SAP HANA specialists.

One controversial item of those growth assumptions is Capgemini’s market competitiveness in being selected by clients as one of their strategic services providers following their supplier reduction initiatives. The company argues that it is more likely than smaller competitors to be part of those selected vendors, because, inter alia, of its sheer size. This rationale has logic. But the growth assumption (3 to 4% in additional growth for overall Capgemini) looks out of proportion, given that the number of competitors with size relative similar to that of Capgemini has increased recently: Atos, CGI, and NTT DATA to name but three, with TCS, Cognizant, Infosys, Wipro and HCL providing increasingly strong competition in relevant outsourcing opportunities.

Along with organic growth, Capgemini is also resuming its geographical growth intentions, with Asia Pacific as a key priority, possibly in Australia. The company is also reconsidering China as its next phase of investment, but being cautious about margins in the country. It is also targeting in the long-term Korea and expanding its Japanese operations (a country it recently re-entered and where it operates with 100 personnel). Altogether revenues from Asia Pacific are to growth from 3% of Capgemini overall revenues to 10% over time. Capgemini is also targeting expansion in Latin America, where as well as expanding its Brazil operations, it is considering local opportunities in Mexico.

Capgemini’s other priorities include:

• Continued focus on cost savings. It has introduced another efficiency program, Augmented Competitiveness, increasing standardization of hardware and software used internally, also automation technologies. The company has reiterated its intention to reach, in the short-term, a 10% operating margin
• Increased emphasis on career development of its offshore workforce (now 45% of global headcount), with a “promote first, hire second” policy, and further investment on training, including for leadership development
• Global key account management, with its Account Management Strategic Initiative (AMSI), currently covering 12 global accounts and including exec sponsors for each. Applying a “One group” approach to these selected accounts to sell, where appropriate, the full Capgemini portfolio will clearly boost efforts to be regarded by clients as a strategic partner. Will this initiative be expanded, in a slightly diluted form, to other accounts? We would imagine so; it would certainly support any attempts to increase client centricity. Capgemini’s organizational structure, of global service lines (a relatively recent organizational development) and geos has clear merits, and it has gone a long way to break country silos, but has made it difficult at times to up-sell across service lines.

Capgemini has achieved a huge amount in recent years: it has completed its offshore transformation (75% of revenues are now transformed), and has made substantial progress in its portfolio management initiatives: Strategic Global Offers are now a major contribution to both the topline and to margin. The company expects to out-perform the market in spite of the mediocre economic conditions in two of its key geographies: the Netherlands and, to a lesser extent, France.

Question marks remain, however, about two of its service lines: Sogeti and Capgemini Consulting (CC), which also are its most cyclical activities

• Sogeti is looking to accelerate its transitioning from a staff augmentation business to a specialized business, with testing, and to a lesser extent security, as key drivers. Sogeti is currently working on a new business plan to accelerate its focus on several key offerings.
• Resuming growth at Capgemini Consulting will probably take some time: Capgemini is aligning CC around digital transformation and SMAC, mirroring similar activities in its Apps businesses. It is unclear if this digital transformation-alignment will be sufficient to resume growth in CC.

Overall, Capgemini is reaching the end of its transformation to achieve a 10% adjusted operating margin.  Resuming stronger organic growth, the next ambition, will be at least as difficult a challenge. It depends on a variety of levers. The company’s strong ongoing focus on portfolio and innovation is evident; it is also the best positioned European headquartered IT services provider for offshore delivery (though its nearshore capabilities in Europe are dependent on just one country, Poland, which is not the cheapest). More needs to be done on client centricity – and the impact on the U.K. business of the end of the Aspire contract cannot be ignored: while Capgemini is likely to pick up other business, this is not likely to replace the lost revenues. 

Dominique Raviart and Rachael Stormonth