NelsonHall recently attended CGI’s global analyst event in London. The key messages in CEO Michael E Roach’s keynote were the success with which CGI is executing on its "Buy and Build" profitable growth strategy and that the expected benefits of the merger are now becoming more visible.

At the same event last year, CGI indicated some of the measures it was applying to improve the profitability of its European operations (essentially the acquired Logica business, see our article at http://research.nelson-hall.com/sourcing-expertise/key-vendor-assessments/?avpage-views=article&searchid=24244&id=78291&fv=2).  These measures clearly work! Logica was acquired in late August 2012; Just 13 months later, in its FY 2013 (ended September 30), CGI was reporting adjusted margins in all its European operations that were much improved from what it had inherited. And this continues: in Q2 FY 2014 (the quarter ended March 31, 2014) adjusted EBIT margin from CGI’s European operations reached 12.7%, up from 8.5% in the prior year quarter. France, not the easiest of markets at the moment, reached an eye-watering adjusted margin of 17.4% (though this included benefits of $10.6m from the renegotiation of a low margin contract, additional tax credits on salaries, and the settlement of a long-outstanding client contract dispute).  Some of the margin improvement has come from a restructuring that reduced three management dimensions to two, led by local geographies, thereby cutting overheads geos.

The company has also highlighted the progress made in the last two years in reducing the number of “red” underperforming/unprofitable contracts. A feature of many of these red contracts was unspecified scope or commitments, and CGI has shown rigor in its client discussions about contractual changes. In other cases, there have been changes in project management teams. In the short term, run off of some low-margin contracts is having a revenue diluting effect in some countries. But book-to-bill ratios look healthy.

If we look at what else has been achieved that augurs well, CGI has worked fast in realigning its European businesses, strengthening management control and accountability at country level, and embedding its “Management Foundation” which appears to be its secret sauce in both business and operational management. CGI’s Management Foundation covers broad principles, governance processes, methodologies, and tools, and has a repository of lessons learned (including recently from the federal HIX platform build in the U.S.).

CGI’s integration of Logica is due to end around October this year, around two years after the acquisition, and the focus now is on the ‘transformation’ phase, one that Roache remarked  will be tougher to execute.

So what are the priorities at CGI now? They include, inter alia:

• Moving beyond thinking about cross-fertilization of some of CGI’s relevant IP across geographies to actually achieving it. There have already been learnings: one early example that CGI considered is migrating its ‘Advantage’ state/local government ERP solution (which has a hosted option) from the U.S. to the U.K. We are not surprised that this is now being downplayed. Two areas of IP which CGI is currently looking to export outside the local geography include
  • Its “License2Share” license management platform for oil and gas operators on the Norwegian Continental Shelf to Canada
  • A bank in a box offering for credit unions in Canada into Continental Europe
• Expand its industry IP, going deeper into sub-verticals, with a priority being North American commercial sectors – in particular financial services, healthcare and manufacturing. CGI is also looking to leverage its government exchange experience in the private exchange market. Will we inorganic growth in the U.S. health payer sector?
• Targeting long-term large outsourcing deals including those that include IP: this implies a targeted shift in its business mix which is currently dominated by consulting and SI (51% of global revenues). After expanding through a series of acquisitions, Logica’s business in Continental Europe tended to be local in nature, with few large long-term outsourcing deals. Expect to see an increased emphasis in CGI marketing about CGI’s global experience of managing complex, large-scale engagements in its marketing in Continental Europe
• Increasing wallet share within existing clients. This includes a stronger focus on increasing the number of global clients. One commercial sector global account who presented, formerly a Logica client, discussed how the relationship (which was formerly strained) is now significantly improved with CGI.
• Increasing the use of near- and off-shore delivery centers (and in North America and Europe where relevant, also rural shore shared centers)
• Continuing the operational excellence agenda: there was little discussion of this at the event, but we imagine that there is a lot to do still here.  

Clearly, CGI is a well-managed company, with strong financial discipline and a level of local accountability that is high – local leaders are accountable for all aspects of their operations, including clients’ and members’ relationships, sales, delivery, and profitability. And there is a clear view of profitability of each contract.

Its organization structure is relatively unusual in today’s IT services vendor ecosystem in that it is a multi-regional service provider whose primary focus is one of client proximity. Logica brought in some near/offshore delivery capabilities, but not of a scale that CGI can position as having extensive global delivery capabilities. At the time of the Logica acquisition we were not alone in imaging that this would be CGI’s next inorganic move… but the message now is that acquiring to increase offshore scale is not in itself a priority and there was a clear statement of intention by Roache that the build and buy strategy that CGI has been pursuing so effectively will continue “we have doubled our company every four years for the last 20 years and . . . the aspiration continues”. So where should we expect to see CGI acquire next?

The company has provided some clues:

• In the U.S., reducing its dependence in the public sector, by developing IP-led commercial sub-sector offerings, with insurance a priority
• Developing its presence in key geographies in Continental Europe where it is weak, notably Germany and Spain
• Expanding in Australia

To achieve everything on this wish list could be done in one of two ways. One of these is a series of smaller acquisitions.. but this is not CGI’s style. Another is the acquisition of all (or part) of a major SI whose portfolio and global reach fits CGI’s wish list... and there is one obvious contender.