By Dominique Raviart & Rachael Stormonth

Deutsche Telekom’s Capital Market Day 2018 included a session in which the new CEO of T-Systems Adel Al-Saleh explained how he intends to turn around the Systems Solutions market unit (T-Systems).

Back to onshore vendor profitability standards by 2021

Al-Saleh’s message to investors is clear: the priority is improving profitability, targeting a 5% yearly increase in adjusted EBITDA over the next few years, reaching an adjusted EBITDA margin of 8%-10% by 2021.

Contract discipline is an immediate target, avoiding T-Systems’ past mistakes in getting into loss-making contracts by instigating more stringent risk management procedures and applying more discipline in transition. There will be more selectivity in pursuits, particularly for activities such as EUC services where margins are low.

There is also a €300m cost savings plan, of which €100m from further right-shoring (Hungary, Slovakia, with India growing from 200 to 1k personnel by end 2018); €100m from delivery standardization automation & tooling and €100m from overhead reduction. Simplification is a priority with a reduction in hierarchical layers from eight to five.

And, of course, there are also ambitions with the portfolio.

Modest revenue growth

Al-Saleh is aiming to set T-Systems back on a modest topline growth course, targeting 1% CAGR over the next three years, reaching $7.3bn by 2021. To achieve this growth, T-Systems reckons it needs €6bn each year in bookings, well above the €5.2bn bookings of 2017.

Portfolio management (where there was little apparent discipline in the last three-year plan) is naturally a major focus. T-Systems’ portfolio has three distinct clusters:

• Telecoms (TC, 2017: €2.2bn revenue), a core business with double-digit margins, but being impacted by price erosion, and the migration to IP-based telephony. T-Systems intends to protect its TC business by focusing its commercial activity to large and mid-sized enterprises in Germany, only bidding for international contracts that include a large German scope. The expectation is flat growth over the next few years
• “Classic IT”, managed IT infrastructure services & private cloud, and systems integration (2017: €2.5bn revenue), businesses that have been impacted by pricing pressure, T-Systems’ widespread geographical presence, and by large unprofitable contracts. The strategy is likely to feature increased selectivity in pursuits, offshoring, delivery automation, and standardizing offerings. There are likely to be some divestments: obvious candidates include end-user computing (€0.4bn in revenue; T-Systems has already divested its onsite desktop services business, €80m revenue, back in 2014) and standalone hosting.  
• Finally, what Al-Saleh refers to as T-Systems’ “growth portfolios” that between them generated €2.1bn in revenue in 2017. These include “classified ICT” (€0.4bn), security (€0.3bn in 2017, all the security units in DTAG were combined in T-Systems), IoT (€0.3bn, including SIM cards and connectivity), road charging schemes (€0.1bn), a new unit Digital Solutions (€0.4bn), public cloud managed services (€0.1bn) and SAP (€0.5bn).

Looking at the ambitions with some of the “growth portfolios” business:

• T-Systems believes its IoT offerings have the potential to grow at 20% CAGR, and is building on its capabilities around connectivity
• With its cloud offerings, T-Systems is shifting its focus from private to public cloud, with Open Telekom Cloud as an alternative to the hyper-scalers
• The SAP portfolio is being reshaped around S/4HANA, with Al-Saleh looking to achieve annual growth of >5%.

There is also a major drive to revitalize the salesforce. Al-Saleh has started by integrating the sales and go-to-market team into one unit, which has responsibility for the entire portfolio, supported by portfolio specialists. Al-Saleh wants to also increase the client-facing time of the sales workforce from 5% to 25%. He is investing in sales software, and improving processes, to free up time.

T-Systems has solid potential

Al-Saleh’s financial objectives for T-Systems are bold but realistic.

They are bold because T-Systems has barely been profitable in the past ten years, revenues have steadily declined, and the order book in 2017 plummeted. So, achieving profitable growth is evidently a challenge.

Yet they are also realistic, as T-Systems does have solid potential:

• A third of its business (TC) will continue to enjoy double-digit profit margins despite slightly negative growth
• A third of its business (the growth portfolio offerings) has both high revenue growth and double-digit margin potential
• Profitability in the declining Classic IT businesses is possible if there is a relentless focus on delivery execution and portfolio rationalization.

Al-Saleh is publicly acknowledging that T-Systems’ sales set-up, structure, tools and processes were internally focused, and also that there are capability gaps. The fact that he is able to do this indicates a willingness by its parent to invest in all aspects of the turnaround plan. This is welcome news.