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Capgemini Looks to Accelerate LatAm Business in 2014

NelsonHall recently attended an event hosted by Capgemini Brazil. We were keen to find out about developments in the three and a half years since Capgemini acquired a 61% stake in CPM Braxis, at the time something of a scoop. The acquired capability provided Capgemini with a significant presence in the attractive domestic market of Brazil. But it was dilutive on margins, and management expected this would be the case for at least three years.

In particular, we were keen to find out about developments to the portfolio, business mix, and target market. The Brazilian economy has slowed down (growth fell to just 0.9% in 2012), and other multi-national IT services vendors operating in the country, such as Accenture, have been taken by surprise by their lack of growth. For Capgemini Brazil, a highlight in 2012 was being selected by Caixa (the fourth-largest bank in Brazil) as its strategic partner for modernizing its IT systems, in a ten-year deal which involved Caixa's investment arm CaixaPar taking a 22% stake in CPM Braxis for BRL121m (~€48.4m), reducing Capgemini’s stake to 56.8%. Winning the Caixa deal was possibly a short-term distraction locally (in H1 2012, Capgemini saw no growth in Brazil), but strategically it means Capgemini can position as a major IT services provider in the Brazilian retail banking sector. We believe that Capgemini’s approach, offering Caixa a stake in CPM Braxis, was a more attractive proposition to Caixa, than one which involved setting up a JV.

The integration of CPM Braxis is complete. Could Capgemini have been more aggressive in developing its IT services business in Brazil (portfolio development, industrialization, GTM, etc.) after acquiring CPM Braxis? Possibly. Certainly, Capgemini instigated a strategic review of its LatAm business earlier this year. It was put under the leadership of Patrick Nicolet, with a view to defining a regional strategy. A new regional head for Apps and Infrastructure has been appointed, Walter Cappilati, who is relocating from Capgemini France to Brazil (Capgemini’s head of BPO in LatAm is well established: see here for our blog on our visit to Capgemini’s BPO center in Campinas http://research.nelson-hall.com/blog/?avpage-views=blog&type=post&post_id=98).

Capgemini is keen to increase the proportion of revenue coming from outside Europe, with North America (a good margin business for Capgemini) a major target geo. Its operations in Mexico (Apps, BPO); Colombia (Apps); Argentina (Apps, consulting); Guatemala and Chile (both BPO) are currently primarily nearshore delivery locations.

In LatAm, the primary focus unsurprisingly remains the large market in Brazil, where Capgemini has nearly 6,800 IT services personnel working out of seven sites (Alphaville, Brasilia, Curtibia, Porto Alegre, Rio de Janeiro, Salvador, Belo Horizonte), plus over 1,000 BPO personnel in two centers in Blumena, and Campinas), giving it a country presence in six key states. Brazil accounts for over 85% of the overall headcount in Latin America.

Within Brazil, the financial services sector, ~52% of total country revenue, is the key strength and focus. With Bradesco and Caixa as its two key clients, Capgemini is positioning on its ability to act as a strategic IT partner for applications projects such as core banking and insurance platforms (with the latter, using partnerships with Pega and Guidewire), and multi-channel initiatives, also in IT infrastructure consolidation and ongoing management. Capgemini is planning to draw on support from the group’s global financial services BU. As well as increasing wallet share in the current account base, Capgemini will also be targeting new large accounts, drawing upon its global account strategy.
In the manufacturing sector (MRD is ~16% of total country revenue, no significant change since 2010), the primary focus is on SAP AM opportunities and on the multilatinas in its client base such as Embraer and Grupo Bimbo.

Capgemini’s public sector business in Brazil has grown from an estimated 8% of county revenues in 2010 to ~13% in 2012. Client references include application development engagements for Military Police of São Paulo (the largest police force in Brazil and the third largest in Latin America). Capgemini’s focus is on opportunities around tax and welfare and public security (in Mexico as well as Brazil), and to draw on experience from other countries such as the Aspire program in the U.K. But in the short term, the presidential elections in 2014 will impact any new contract signings.

By service line, the priority is application services, and bringing in new Capgemini offerings such as Next Generation Application Management (NGAM, about which NelsonHall has written in a standalone vendor profile available to ITO program subscribers), SAP OnePath, and managed testing services. Capgemini has client references in Brazil for SAP OnePath (a regional toiletries distributor) and for testing services (mining company Vale). A number of recent hires in sales and pre-sales indicate a drive to accelerate growth in application services. Capgemini is also looking to improve margins, both from improving productivity (target is by 20%+ by 2016), also from relocating some activity from Alphaville (a suburb of Sao Paulo) to a lower cost location with a 20%+ fully loaded cost differential, probably to the south east of the country (a similar relocation initiative has been made by the BPO operation in Brazil).

With its IT infrastructure offerings, Capgemini needs to shift the mix of its business from product reseller activities to higher margin engagements that include deployment and management services, including as-a-service offerings (from IaaS and PaaS through to SaaS). IT infrastructure management client references include NET Serviços, the largest multi-service cable company in Latin America, for whom Capgemini is providing L1 and L2 service desk and field support for users across 70 cities. Capgemini has started work on leveraging global alliances: in February 2013 it announced an extension of its strategic alliance with EMC, with the launch of a joint go-to-market agreement in Brazil, primarily targeting the banking and agribusiness sectors.

With BPO, Capgemini is looking to develop go-to-market synergies with applications services: one area in the retail banking sector could be mortgage services. Accenture has already made a move in this market with the acquisition of Vivere (in October this year, see separate article): was Capgemini caught napping?

Overall, Capgemini is very well positioned in Brazil, with a portfolio that spans applications, infrastructure and BPO services and the ability to support multi-national clients operating in the region with their globalization agenda. There is no intention to build a consulting capability in the short term (this is not currently where the main opportunities lie).

There is clearly a renewed focus on Latin America by Capgemini. We expect to see accelerating topline growth in in the applications business from 2014, with margin improvement coming initially from relocating a significant proportion (we estimate 50%) of applications services personnel from one major center to a lower cost location. Another potential opportunity is blended global delivery: elsewhere in LatAm, Capgemini’s BPO business in Guatemala City has done this successfully in one area of F&A for one client, using India in some non-voice sub-processes. Capgemini may look at some blended global delivery in its applications services business in Brazil, a country which has the increasing challenge of labor constraints.  Short term growth is likely to come from activities such as SAP SI projects. Extending the application services business in the insurance sector is likely to take a little longer.

Transforming the legacy IT infrastructure business into a higher margin solutions-led business is likely to be a multi-year journey, one that will be helped by initiatives such as the joint GTM partnership in Brazil with EMC, also by strengthening local account management to target major MNC clients that have operations in Brazil.

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